The Polish Experience with Bank and Enterprise Restructuring

January 1997 Poland's program tackled simultaneously bank and enterprise restructuring and dealt decisively with the bad debt stock and flow problem with measures to improve incentives and institutional skills. Among transition economies, Poland was a pioneer in bank and enterprise restructuring. The main tool it used to implement the restructuring program was the 1993 law on financial restructuring of enterprises and banks, in an approach that encouraged banks to play a central role in enterprise restructuring. Bank recapitalization was linked to improvements in the banks' operating systems aimed at increasing efficiency and loan recovery. Poland's program to restructure banks and enterprises was successful because it was comprehensive. It tackled banks and enterprises at the same time, dealing both with the bad debt stock problem and the associated flow problem. It made assistance on the stock problem contingent on concrete actions to improve lending practices, with the prospect of possible privatization or liquidation. The lesson Poland's experience offers is that solving the stock problem through bank recapitalization is necessary but not sufficient. Bank recapitalization without measures to improve performance incentives and bank skills is likely to fail. Poland was also realistic about isolating too important to fail enterprises, providing special temporary budget support (after progress in key areas) that gave the program political viability. Poland took steps to modernize bank supervision and adopted measures to privatize banks and set up workout units showing genuine interest in changing banking practices. Poland's banking sector now resembles a modern market economy in structure. Commercial banks have a more than adequate capital base. Banking competition has increased and the sector seems relatively efficient and profitable. The experience of t...