Several external and domestic factors cause borrowers in Bangladesh to experience difficulties in running their businesses, which result in loan defaults. Consequently, the banks which have lent to these borrowers are burdened with high non-performing loans (NPLs) . In 2014, Bangladesh Bank (Central Bank of Bangladesh) introduced an out-of-court restructuring programme in the form of “corporate debt restructuring” in order to avert the impending insolvency of the distressed firms as well as improve the stability of banking sector.
We investigate the impact of the regulator-initiated corporate debt restructuring (RCDR) on bank stability by a “natural experiment” known as the difference-in-differences (DID) method. The DID is a useful method to evaluate the differential effect of outcome variable between treatment and control groups given a particular policy intervention. In this case, the differential effect of outcome variables ( such as NPL, Provision, Z-score) was investigated between two groups of banks, one that came under RCDR policy and the other that did not.
In contrast to Ahamed and Mallick (2017), who predicted an increase in the stability of treatment banks due to the direct benefit of lower provisioning, this paper finds that the stability of the participating banks decreased to 52% with the implementation of the RCDR policy, while both, NPL and Provision, decreased following the genesis of RCDR. Hence our evidence does not support the claim that debt restructuring can improve participating banks’ stability. This research, therefore, provides new and important insights into the debate on the effectiveness of debt restructuring on bank performance and thus contributes to the nascent literature on the out-of-court restructuring mechanisms in the financial sector.
