As per Banking law and particularly loan recovery law, bankers in Bangladesh are most fortunate bankers in the world as they have authority to extend loan with without any liability for default loan. There is no accountability for selection of wrong borrower or wrong feasibility of investments.
The borrowers are responsible for any kind of mistake of bankers or unforeseen business or natural environment causing loss of investment. Bankers have hardly any responsibility to recover loan and the Artho Rin Adalat act is sufficient to hand over the responsibility of recover of loan by court. The Artho Rin Adalat act made the Bankers inefficient, lazy and corrupt. They get additional bonus and other benefit for recovering the default loan.
Banks use to lend loan to financially solvent borrowers or prefer to extend loan to known old clients. But the intermediation for planed investment is a social responsibility of Bankers. In many counties there are heavy directed lending with over investment in low return projects often result in low profitability and poor asset quality.
Directed lending may cause increase in default loan even though they ensure national/social commitment. Prudential regulations of India and Nepal have clearly directed the commercial banks to lend certain portion of their credit portfolio to priority sectors.
In Nepal, banks are required to extend loans to the priority and deprived sectors up to 12% of their advances but this requirement is being phased out so that by 2002-03 it is reduced to 7% by 2003-04 to 6%, 2004-05 to 4%, 2005-06 to 2% and 2% for 2006-07.
From FY 2007-08,investment in priority sector is not compulsory.In India all banks must lend 40% of their net loan to the priority sector, out of which 18% should be given to agricultural sector, 10% to the 'weaker sections' and 1% of previous year's total advances is given under the Differential Rate of Interest (DRI) scheme.
Foreign banks in India must make 32% of their loans to the sector, out of which, no less than 10% should be allocated to small-scale industries sector and no less than 12% to the export sector.
The priority sector broadly covers businesses or schemes to which the government wants to channel credit to achieve its social objectives, including agriculture, small-scale industries small business, retail trade, small transport operators, professional and self-employed persons, housing, education loans and micro-credit.
The regulations of India and Nepal have clearly directed the commercial banks to lend certain portion of their credit portfolio to priority sectors; however, the regulatory bodies in Bangladesh, Pakistan and Sri Lanka have issued no such guidelines except a small port of loan for SME or any other small sectors.
The law of the land does not give any authority to exempt any loan or interest thereof but the Banks are cleverly keep the Balance Sheet in order to satisfy the donor and international standard practice of loan provisioning etc. Banks use to write off the classed loans to clean up their Balance Sheet and release the blocked fund against classified loan amount for investment. But never "forget and forgive".
These are very specifically mentioned in the instruction of Bangladesh Bank. As per the circular ref: BRPD Circular no: 2 dt 13 January 2003 sec 3- Bank will continue efforts to recover the amount and if not already goes to court, the bank must file case against borrower before write off.
Sec 4 : Bank will have separate debt recovery unit to collect the write off debt. Even Bank appoint independent recovery unit for collection of the amount (sec 5). Bank will not mention the amount in debit account but maintain a separate ledger and mention in note at Balance sheet (sec 6).Bank will report about the borrower as defaulter to CIB and he will not have any further loan in future (sec 7).
It is interesting to note that after 10 years of circular of write off of loan and case against exempted borrower, the Central Bank find that the cost of litigation is more that capital and interest earn in case small amount, hence BB allowed the FI not to go for litigation for loan amount less than Tk50,000 as per BRPD Circular no 13, dt November 07, 2013. It is categorically be mentioned that unlike any other countries no defaulters are relieve of liability of any loan or interest either appear in Balance sheets or not.
Nepal has No specific prudential guidelines on the write off of nonperforming loans by NR Band banks can write off their loss advances at their own discretion. In Pakistan Bad / irrecoverable loans may be written-off by the banks themselves with the express approval of their Board of Directors or their nominated/designated authority/ committee. Before allowing write-off, all liquid assets held under lien and pledged goods should be realized and appropriated towards reduction of outstanding amount and should be legally cleared by the bank's legal counsel.
Sri Lankan Bank may as there is no specific prudential guidelines on the write off of non-performing loans by CBSL and banks can write off their loss advance sat their own discretion.
Real picture of classified loan is not reflected in Bangladesh as classified loan becomes a regular loan by rescheduling but in India once a loan is classified, by rescheduling its status becomes sub-standard not a regular loan. Bangladesh already take preventive measure regarding rescheduling by stating that "habitual" defaulters should not get any loan rescheduling facility.
Bangladesh borrowers shoulder additional burden of Interest on interest. Sec 28/ka/II of Banking companies act amended in 2013, the Interest was included with loan and the interested will inflated further showing huge loan amount. Any respite of loans in disregard of the provisions of above subsection, shall be illegal, and the director or the authorized officials whoever is responsible for such a respite shall be punishable with imprisonment for no more than three years or a fine of no more than three lac Takas or both as per Banking company act.
Despite all liberty of Bangladesh regulation the default rate is higher in Bangladesh. More over there is hardly any breathing space for borrowers for genuine cause of loss in the business. Write-off is an internationally acceptable procedure; Bangladesh, India and Pakistan has specific guide line for write-off but Nepal and Sri Lanka does it at their own discretion. The media report and "expert" opinion is that the Banks are hiding the real default loan and every now and then write off loan and interest causing huge loss of bank and risk of depositors.
There is a wide circulated gossip that defaulters are enjoying all benefits and serving in the Board of Director of other banks. One of the "star" defaulters believed to be holding political office and very influential and above the law of the land. Interestingly, the "star defaulter" was always star during all political regimes of last few decades. The common people also believe these stories. There are similar believes are discussed in the seminar of Bangladesh Institute of Bank Management (BIBM) where the scholars usually attend seminars and discussions at BIBM.
Thanks to Mr Faruque Moinuddin, a career banker for an elaborate article at Daily Prothom Alo on 29th August, 2016 on same subject on bankers perspective. It has been said that Banker cannot hide real bad debt and cannot write off due to strict law and rule of the land. In some cases the interest may be exempted under strict rule and approval of Bangladesh Bank.
The truth should be admitted and widely discussed.
The writer is a legal economist
Email: [email protected]
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