Defaulter Groups' Affiliated Companies Can Borrow Loans

 
Banks can extend loans to companies associated with groups that have defaulted on loans until they are classified as willful defaulters. However, in such instances, the process will require approval from the Bangladesh Bank (BB).

In a circular issued on Wednesday (3 April), the central bank upheld the benefits of defaulted borrowers at a time when banks grapple with the challenge of identifying willful defaulters among their defaulting customers.

Section 27 of the Bank Company Act 1991 states that if any group of companies becomes a defaulting customer and there is a reasonable cause for the failure to repay their debts, then any other institution or company belonging to that group will not be considered a defaulter. Such institutions or companies can be granted loan facilities, subject to prior approval from the Bangladesh Bank.

The circular also mentions that if a bank or financial institution classifies a borrower as a willful defaulter, the aggrieved party can appeal to the central bank. Unless the appeal is resolved, banks cannot apply to the Bangladesh Bank for permission to provide loan facilities in favour of any other institution belonging to the group.

The managing director at a Shariah-based bank told journalists that it is a complex process to identify borrowers who have defaulted due to reasonable causes.

"All borrowers would claim that there is a local reason behind their default. In such cases, if new loans are disbursed among these borrowers, it will create further complications in credit governance in the banking sector," he expressed concern.

He also mentioned that many borrowers do not repay their loans, but numerous complications arise in classifying their defaulted loans because they wield significant influence and cannot be categorized as defaulters. In such cases, adding these borrowers to the list of willful defaulters without a specific process is a very complicated matter.

The managing director of another bank said, "Previously, banks did not provide loans to other affiliated institutions if a group defaulted. Now, with it being made even easier, they will obtain fresh loans if they are not classified as willful defaulters. As a result, the amount of bad loans held by banks will increase further." 

He mentioned that in the central bank's circular, it is stated that in the process of identifying willful defaulters, any person or organization that defaults without paying the loan despite being able to repay it will be included in the list of willful defaulters.

"How will bank officials assess the debt repayment capacity of the institution? The central bank should provide more clarification in this area," he added.
In a decisive move to rein in willful loan defaulters, the Bangladesh Bank on 12 March directed scheduled banks to establish dedicated units within their organizations by 9 April to scrutinize and identify those deliberately defaulting on loans.

These units, dubbed "willful loan defaulters identification units," will be under the stewardship of seasoned officials, no more than two ranks below the managing director or chief executive officer of banks. The circular delineates the methodology for identifying willful defaulters.

However, economists have expressed mixed reactions over the move by Bangladesh Bank to allow the affiliated companies of defaulter business groups to take more loans. Financial experts have again and again called upon the government and the regulatory authorities to take stern actions to stop the sick ambience of loan defaulting. Most of the mega loan defaulters exercise influence through government high-ups and political leaders allegedly to avoid paying back loans. Big loan defaulters also escape through regulatory loopholes and thus they skip the defaulter status.

Financial scholars have stated that instead of giving undue privileges to loan scammers, Bangladesh Bank and Finance Ministry should crack down hard on financial fraudsters who have plundered both state-owned and private banks by borrowing huge sums of loans. Even analysts have requested Bangladesh Bank a number of times to expose the names and particulars of top loan borrowers to figure out the true extent of defaulted loans.