NBFIs see 37pc rise in unsettled loan defaults

Non-bank financial institutions (NBFIs) are grappling with a surge in defaulted loans awaiting court settlements. Central bank data shows a rise of more than 37 per cent in just three months, prompting concerns from economists about lax lending and recovery practices.

In December 2022, a staggering Tk115.52 billion of NBFIs' funds remained stuck in loan defaults managed by the money loan courts. This figure swelled to Tk 158.77 billion in March 2023 -- roughly half the construction cost of the Padma Bridge.

The crisis did not accumulate overnight.

Industry insiders acknowledge that poor governance and limited capacity within NBFIs have contributed to the problem.

These shortcomings lead to inadequate loan assessments and weak recovery efforts. Ultimately, institutions resort to the money loan courts to recover defaulted loans, only to face an overburdened system with insufficient infrastructure, a shortage of judges and lengthy legal proceedings.

The Artha Rin Adalat Ain, 2003 (Money Loan Court Act, 2003) provides the principal legal framework for resolving loan default cases involving both banks and NBFIs. The legislation outlines procedures for these institutions to recover funds from defaulters.

A key provision is the creation of dedicated courts specifically designated to handle loan default cases. Only banks and NBFIs are authorised to file cases in these courts.

However, the number of courts and judges is insufficient to handle the growing number of cases, according to Golam Sarwar Bhuiyan, managing director of the Industrial and Infrastructure Development Finance Company Limited (IIDFC).

Bangladesh currently has 35 operational NBFIs, with the first established in 1981. These institutions are regulated under the Financial Institution Act, 1993, and overseen by the Bangladesh Bank.

Bangladesh Bank data shows that non-bank financial institutions (NBFIs) disbursed Tk 704.16 billion in loans by September 2023. Alarmingly, a large chunk of it -- Tk 173.72 billion, or 24.61 per cent --  went into default.

This figure has been steadily rising, with NBFIs recording defaults exceeding Tk 130 billion by the end of December 2021.

Senior Supreme Court lawyer Khurshid Alam Khan believes the  central bank immediately needs to strengthen its monitoring of NBFIs to ensure they adhere to credit guidelines when approving loans.

Stricter regulations, he argued, could prevent a significant number of defaults from reaching the already overburdened court system.

Like Mr Khan, IIDFC Managing Director and President of the Bangladesh Leasing and Finance Companies Association (BLFCA) Golam Sarwar Bhuiyan emphasised thorough loan assessments.

"Financial institutions must conduct rigorous checks before approving loans," Mr Bhuiyan said. "This includes verifying collateral and ensuring proper documentation."

He said his organisation, IIDFC, offers training programmes to improve staff skills in areas like recovery management and credit risk assessment.

Mr Bhuiyan also noted how borrowers sometimes exploit legal loopholes to delay court proceedings. Some deliberate defaulters, he claimed, file petitions in the High Court to stall lawsuits, further extending the recovery process. To address the issue, lawyer Khurshid Alam Khan proposed legal amendments to expedite trials and ensure cases are resolved within set timeframes.

"A provision requiring defaulters to pay the full disputed amount before filing an appeal would facilitate the recovery of outstanding loans," he said.

Zahid Hussain, a former lead economist at the World Bank's Dhaka office, echoed concerns about legal loopholes being exploited to cause delays.  "We've observed parties exploiting loopholes to stall cases in the High Court, significantly extending resolution times," he said.

Mr Hussain supports implementing specific time limits for resolving cases within the existing legal framework, believing it would benefit financial institutions.

He also suggested promoting the use of alternative dispute resolution (ADR) mechanisms to expedite the recovery of defaulted loans.

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