NPLs: Making wider use of ADR, amending Artho Rin Adalat Ain

Nashir Uddin | Published: August 15, 2018 20:56:19 | Updated: August 31, 2018 21:35:26

A suggestion recently put forth by chamber leaders and top bankers for wider use of alternative dispute resolution (ADR) for managing ever-increasing non-performing loans (NPLs) is a timely and realistic one. They came up with the proposition at a recent roundtable session in Dhaka on ADR in managing the risk of NPLs in banking industry.

In recent years, the banks witnessed a ballooning growth of NPLs that stood at Tk 885 billion at the end of March 2018. Against this backdrop, ADR can save time and cost and ease the burden of pending cases with the judiciary while also help banks and financial institutions curb NPLs.

Bad loans or NPLs in Bangladesh stand at present at 10.78 per cent, while up to 2.0 per cent is deemed to be the allowable level in developed economies.  The figure is 0.9 per cent for Australia, 1.1 per cent for Sweden, 1.2 per cent for Japan, 1.4 per cent for Singapore, 1.6 per cent for Malaysia, 1.7 per cent for China and 1.9 per cent for Philippines. And even Nepal  has only 2.0 per cent NPL.

The high ratio of NPLs poses a serious challenge for the banking sector as well as economy of Bangladesh. It is a big concern for the banking sector from the perspective of financial stability. Bangladesh Bank (BB) in its latest Financial Stability Report (FSR), released last month, has observed that the high level of NPLs has caused deterioration to the asset quality of private commercial banks (PCBs). In the FSR, BB said, "Pertinently, inadequate due diligence in credit management is one of the key reasons for persistent high NPL in (a) few banks."

The central bank has also identified the increasing NPL ratio in state-owned commercial banks (SoCBs) as another reason behind high overall classified loan ratio in the banking sector. The SoCBs' gross NPL ratio increased to 26.5 per cent in CY '17 from 25.1 per cent a year ago. BB in the FSR noted, "Though the gross NPL ratio at end-December 2017 was only 10 basis points higher than that of previous year, rescheduled standard and restructured loans to total loans increased by 1.7 percentage points over the year, which demands cautious monitoring from both bankers as well as regulator to improve overall asset quality of the banking sector products."

Against this backdrop, ADR holds a huge potential. One may also consider it as the order of the day as disputes arising out of business and commercial transactions can be settled out of court thereby saving time and cost while also helping reduce burden on the judiciary and pendency of cases. Besides, some initiatives like improvement of corporate governance at banks, following due diligence while sanctioning loans, adopting zero-tolerance policy towards loan recovery and bringing loan defaulters and their collaborators to justice are some of the basic steps that can lead to better NPL management.

NPLs are linked with the liquidity of banks. The financial sector could be further strengthened if the volume of NPL could be brought down. While making wider use of ADR, the government should also seriously mull the idea of policy reforms based on market assessment to help rein in the rising NPLs. Efforts should simultaneously be made to make the banks compliant with rules and regulations. Laws should be strictly followed and applied to turn  NPLs into performing loans.

A sound economy depends on a vibrant banking industry. Ideally, no economy can afford to bear the brunt of NPLs as high as the one in Bangladesh right now. It has been observed that the Artho Rin Adalat Ain 2003 is riddled with loopholes and unscrupulous elements take advantage of these. This is said to be the main reason for increasing volume of NPLs. The opportunist loan defaulters are taking full advantage of it.

ADR, though may be highly effective, is not the panacea to treat the malaise of NPL. Some professional bodies have of late suggested that the government suitably amend and update the Artho Rin Adalat Ain 2003 to streamline the banking sector which will naturally curb NPLs. The government should heed the views of expert people and bodies.

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