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Reining in loan defaulters  

Shahiduzzaman Khan     | Published: February 09, 2019 22:11:45


Each and every bank of the country is expected to come under a kind of special auditing system. Finance Minister AHM Mustafa Kamal has recently announced the decision of the government in order to bring loan defaulters under close scrutiny.

The minister said the main purpose of such auditing is to help the banks get rid of bad loans. The government needs to identify who are the genuine borrowers and who are the wilful defaulters. It should monitor how the bank loans are being used. Three auditing firms will be engaged to conduct this special auditing.

The central bank's latest move came against the backdrop of the rising trend in loan defaults in the country's banking system.

There is no denying the fact that necessary legal reforms should be brought about in order to address the issue of rising nonperforming loans (NPLs). In Malaysia, for example, wilful defaulters get blacklisted by all government agencies. They are not even allowed to leave the country.

The country should, in fact, bring similar legal reforms to mitigate the sufferings of the ailing banks on account of soaring bad loans. The loans that are becoming classified are, to mention, actually the hard-earned money of the ordinary people of the country. Therefore, bank officials have to go tough on such wilful defaulters.

The finance minister also termed loan default a 'crime against the whole nation.' He asked the bank officials to better understand their clients before issuing loans and said no long term loan should be issued against short term deposits. In this regard, there is a need for strengthening corporate governance culture within the banks.

In another development, senior bankers and the law minister are likely to meet the High Court judges and Attorney General's Office to discuss ways and means of reducing troubled loans through effective implementation of existing laws. Necessary amendment to the existing laws relating to banking, according to a report, will be discussed at the high-level meeting.

There are, however, many problems in recovering default loans. In order to address the problem, the authorities concerned should gear up legal process. Introduction of arbitration is also a process to solve the problem. It should be introduced in Bangladesh to help settle loan disputes. The central bank may submit its recommendations for amending relevant laws and regulations after detailed scrutiny to the Ministry of Finance to help reduce the volume of non-performing loans (NPLs).

The central bank has already formed three committees to prepare a set of recommendations for amending relevant laws and regulations to help reduce the volume of default loans. The committees are now working to submit the recommendations to the finance ministry for amending the Banking Companies Act, Bankruptcy Act and Negotiable Instrument Act along with Merger and Acquisition (M&A) regulations.

The defaulted loans include substandard, doubtful and bad loans or loss of total outstanding credits, which stood at Tk 8,680.07 billion as on September 30, 2018, from Tk 7,981.96 billion as on December 31, 2017. The NPLs are, in fact, threatening the growth and stability of the economy. Analysts say loans should not be concentrated to a number of large borrowers. The number of state-owned banks should also be reduced as NPLs and classified loans are increasing in these banks with the top 20 borrowers holding a third of the default loans.

There are, according to banking analysts, uncertain balance-sheet risks at several state-owned and private commercial banks. Recent changes in the tenure and family membership of bank boards have weakened the required oversight. The banking sector is not just about money as there is the issue of confidence.

On the other hand, depositors are deprived of fair rate of interest on their deposits owing to the high NPLs. There is no competition in the banking sector regarding interest rate fixing.

The central bank has, in the meantime, issued a circular that the banks can now write off  higher amount of bad loans without filing lawsuits after the issuance of new policy. The banks are empowered to write off loans up to Tk 0.20 million instead of the previous ceiling of Tk 50,000 without filing cases for recovery. The policy also allows the banks to write off such loans after three consecutive years instead of the previous five years.

Banking sector analysts say wilful defaulters will benefit from the latest policy relaxation, but small and medium entrepreneurs may face trouble in securing fresh loans. Provisioning cost of the banks will be reduced after the relaxation of the policy, they argue.

The amount of NPLs in the banking system, according to them, is likely to go down if 100 per cent cash provisioning against the bad loans are written off. It might help reduce the NPLs in retail credits, particularly of credit cards. However, many say the policy will not leave any significant impact on large loans. The amount of small bad loans has been redefined for writing off to avoid additional expenses for legal purposes in the new policy.

The central bank had introduced guidelines for writing off classified loans in 2003 aiming to improve loan recovery and make the financial statements of banks more transparent and accountable. Writing off loans is a global practice. But it will depend on the capability of the bank concerned to write off bad loans. Before making any final decision in this regard, the bank management has to ensure 100 per cent provisioning against the amount to be written off.

Analysts say loan defaulters will become more aggressive if they are given such benefits and might come up with new demands. Bangladesh Bank will have to strictly supervise the sector. It will not be wise to waive the loans written off without filing cases. No one will take care of those debts if there is no lawsuit about those, they added.

In the circumstances, the government should form a banking commission to carry out close monitoring of NPLs and some supervisory works over the whole affair of loan operations. Bangladesh Bank needs to perform the lead role in this respect. This might help reduce bad loans in the near future.

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