Home ›› 20 Jul 2022 ›› Editorial
The Bangladesh Bank (BB) has observed that many banks are involved in giving interest exemptions to their clients bypassing the existing policy. BB issued BRPD circular no 06 dated 21st April 2022 on interest waiver tightening the existing policy to ensure discipline in the banking sector. The latest policy has stated in detail who will get the waiver facility and how the whole process will work. The circular stated that banks cannot waive wilful defaulters’ interest on loans.
The circular has a provision for defaulters for the facility of waiver of interest under certain conditions. According to the circular, the governing board of a bank can be permitted to waive interest worth of maximum Tk 1 million in case of unavoidable reasons including if the project closed is for 3 years, if the recovery of loan and interest could not be recovered from loan margin, other deposit, the asset of the projects and personal properties of the entrepreneurs, death of the entrepreneur, natural calamities, erosion, pandemic and closure of product due to crisis.
The central bank also advised that banks would consider the financial statements of the borrowers for three consecutive years. If the owner's equity of the financial statements becomes positive after paying taxes, they will not get an interest waiver facility.
Usually, banks waive the interest at a time when a natural disaster or other ‘force majeure’ - unforeseeable circumstances that prevent someone from fulfilling a contract - happens. Banks also face difficulties to recover their loans if borrowers die and natural calamities like river erosion take place.
The central bank also asked the financial institutions to keep the wilful defaulter and fraudulent borrowers out of the facilities. According to the directive, the banks should assess the financial statement of the borrowers for three corresponding years before taking the waiver decision. As per the new policy, banks will not waive the principal amount of the loans under any circumstances. The financial institutions will also not allow any waiver to the loans taken by wilful defaulters. Banks will have to manage their funds for loans while waiving any amount of interest.
The funds that have already been transferred to the income segment of banks cannot be waived. Managing directors and CEOs of the banks can waive interest accrued principal amount of Tk 1.0 million, while the above needs to be approved by the respective boards. Banks must consider costs associated with the fund while exempting the interest. The cost of funds refers to how much banks spend to acquire money to lend to borrowers, according to the latest circular. The cost of funds may be relaxed for the projects, which have been closed for three years in a row. If banks do not get back the default loan despite the completion of all legal procedures, the formula of cost of funds can be sidestepped. The state-owned banks, however, will follow the government directives on interest exemption.
The borrowing business may default ‘wilfully’ for several reasons such as deliberate non-payment of dues despite adequate cash flow, underreporting of cash flow, diversion of funds, siphoning off funds etc. The word ‘wilful’ has been in use for the last few decades in the media and in many official documents. Wilful defaulters are actually habitual defaulters who take loans from banks/FIs with mala fide intention not to pay back the loans. Very often banks/FIs do not have legal obligations to properly identify these categories of defaulters. BB has defined 'substandard', 'doubtful' and 'bad' loans, but words like 'wilful' or 'delinquent' are not used as qualifying adjectives before the bank borrowers. At present, the Bangladesh Bank brands all the default borrowers as wilful defaulters when the borrowers fail to repay a loan after it has been rescheduled for the third time. A wilful defaulter will not be able to get more loans or rescheduling opportunities.
In order to rectify the haziness in the law and policy related to bank loans, the government has decided to amend the Banking Companies Act to incorporate a definition of the wilful defaulter. The draft of the Bank Company (Amendment) Act 2021, approved by the Cabinet Division on 17th May 2021 defines wilful defaulters for the first time and provides for stringent actions against them. Wilful defaulters will not be allowed to travel abroad at all. Also, the ban on registering their homes, cars, and companies in their names remains in force. They will not be invited to social and state programmes and will not be allowed to hold positions in any organisation.
However, according to the draft law, as reported in the media, an individual will be considered a wilful defaulter if he or she does not repay a loan, taken under their individual name or for their company, to banks despite being able to pay it back. A borrower will also be defined as a wilful defaulter if he or she transfers any assets, kept as mortgaged in banks, to get loans without prior approval from the bank concerned.
The identification of a wilful defaulter is not an easy task. BB needs to build an institutional arrangement to identify the defaulters. The criteria will have to be based on the borrower's audited profit and loss, balance sheet and beyond to account for any action the borrower has taken affecting the value of the collaterals against the loan and their credit history.
In developing countries, however, wilful default occurs at the equilibrium as (1) the data to verify and cross-check the actual cash flow is unavailable. (2) auditing is not up to the global standard and is often random. It may not be easy to prevent untruthful reporting in the auditing zone if the borrower colludes with the internal auditor of the bank so that the auditor does not truly audit the borrower’s actual cash flow position. Moreover, there is no legal option of auditing the books of accounts of borrowers by the banks. There was even a policy of appointment of a nominated member of the borrowing company in the Board of Directors. But the policy has been silently withheld by the Bankers and BB is silent on this issue. Asymmetric information to monitor the loan operation is one of the major issues for bankers.
If habitual or wilful defaulters fail to repay the loans within the stipulated time, banks will arrange an auction to sell the mortgaged assets of the wilful defaulters as per the Money Loan Court Act 2003. At present, the bank uses the Money loan Court act to recover loans from both wilful and non-wilful defaulters. The amendment of the Banking Law has no option to deal with non-wilful defaulters. It should be specified in the law how to rehabilitate the non-wilful defaulters.
Further, regarding the identification of wilful defaulter policy, BB must have two independent separate committees to 'identify' and 'confirm' the wilfulness of a borrower before any legal action. Otherwise, any borrower may become a victim of wrong identification.
The writer is Non-Government Adviser, Bangladesh Competition Commission. He can be contacted at [email protected]
