The Financial Express

Punishment or reward for loan defaulters?  

Abdul Bayes     | Published: March 29, 2019 22:04:28

Punishment or reward for loan defaulters?   

During the last couple of years, turbulence gripped the banking sector in Bangladesh - largely in the state sector but lately in the private sector also. Loan defaults have historically bled the sector but successive financial scams have tarnished the image of the state banks in particular. Amid the downturn, permission to new banks could only worsen the situation. However, the greatest concern seems to rally around loan defaults that we would like to deal with in this column. In Bangladesh, there is a saying that, the loan is in default while the loanee is riding on cozy cars, sleeping in palace- like buildings, buying assets abroad to settle family and growing politically powerful. Perhaps nowhere in the world, loan defaulters and elements involved in scams walk with chest as expanded as in Bangladesh.

We are very happy to note that, immediately after taking over Finance Ministry, Finance Minister AHM Mustafa Kamal has expressed grave concern over the ailments in the banking sector, particularly that pertaining to loan defaults. His position apparently is a reflection of the widespread social concern. In fact, as is evident from his reactions to various questions asked by the media, he is committed to bring down the rate within a short span of time. We appreciate the minister's concern since the banking sector is the lifeline of the economy and any disequilibrium in the sector seems to send wrong signals to stakeholders.  Particularly, during the last couple of years, the banking sector had to bleed profusely from a number of furtive scams, responsible for which was an unholy alliance of a certain group of businessmen and bank officials. Loan defaults continue to rise, obviously under different pretexts, and tend to hover around one lakh crores of taka. The problem is two-pronged: on the one hand money is not coming back to banks because of defaults --deliberate or otherwise and on the other hand, the government has to set aside a significant amount in the budget every year to feed the failing banks.

As an initiative to reducing loan defaults, the FM has assured of perking the interest rate at simple seven per cent for "good borrowers". It is true that few borrowers face genuine hardships in repaying loans due to, for example, adverse factors beyond their control. Besides, a number of favourable incentives like loan rescheduling have already been offered in successive years yielding no positive outcome whatsoever. In other words, the government has been helping businessmen but they were not helping the government with due respect to the rules. The first concern that could loom large on the horizon is how to select the 'good apples' from a basket of both good and bad apples. Critics of this step find a smell of political highhandedness in the distribution of the leverage. It is not unlikely that some bad borrowers will emerge as good ones through political manoeuvring, and thus putting the banks in a perilous state of pressure. By and large, this 'reward' could be counterproductive too.

We recollect that successive budgets kept provisions for whitening black money through the provisions of paying a fixed marginal penalty and other economic and non-economic benefits. This allegedly 'unethical' move was taken with a view to bringing back the underground money on to the surface and thus helping grease the growth wheel. To the utter dismay, the 'good intentions' of the government  of attempting to whiten black money miserably failed as not many responded to the call and the amount stood negligible. The rational economic agents did not value the benevolent attitude of the government because they knew well that existing rules and regulations carry many loopholes to save them.

Second, is the interest rate the only problem in business and trade? Perhaps it is not. Because from a double digit in the earlier periods it has appreciably come down to 7-8 per cent or so in recent periods, There is no reason why it should evoke a hue and cry.  To enhance business and trade, we need to address  the problems relating to energy, ports, bureaucracy etc, that are responsible for a rise in the cost of doing business in Bangladesh.

If we are at all interested in truly addressing the problems of loan defaults and  financial scams involving banks, and if we are up to build a sound banking system, we must have political commitments to let law take its own course. Of course, by that we do not want to mean only existing laws that are in fact an escape route for evaders. On the contrary, it implies formulating new laws and setting up new high court benches, with relevant experts, to quickly deal with financial cases. We may even ask for special tribunal to handle banking, capital flight and tax dodge cases.

We are hopeful that the proposal of putting a simple interest rate for 'good' borrowers would yield dividend by providing incentives to defaulters and bring back the money to banks to strengthen their liquidity position. But we are equally scared about the outcome. Our pessimism largely stems from the famous saying: burning the mouth by slaked lime, one fears to consume curd!

Rewarding the good and punishing the bad is a not an easy matter.

Abdul Bayes is a former Professor of Economics at Jahangirnagar University.


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