The Bangladesh Bank (BB) is reported to have prepared a set of recommendations to be submitted to the Ministry of Finance (MoF) wherein they have put forward some suggestions to expedite the recovery of non-performing loans (NPLs). From what has been learnt from newpapers, the recommendations may suggest amendment of some acts and regulations related to banking. The BB, Financial Institutions Division under MoF, four large state-owned commercial banks and Association of Bankers, Bangladesh (a forum of the owners of private commercial banks) are working together to find a suitable solution to address the problem of rising NPLs which has taken a serious turn for the banking sector.
Soon after assuming his new responsibility as Finance Minister, AFM Mustafa Kamal assured the bankers and other stakeholders in the sector that there would be no further increase in NPLs. Although it is a difficult and challenging task, yet his words indicate his commitment and seriousness towards resolving the pressing problem.
However, NPLs are an integral part of bank's lending business. If bank lends, part of the unrecovered loans naturally become NPLs. This phenomenon occurs all over the world. What can be ensured is to keep NPLs as minimum as possible and that is possibly what the FM has meant. If NPLs can be curbed, discipline in the bank sector will automatically be restored. There is a correlation between low NPLs situation and strong discipline in banking sector.
As a part of the measures for addressing NPL, Bangladesh Bank has already suggested that the Banking Companies Act, Bankruptcy Act, Negotiable Instrument Act, Artha Rin Adalat (money loan courts) Act and Merger & Acquisition (M&A) regulation, be amended. However, to what extent amendment of these acts and regulations will help reduce NPLs remains to be seen in the near future. Amendment and update of these acts, regulations and some other relevant laws are required to completely overhaul country's entire financial sector. For this, a long-term comprehensive plan with action programme is required.
NI ACT & ARTHA RIN ADALAT ACT: The requirement of amending the Negotiable Instrument Act (NI Act) is long overdue. The law was enacted in 1881 and many of its sections and clauses have become obsolete. The language of this act is very complex and difficult. Most bankers cannot understand the language of the Act properly, despite being required to be familiar with this law in order to perform their day-to-day jobs. Since its enactment nearly 140 years ago, banking services have undergone rapid changes as use of cheques and cash have been substantially minimised. Hence the application of NI Act has become limited. On the other hand, many technologically advanced products and services have become popular means of banking transaction but these are not covered under NI Act. So, amending NI Act 1881 has become inevitable.
Artha Rin Adalat was enacted in 2003 to expedite the recovery of non-performing loans through legal action. Unfortunately this law could not produce satisfactory results in recovering NPLs as any verdict given by this special court moves to the High Court for final decision and only afterwards can be enforced. In the Supreme Court, there is no special bench to exclusively handle all cases tried in Artha Rin Adalat. So, amending Artha Rin Adalat Act, along with creation of a special bench in High Court to look at these cases, may be a timely initiative. Although history of recovering NPLs in massive scale is not satisfactory anywhere in the world, the presence of such exclusive court in dealing with NPLs may help keep the borrowers alert as far as repayment of loans is concerned.
BANKRUPTCY ACT: Theoretically Bankruptcy Act and Merger & Acquisition Act are considered very powerful weapons in fighting NPLs across the world, especially in the developed countries. In reality, how these acts help lenders recover bad debt is a questionable matter because bankruptcy act is used to protect the borrower form the lenders' action. A company when found indebted can file bankruptcy case to seek protection from repaying the loans. Usually when company's liability, particularly amount of debt, substantially exceeds its assets, the company loses the ability to repay the debt and is considered indebted. This is when it can file bankruptcy case under Bankruptcy Act. As soon as any borrower files bankruptcy case, the lender gives up the hope of recovering any amount and therefore, entirely writes off the outstanding loans. Although residual value realised by disposing of all assets of bankrupt company is proportionately appropriated among the debtors, historically very insignificant amounts of loan has been realised from bankrupt companies. The developed countries have mixed experiences with the bankruptcy act because large corporate business units can easily liquidate their business by declaring bankruptcy. At the same time, this act is abused in large scale by small and individual business units as they mostly borrow money from banks, divert funds from business and then enjoy protection from paying off the loans under bankruptcy act. In the developed world, there is a strong practice of barring a bankrupt company from banking for certain number of years, yet this law does not help that much in recovering NPLs. When developed counties cannot get benefit from bankruptcy act, how can Bangladesh hope to get benefits from it?
Fund diversion and obtaining loans under fictitious names are illegal but common practices in Bangladesh. Such loans cannot be recovered using the Bankruptcy Act. Moreover, the business environment in Bangladesh allows a company to be opened in the morning and closed that day or the next day. The concerned authorities responsible for working on the country's NPLs crisis should look into this issue seriously.
MERGER & ACQUISITION REGULATION: Merger & Acquisition Regulation has not been as helpful in recovering NPLs as it has been conducive at streamlining the business environment. It was believed that this regulation will provide an opportunity for a company with debt-servicing problems to merge with another company that is capable of repaying loans. But unfortunately, this did not happen as was expected. However, this act provides an opportunity where ownership structure of the company is frequently changed without affecting common people. It has also been experienced that healthy competition in the market is strategically manoeuvred under the Merger & Acquisition Regulation. Under the name of merger and acquisition, small companies with rapid growth prospects have become easy targets of market giants. This regulation, if made effective through amendment, can help streamline the country's business environment, but would not essentially expedite recovery of NPLs. The authorities concerned should take this issue into active consideration while recommending amendment of this regulation.
There is no shortcut method for resolving NPLs problem. So far, only acceptable standard practice globally for treating NPLs is retaining adequate provision and using that to write off NPLs. Usually two different approaches are applied in loan operation. One of them is to streamline loan approval and loan operation procedure so as to avoid or minimise new NPLs and the other is to treat existing NPLs. Based on periodic evaluation of loan portfolio, bank gradually builds adequate provision used to write off the loan as soon as it turns NPL. In case of any abrupt situation, if the bank's accumulated provision is found inadequate to write off outstanding NPLs, then additional capital is injected to cover shortfall. If additional capital injection is found impossible from the owners, third-party help in the name of bail-out package especially from the government, is required to overcome this situation. Additional capital or bail-out fund is subsequently reimbursed from future earnings. Apart from this internationally accepted standard strategy, no other technique has been invented to successfully deal with NPL problem.
The Bangladesh Bank and others who are preparing recommendations for the MoF should seriously consider these issues.
Nironjan Roy is a banker.
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