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Collateral against credit

Lenders oppose WB move to make movables into surety

Jasim Uddin Haroon | Published: November 16, 2017 09:54:28 | Updated: November 16, 2017 21:13:44


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A World Bank move to make intangible movables such as 'accounts receivables', 'intellectual property', 'derivatives products' into collateral against credits faced opposition from lenders in Bangladesh. 

BLFCA, a group of 34 non-bank financial institutions (NBFIs), argues that in Bangladesh accounts receivables are yet to be reliable assets as many may abuse it by overestimating the amount of receivables.

The Bangladesh Leasing and Finance Companies Association or BLFCA made these observations in writing to the World Bank Group as part of strengthening the relevant act.

Intellectual property also cannot be a solid asset to count it as collateral as such assets may be twisted or inflated to derive increased loans from the financial institutions, the BLFCA said in the representations to the international multilateral development financier.

It noted that although there are some goods brands having goodwill value, but there are firms still lacking in brand value and it is quite tough to value their goodwill.

The derivative products which usually deal with future trades also are opposed by the BLFCA as surety. It also bears huge risks as there may be wrong or overestimated value.

The World Bank Group has been pressing over the past couple of years for introducing movable property, like goods, a document of title, security, instrument, money or any other intangible asset such as goodwill, as collateral against credits. 

Such goods and assets are not accepted now in the financial sector as security for loans. Currently, only the immovable like houses or flats, land property are accepted by banks and financial institutions as collateral.

The WB met with the Bangladesh Investment Development Authority (BIDA), the Ministry of Commerce (MoC) and the 34 non-banking financial institutions grouped in BLFCA as part of preparation for strengthening the draft act to suit in the current context.

Earlier, the WB Group had prepared a draft law titled 'The Secure Transaction Act' providing for such non-traditional mortgage system and submitted to the central bank. The central bank asked them to meet the stakeholders to prepare an ideal act.

The BLFCA also said the current legal environment needs to be immediately overhauled and loopholes plugged to ensure that justice and fair play is established, in the absence of which Movable Collateral Registry programme will not yield desired results.

"We may move cautiously in enacting Movable Collateral Registry to make funding easy and accessible to the SMEs. For the programme to succeed, the legal environment has to improve," says the report given by the BLFCA.

It also said without a sea change, chances are that the new Act will also face the same fate as Registered Mortgage on immovable property. "The defendant will continue to use the loopholes in the writ petition for denying justice to the lending institutions even in the case of Movable Collateral Registry Programme."

It said the crying need for Bangladesh is now enforcement of law. At the same time facilitation and ease of doing business should be ensured to move the country to its desired destination up the trajectory of development. 

After finalizing the draft it will be sent to the Ministry of Law, Justice and Parliamentary Affairs for getting it through Parliament.

The WB Group's financial specialist people held the latest meetings with the stakeholders as the central bank had asked them to take their opinions to further strengthen the draft act concerned.

"We got huge positive response from the three key stakeholders," one concerned in the WB Group told the FE Wednesday. 
He, however, said they will meet with the central bank shortly on the finalisaiton of the draft law.

The Ministry of Finance (MoF) said this initiative is intended to help small and medium entrepreneurs and those engaged in self-employment and unable to furnish immovable property as security against credits.

However, there will be a separate entity paving the way for people to borrow by using such moveable property as security under the act.

The institution will help lenders get a risk-free picture of the security to accept movable property as collateral for advances.
The oversights body will be established under the name 'Secured Transaction Registration Authority'.

The main objective of the authority will be to promote the interests of the national economy by facilitating secure transaction against movable property in compliance with the legal provisions in the making.

The governor of Bangladesh Bank will be chairman of its board or a person nominated by him as his representative will work in the entity.

Under the law, the MoF secretary or a person to be nominated by him will stand as second in authority at the Authority. A registrar will also need to be appointed.

The draft also states a designated person from Bangladesh Securities and Exchange Commission will also be on the board. The main function of the board is to ensure registration of security rights of movable property.

jasimharoon@yahoo.com

 

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