All the hard earned progress is now at risk due to loan management failure. Improper lending, dismal foreclosure law to recover the bad loans can increase nonperforming loans. Coherent strategies backed by legal instruments offer a way forward for economic recovery caused by nonperforming loans.
It is needless to say that access to credit has increased over the last two decades, securing economic expansion and creating jobs - mostly in developing countries. But the other side of the coin is not so glittering, that this credit boom-- non-performing loans have reached sky high and the amount of distressed assets is much higher than ever. The flare-up of distressed assets poses a seismic threat to financial markets and economic growth in emerging economies.
At the end of March of the running year, default loans of the country's banking sector stood at Tk. 950.85 billion, which was 8.07 per cent of the total outstanding loans of the sector-- latest data from Bangladesh Bank show so. Bad loans were 7.66 per cent of the total outstanding loans three month earlier amounting to Tk. 887.34 billion. In fact default loans showed a descending trend since last year due to a loan rescheduling special package at 2.0 per cent down payment offered by the Bangladesh Bank in May last year.
Poor loan management is a great spoiler, risking all the positive indicators of finance. Development is crushing. Funds have vanished. Tax collections are shockingly low; budget deficit is high. But there isn't sufficient loss-absorbing cushion left for private or government authorities. The banking sector is grappling with a vicious internal cycle of default loans.
Society is persistently pleading the government to bring change about the nurturing the ills that plague the people, like lawlessness and the lack of good governance but the government's efforts are pathetically weak. It is true that in the absence of some stern regulatory legal instruments, the money market is like a rudderless ship drifting towards the violent rocks.
With an aim to curb the bad loans, Artha Rin Adalat Ain, 2003 (Money Loan Court Act, 2003) came into force on May 1, 2003. The goal of the law was to bring changes to a great extent in the administration of justice delivery system for regulating the suits regarding loan recovery but it failed miserably to recover the bad loans expeditiously from the defaulters.
In most cases, the concerned courts are failing to complete trial within the stipulated time (maximum 120 working days) mandated by the section 17 of the Artha Rin Adalat Ain, 2003. Section 17(1)(2) of the law provided time limit to conclude the trial within 90 days, if not, extended the period of further 30 days could be allowed. The said section of the Artha Rin Adalat Ain, 2003 is not mandatory, and this is one of the reasons for non-functioning of the law. Next to this section comes the time limit for disposal of execution process. Section 37(1) of the Artha Rin Adalat Ain, 2003 provides that subject to the provision of Sub-section (2), an execution suit under the Artha Rin Adalat Ain, 2003 would be settled within 90 days or within an additional 60 days only after recording reason/s for the failure to settle it within the stipulated time. There is an urgent requirement to amend some provisions of Artha Rin Adalat Ain, 2003 as habitual defaulters are exploiting the ambiguity of the law to not repay their loans.
The Law Commission recommended for amendment of the Act in 2015. Finance ministry and Bangladesh Bank also prefer amending the act as well as Bank Company Act, 1991 to regulate default loans.
The government is now working on a new plan (by enacting law) to accommodate stressed loans of the banks. In this regard, the plan is to set up an alternative state-run corporation which will get hold of bad debts from the banks and other lenders. The proposed Bangladesh Asset Management Corporation (BAMCO) would be a state-run entity which will work under the Financial Institutions Division of the Ministry of Finance to purchase default or bad loans from banks or financial institutions and specialised banks and sell them off to individuals or corporate entities. In the process the aggrieved entity or individuals will be able to appeal for review but will not be allowed to sue BAMCO before appealing.
The corporation would sign deal with banks and concerned financial institutions to realise bad loans, it would receive a portion of the realised money, the draft act suggests. Financial experts seem skeptical about the success of the new law.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh (PRI), shared his view with the Daily Star saying, "The weakest banks would use it to dump their bad assets and put the burden on the government. Why should the government take this responsibility? Why should the public sector take responsibility for the bad debts of the private sector?"
M M Khalekuzzaman is an Advocate of the Supreme Court of Bangladesh and a policy analyst. [email protected]