Legal reforms are crucial for bank consolidation and identification of willful defaulters

At this moment, the most discussed issue in the banking sector is weak bank consolidation and willful defaulters being identified and brought under strict penalties. For a long time, the country's economists and bankers have been suggesting reforms for the banking sector, but the authorities have not heeded them. Recently, somewhat unexpectedly, Bangladesh Bank has instructed weak banks to merge with stronger ones in order to consolidate the banking sector. Simultaneously, there have been indications of adopting stringent measures against willful defaulters, who are considered as a 'menace' to the banking sector due to their significant influence and notoriety. Many have raised questions about why Bangladesh Bank has become vigilant regarding willful defaulters of loans and why it is initiating efforts for the consolidation of weak banks. Bangladesh Bank has not taken consistent or self-motivated initiatives to enforce stringent legal measures to address weak bank consolidation and identify willful defaulters of loans.
Bangladesh Bank has not taken consistent or self-motivated initiatives to enforce stringent legal measures to address weak bank consolidation and identify willful defaulters of loans.

On January 30th of last year, Bangladesh signed an agreement with the International Monetary Fund (IMF) for a loan assistance of 470 crore US dollars. The first installment of the loan, totaling 47 crore 43 lakh US dollars, was disbursed to Bangladesh on February 2nd of the same year. The second installment of 68 crore 10 lakh US dollars was disbursed in December of that year. One of the conditions of the agreement is to significantly reduce the amount of non-performing loans in the country's banking sector and ensure internal governance.

Failure to comply with this condition could lead to problems in the future regarding the disbursement of loan installments. Therefore, Bangladesh Bank has taken initiatives to manage the reform programs in the banking sector. The sincerity of these initiatives by Bangladesh Bank has prompted many to raise questions. Meanwhile, Exim Bank Limited and Padma Bank Limited, facing adversity, have signed a memorandum of understanding to merge. Additionally, 7 to 10 more banks could undergo consolidation. It is surprising that Bangladesh Bank has not yet enacted any laws regarding bank consolidation. Without specific legislation, doubts naturally arise about how successful an initiative can be undertaken beyond the scope of existing laws. Bangladesh Bank has issued a circular for the identification of willful defaulters and the adoption of measures against them. However, achieving such a significant endeavor solely based on a circular seems unlikely. Those involved in willful defaulting are extremely powerful and often enjoy political patronage. Consequently, imposing punitive measures against them may not be straightforward. Many argue that the initiatives taken by Bangladesh Bank for bank consolidation and identification of willful defaulters are primarily aimed at pleasing the IMF. There seems to be no effort within these initiatives to restore stability in the banking sector.

While the term "bank consolidation" is being used, there hasn't been a specific definition established for consolidation versus acquisition. The signing of a memorandum of understanding for consolidation between Exim Bank Limited and Padma Bank Limited has raised doubts whether it is indeed consolidation or acquisition. A prominent example of bank consolidation is the merger of Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha to form Bangladesh Development Bank Limited (BDBL). No employees of the previous entities were laid off following the formation of BDBL. No bank has dominated over another bank. Both institutions have transitioned under new names by discontinuing their previous existence. However, the way Exim Bank and Padma Bank are coming together is better termed as acquisition rather than consolidation. It appears that Padma Bank is losing its identity amidst the merger with Exim Bank. If both banks had started their journey under a new name or as Exim-Padma Bank Limited, then it could have been considered consolidation. Although Exim Bank and Padma Bank will be integrated in what process, it cannot be said conclusively yet. It seems that Padma Bank may be absorbed by Exim Bank. Until Bangladesh Bank adopts specific guidelines for bank consolidation, final comments on this matter cannot be made.

However, considering the policy announced by the Bangladesh Bank regarding the identification of willful defaulters, it can be said that the likelihood of success for this initiative is very low. Firstly, implementing such a legal program would not be possible solely through issuing circulars by the Bangladesh Bank. For this, specific legislation would need to be enacted by the National Parliament.

Most members of the National Parliament are business-industrialists themselves. Many among them have been identified as willful defaulters. However, prior to the National Parliament elections, they have regularly updated their loan accounts through detailed scrutiny. Would they advocate for the identification of willful defaulters and effective measures against them? What we have observed recently, especially in the last 5/6 years, is that the amendments made to the existing laws in the banking sector have protected the interests of willful defaulters and dishonest clients. It seems unlikely that any legislative reforms will be able to address the issue of willful defaulters while safeguarding the interests of regular loan repayment clients. By examining recent legislative amendments, it becomes evident that these laws primarily serve the interests of certain individuals.

First and foremost, it is important to mention the context of the existing laws regarding loan rescheduling. Loan rescheduling essentially refers to extending or reducing the time limit for repayment of installments for loans received from banks. Typically, the time limit for repayment of loan installments is extended rather than reduced. For example, the due date for installment repayment of a loan may be set for June 30th, 2024. However, the borrower may be unable to repay the installment in June due to various reasons. Upon their application, the bank management committee may grant them permission to repay the installment on January 31st, 2024. This is an example of loan rescheduling.

However, just a few days ago, a special directive allowed the opportunity for loan rescheduling for a total of 10 years, including a grace period of one year, with only a 2% down payment. This opportunity has been utilized by at least 38 thousand individuals and institutions to reschedule their loans. Those who have opted for loan rescheduling will not be classified as defaulters as long as they do not violate the terms of the agreement. Among the 38 thousand loans that have been rescheduled, a significant portion consists of willful defaulters. According to the law, they cannot be classified as defaulters because the law has granted them amnesty for a certain period. So, how will banks take action against them?

In 2015, due to political violence, the business and commerce sector incurred losses. In response to this crisis, a prominent group of entrepreneurs in the country has restructured 500 crore taka and more nonperforming loans. Loan restructuring and rescheduling are essentially similar in nature. Eleven groups of entrepreneurs have restructured 15 thousand crore taka of nonperforming loans. They will not be classified as defaulters for a certain period. At that time many people raised the question, the defaulters of 500 crore rupees and more have suffered due to political instability, have others not suffered? So why is the legal opportunity only given to a special class? The restructuring of loans through a 20% down payment and the facility provided for restructuring loans of defaulters with 500 crore taka and above will not be revoked until any further notice. This facility cannot be considered as a recognition of willful defaulters in any way. Taking action is a distant possibility.

Earlier, the principles of debt settlement were of international standards. Although the term 'loan write-off' is uttered, many people think that the bank has waived its outstanding debt or waived the loan claim. That is not the case. The bank's claim on the foreclosed loan account remains unchanged. That is, the bank does not waive the loan amount due to the foreclosed loan account in any way. As part of disclosing defaulted loans as 'Non-performing Loans (NPL)', banks transfer the accounts from their main ledger to another account for maintenance. The banks make utmost efforts to recover the funds of these loans. If a loan account remains classified as substandard for over 5 years, appropriate provisions are maintained before filing a case in the relevant court, as per previous provisions. This provision used to involve disclosing a loan account. Several years ago, this law was amended. If a loan account becomes classified as substandard, it is considered eligible for disclosure after three years of being overdue. However, this duration has recently been reduced by one more year. Now, if a loan account remains substandard for over two years, it is eligible for disclosure. For loans of less than 5 lakh taka, the condition for filing a case in the appropriate court has been revoked. The provision for maintaining a hundred percent provision has also been withdrawn. Provision is a technique in the loan security regulation. It is necessary to maintain provisions at a predetermined rate opposite each class of loan account. Provision is maintained opposite the loan accounts which are classified as substandard, meaning the accounts from which future loan installments are not expected to be received. One hundred percent provision is maintained against these loan accounts. The disclosed loans are not accounted for as default loans in the bank. The provision method for loan disclosure is an accepted technique for reducing the amount of default loans in the bank.

Bangladesh Bank has stated in their issued circular that a high-powered committee of the bank, led by one of their employees under the supervision of the management, will investigate willful defaulters. However, this may not be appropriate in any way because without the collaboration of corrupt bank employees, no one can become a willful defaulter. There are certain dishonest employees within the bank who approve loans recklessly, disregarding the bank's interests for their own personal gain. If those who are involved in the investigation committee for willful defaulters have any connection to the approval process of those loans, would they want to label the recipients of those loans as willful defaulters? Instead, retired judges or committees led by retired judges with multiple authoritative powers could be formed to initiate efforts to identify willful defaulters impartially.

In recent times, amendments have been made to laws concerning loan account disclosure, loan account reclassification, and loan account restructuring, revoking those which fail to uphold international standards. If necessary, these laws should be further strengthened."

Bangladesh Bank's autonomy must be ensured simultaneously. Under the Ministry of Finance, there exists a separate division for banks and financial institutions. As a result, there is a dual governance structure in the banking sector. The way Bangladesh Bank, which falls under private ownership, can wield power is not applicable in the case of state-owned banks. Bangladesh Bank can better understand the problems and potential of the banking sector compared to the Banking and Financial Institutions Division. Above all, political consensus is needed first. Such initiatives will never be implemented without the political consensus of the government.

Author: Retired General Manager, Bangladesh Development Bank Limited (PBL) and author on economic issues.