How an inexhaustive legal regime contributes to rising non-performing loans

Photo: Collected

The economy of a country is primarily dependent on its capital and money market. Traditionally, our capital market is weaker than the money market. Moreover, the share market scandals of 1996 and 2010 weakened the capital market. So, our economy is highly dependent on banks and non-banking financial institutions. 

Unfortunately, non-performing loans are a critical problem plaguing our banking sector and are increasing day by day. Now the amount is more than Tk1.34 trillion. 

Most of these loans can be attributed to the so-called big fish. They can cash in high amounts of loans thanks to collusion with high officials of the concerned banks, while honest businessmen don't get a loan even after directions from the government to the banks. According to experts, non-performing loans would have been much higher had the central bank not relaxed the loan classification policy. 

One of the main reasons NPLs continue to grow every year is that our legal mechanism for recovering defaulted loans is inconsistent and archaic. Through a single act, Insolvency and Bankruptcy Code 2016, India manages the whole system for recovery of money, procedure of insolvency and collecting all government dues. Unlike India, we have a hotchpotch of laws.

At present, two major laws control our loan recovery procedures, Artha Rin Adalat Ain (Money Loan Court Act) 2003 and Bankruptcy Act 1997. Bangladesh enacted the Bankruptcy Act in 1997 to quickly recover borrowed money from loan defaulters. An individual can be declared 'bankrupt' through an order of adjudication by the bankruptcy court if he commits an act of bankruptcy, as described in section 9 of said act. 

The act provides opportunities for both creditors and debtors to initiate bankruptcy proceedings. A petition may be presented before the bankruptcy court by the debtor himself or the creditors to publish an order of bankruptcy. According to section 13 of the Act, in case of a petition by the debtor himself, certain conditions must be complied with, e.g. (i) he has to mention specifically in his plaint that he is unable to pay his debt, and (ii) the amount of debt should be minimum Tk20,000 or due to his incapability of paying off the debt, the debtor is not under arrest or detained in prison in the process of execution by the court, or his property is not attached amid the filing of the plaint. 

The main limitation of the Act is it is focused on individuals and does not extend to corporate bodies and cross-border bankruptcy issues. As a result, large scale defaulters are mostly out of its orbit.  

There is a new law being drafted by Bangladesh Bank on bankruptcy. The draft provides that if a person becomes bankrupt after borrowing from a bank or financial institution, he will not be able to enjoy government facilities and contest in any election. He will not be allowed to vote either. In addition, he will not be entitled to take fresh loans from a bank or a financial institution. He also will not be able to take part in the state functions.

The Artha Rin Adalat Ain (Money loan court act 2003) 2003 was enacted by the legislature by repealing the Artharin Adalat Ain-1990 to recover loans from defaulted borrowers. This act is bank-friendly. Here only banks, financial institutions and other loan-providing agencies, defined in section 2(ka), can file the suit to recover lending money.

Section 4 of the money loan court act stipulates the formation of courts in each district by a joint district judge. Section 12 provides that without publishing a notice in the national dailies or not fulfilling the procedures of an auction, a suit cannot be filed. Section 22 provides alternative dispute mechanisms out of the court. 

According to section 41 of this Act, 25% of the money should be submitted before the appellate court for appeal. There is no such procedure in normal civil matters. 

According to section 47, a bank cannot file a suit for more than 200% of the loan's original amount. According to section 17, the disposal of the suit shall be done within a maximum of 120 days. In practice, it takes years, even 5-8 years, to settle a suit. 

Though it is a special law, the procedures resemble ordinary, backdated civil procedures. Although there is no question or review of the court's proceedings according to section 20, there are many situations or practices where the defendant can move to the High Court Division to delay the proceedings. 

Most defendants try to keep lawsuits stuck at the stage of hearing in the money loan court. The byways, lacunae and loopholes in the system leave money loan suits filed by banks pending with the lower courts year after year. 

The present legal mechanism is a lengthy process and has become an obstacle to recovering loans through legal means. Procedural delay in the disposal of cases is a major challenge and hurdle to the recovery of non-performing loans. Many loan defaulters take the opportunity of the flaws in the system and protracted legal bureaucracy in the disposal of related cases.

Under the money loan court act, quasi-legal tribunals like in India can be set up by creating provisions for recovery officers to directly execute the decree, without filing another execution case under section 26 of this Act. 

There should be specific provisions for issuing certificates of possession in favour of the banks immediately after the judgement given by the court. A separate bench of the High court division of the Supreme court should be set up for speedy disposal of the matters arising out of money loan suits in the lower court. This bench should only hear and dispose of the writ petitions and appeals filed by or against the banks. 

Apart from the two mentioned above, the Negotiable Instrument Act 1881 is also a tool to recover unpaid loans, by filing quasi-criminal cases. In this procedure, a cheque dishonour case is filed before the magistrate court if the amount is not paid within 30 days on issuing a legal notice to the accused, according to Section 138 of this act. 

After taking cognisance, the case is transferred to Sessions Court. After going to Sessions Court, a fresh number is given to the case. It usually takes six to nine months to transfer a case from magistrate court to session court. Hence, most of the cases don't get resolved within the stipulated time frame and a cheque dishonour case takes about two or more years to settle.

After the passing of the Money loan court act, the necessity of the Public Demand Recovery Act 1908 decreased drastically. All of the banks have since filed money loan suits to collect defaulted loans. Rajshahi Krishi Bank and Bangladesh Krishi Bank usually files a certificate suit for recovery of loans up to  Tk5,00,000. If it exceeds the amount, a suit is filed before the money loan court. 

Looking at it from a different lens, our legal mechanism for loan recovery is partial to banks or financial institutions and hostile to small borrowers and mortgagors. The bank has the opportunity to take both civil and criminal action simultaneously against the borrowers. However, our apex court, through its judgments, has given validity to this ongoing practice by loan offering agencies. 

Another critical point is that the rate of interest mentioned in the Artha Rin Adalat Ain is above the regular interest rate. Now, the banks disburse the loans at 9% interest, but a borrower has to pay 12% interest after the judgement delivered by the court.  Sometimes it is 16% to 18%.

Existing laws give extra facility to loan defaulters, but on the other hand, they are not business friendly. To ensure good governance in our banking sector, increasing people's trust and quick recovery of defaulted loans, our concerned laws should be updated on a priority basis. 

Kaium Ahmed. Illustration: TBS

Kaium Ahmed is the Editor at Bangladesh Corporate & Commercial Law Review