Bankers hail proposed tougher law against willful defaulters, want speedy case disposal

Top bankers have welcomed the proposed tough laws on wilful defaulters and sought a speedy disposal of default loan cases as habitual defaulters are benefiting from the lengthy hold-ups in settling the disputes.

For effective implementation of the proposed changes in the recently approved bank company act, money loan courts need to be strengthened to prevent willful defaulters from taking advantage of the weak judicial system, in their view.

According to bankers, some cases filed with the Artha Rin Adalat (money loan court) are pending for 8-10 years and willful defaulters are banking on the delay to find legal loopholes for a way out of their obligations.

In many cases, these habitual defaulters manage to secure a stay order from the court delaying the legal process further. That is why bankers demanded a reform of the money loan court to recover the default loan from wilful defaulters.

The draft Bank Companies (Amendment) Act 2023 has recently been approved in the regular meeting of the Cabinet and is expected to be placed before the parliament in September. 

The draft of the newly amended law has provided a definition of wilful defaulters. It also said that no more than three people from one family can become directors of a bank, a provision that aims to reduce family dominance in the bank's board of directors. 

In addition, several amendments have been brought to the new law, including a ban on foreign travel of wilful defaulters, and the eligibility criteria for being a bank director.

Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and the managing director of Brac Bank, told The Business Standard (TBS), "The new amendments to the Bank Companies Act on the wilful defaulters is a good initiative if enforced properly."

When asked whether the banks will identify the wilful defaulters or the central bank will, he said, "We do not know yet. But banks can assess the intention of borrowers, and whether they want to pay or not."

Pointing out that banks have to rely on the legal system to recover loans from defaulters including the wilful ones, he said, "The problem is that our legal framework is very weak. Exploiting the system, many big defaulters can get stay orders from the courts, leaving us [lenders] in the lurch. This cannot be done in other countries."

"There are many recommendations on how to make the money loan courts more effective. A year ago, we told the law minister at a forum. A proposal was also made by the Bangladesh International Arbitration Centre (Biac). The authorities at that time said they will look into the matter but nothing has been done so far," Selim RF Hussain said.

"A major reform of the legal framework is necessary, otherwise, there will not be much improvement in the recovery of defaulted loans," the ABB chairman added.

A managing director of a private bank, wishing not to be named, also stressed the enforcement of the new regulations. He told TBS, "Those who are supposed to enforce them oftentimes cannot do it for various reasons while large loans remain stuck as various influential parties exert their power in the process."

Syed Mahbubur Rahman, managing director & CEO of Mutual Trust Bank (MTB), told TBS, "The new amendment is a move towards the right direction, but the main challenge is the implementation." 

He, however, believes that it is possible to bring down the loans of wilful defaulters if the enforcement authorities take action with the right intentions. 

"A large portion of the deposits we take have a maturity period of fewer than two years. But sometimes it takes 8-10 years to get a final verdict from the court in a default case. In such cases, banks have to face a liquidity mismatch," the MTB CEO said.

When asked how the problems can be mitigated, Mahbubur Rahman said a significant margin can be kept as security from the defendant if he/she filed an appeal against a judgment of the money loan court. It will reduce the number of appeals significantly. 

In addition to increasing the number of judges and courts, a separate bench should be opened in the High Court for dealing with loan cases. Although not possible in every district, separate courts can be formed by combining the nearby districts, Syed Mahbubur Rahman said. 

Besides, due to the transfer of judges, a lot of time is spent studying the case after the arrival of the new judge, which needs to be addressed as well, the MTB CEO added.

When asked whether it is possible to accurately determine the financial capacity of the borrower, Emranul Huq, managing director & CEO of Dhaka Bank said, "It will be a bit difficult to determine that, but it is possible if all parties concerned agree on it. If the changes brought in the proposed law are implemented, the amount of default loans will be greatly reduced." 

There are wilful defaulters among regular defaulters and if the punishment for wilful defaulters is not ensured, default loan recovery will not progress much, he said.

Stating that the provision to limit the appointment of bank directors from one family will not make a big impact, a managing director of another bank, on condition of anonymity, told TBS, "The real issue is governance. Owners can include their loyalists on the board of directors if they wish. In most cases, the appointed directors are not independent. Many directors are relatives of bank owners or other directors. In most banks, they come to these positions at the will of the bank owner."

According to the central bank's data on money loan courts, the number of cases for recovery of default loans has increased due to legal complications, but the settlement rate is very low. 

At the end of 2022, more than 72,000 cases are pending at money loan courts which were filed to recover around Tk1.67 lakh crore of default loans. 

But more than 69,000 cases involving Tk1.53 lakh crore were pending in the courts at the end of June last year, meaning both the cases and the outstanding amount have increased in a span of six months. Only Tk21,000 crore have been recovered from defaulters in these six months.

At present, private banks have the highest number of pending cases, with more than 43,000 cases involving around Tk88,000 crore. 

On the other hand, state-owned banks have around 15,000 pending cases with a total outstanding amount of Tk71,000 crore.