Cabinet nods tougher laws on wilful defaulters with ban on travel, political posts
Wilful defaulters will be barred from travelling abroad, registering houses, vehicles and companies as well as being in committees of political parties, says the draft Bank Company (Amendment) Act, which the cabinet approved Tuesday.
The draft act also says not more than three people from one family can become directors of a bank.
Briefing newsmen following the cabinet meeting, Cabinet Division Secretary Md Mahmudul Hossain Khan said according to the approved draft law, a bank can also file criminal cases against wilful defaulters if they choose to.
The draft act also prohibits lending to directors without collateral.
After assuming office in 2019, the current government prepared the draft the following year. However, processes to finalise the draft had been progressing at a snail's pace.
The Cabinet meeting chaired by Prime Minister Sheikh Hasina on Tuesday gave the final approval to the draft after the IMF stipulated that the draft law should be tabled in the Parliament by next September.
The much-needed amendments to remove the legal grey area and rein in bad loans have been in the process for years with the central bank preparing the draft in 2020 and getting feedback from stakeholders. The draft seeks changes to a number of provisions of the 1991 Bank Company Act and inclusion of some new provisions.
The cabinet approval of the draft, which followed Bangladesh's renewed pledges for financial sector reforms made to IMF to get $4.7 billion loan support, is seen as the government's strong stance against loan defaulters, seeking to bar them from holding posts in political parties, with the general elections expected in December or January next. The existing law bars loan defaulters from contesting elections.
Bankers and economists, while welcoming the move, have stressed that the toughened provisions should not be on paper only, those must be in force to put the banking sector in order. The bank company act was amended back in 2013 too with tougher provisions for default loans and bank boards, but the provisions were relaxed on various occasions leading to gradual deterioration of banks' health, they pointed out.
'Penalties should be enforced'
Former central bank governor Saleh Uddin Ahmed told The Business Standard, "It seems like, someone wanted it and so a law was made in a hurry. A more detailed and explanatory Bank Company Act was needed."
He stressed that enacting the law will not be enough. Penalties for violating the law should also be enforced.
The existing Bank Company Act does not say anything about wilful defaulters. After the 2014 election, when Abul Mal Abdul Muhith was the finance minister, the amount of defaulted bank loans increased a lot.
At the time, many big industrial groups, alongside their new investments, became defaulters. They then moved the High Court to secure a stay order on being categorised as defaulters, only to take new loans. Since then, the use of the term 'wilful defaulters' started to increase and there have been demands to form a bank commission to take actions against them.
In 2019, after taking charge of the finance ministry, AHM Mustafa Kamal announced that default loans will not increase 'even by a single taka'. The ministry, subsequently, added special provisions regarding wilful default loans in the draft to amend the Bank Company Act.
Who are willful defaulters?
Willful loan defaulters are those who intentionally refuse to repay their loans or who have the ability to repay but choose not to do so.
Besides, taking loan in the name of a non-existent organisation or company with forgery, deception and false information, taking loan for one purpose and using it for another or transferring loaned money will also be considered as wilful defaults.
The International Monetary Fund (IMF) has also asked the Finance Company Act to be amended by September.
Besides, the agency has also asked amendments to be brought to the Bankruptcy (Amendment) Act and the Money Loan Court (Amendment) Act in the next fiscal year and the Negotiable Instruments (Amendment) Act in the Parliament next fiscal year. All the draft laws have already been prepared and published on the website for comments by the Financial Institutions Division.
The IMF said, these reforms will help modernise the financial sector, improve the legal environment of credit and business activities, enhance the insolvency regime, and facilitate recovery of loans.
It further said, stronger governance and regulatory framework will strengthen the financial sector and support medium-term growth objectives. Existing policies for nomination and appointment of directors of state-owned commercial banks (SoCBs) are being examined by an independent committee, which will suggest policy recommendations to strengthen the corporate governance of SoCBs.
"To reduce bank balance sheet weaknesses, particularly of the SoCBs, we will pursue bank specific resolutions. We are developing enforceable Memorandum of Understandings (MoUs) to reduce the average NPL ratio to below 10 percent for SoCBs and below 5 percent for private commercial banks (PCBs) by 2026," the government committed to the IMF.
"These MoUs will also aim to increase capital adequacy ratios and provisioning coverages of SoCBs to 10 percent and 100 percent and of PCBs to 10 percent and 100 percent by 2026," the government had said.
Mahmudul Hasan Khan said the banks will provide the list of wilful defaulters to the Bangladesh Bank.
"Bangladesh Bank can impose restrictions on wilful defaulters from going abroad. Besides, it can impose a ban on trade licence issues and ban on company registration with the Bangladesh Securities and Exchange Commission (BSEC) and the Registrar of Joint Stock Companies And Firms," he said.
"A person or institution listed as a wilful defaulter cannot become a director of any bank company or financial institution within five years after being exempted from the list," Mahmudul Hasan said, adding, "If the director of any bank or financial institution is considered a defaulter, the central bank can declare his directorship vacant."
According to the draft law approved by the cabinet, banks and financial institutions will form two separate committees as per the directives of the Bangladesh Bank to identify and finalise wilful defaulting borrowers. Banks and financial institutions will send the list of wilful defaulters to Bangladesh Bank from time to time.
Once the list is finalised, the wilful defaulter can appeal to the Bangladesh Bank within 30 days and Bangladesh Bank's decision in this regard will be considered final.
"Bangladesh Bank can send the list of wilful defaulters to various agencies of the government and if requested to take necessary measures to ban them from travelling abroad, ban car and house registration, trade licence issue and company registration at RJSC, the relevant government agencies will take necessary action," according to the draft law.
Besides, it states that wilful defaulters will not be considered eligible to receive any state honours or participate in state functions and cannot sit on any committee of any professional, business, social, cultural or political organisation.
Mahmudul Hasan Khan said, if the wilful defaulters fail to pay the full amount within two months of receiving the bank notice, a case can be filed in the money loan court.
He also said if any bank or financial institution does not send the list of defaulters, Bangladesh Bank can impose a maximum penalty of Tk1 crore. Even then, if the violation continues, a fine of Tk1 lakh per day can be imposed.
Transactions with bank related persons, granting of loans to directors of banks and taking collateral from them have been included in the new draft.
Anyone who is a member of the board of directors of the bank or his relative must take the loan with collateral or bond or security.
The Bank shall not grant any loan or advance to any director or member of the director's family other than a secured loan or advance.
"Now it is specified that every one, whoever he or she may be, must provide collateral. It has been made mandatory for everyone," said Mahmudul Hasan and added that the clause has been added so that the Bangladesh Bank can conduct regular inspections of institutions or foundations financed by bank companies.
How do other countries punish wilful defaulters?
In India wilful defaulters may be declared as such by the banks or financial institutions that have extended the loans, and their names may be published in a public database of defaulters. This can have serious consequences for their credit scores and ability to obtain loans in the future. In some cases, legal action may also be taken against them, including criminal charges.
In the United States wilful loan defaulters may be sued by their creditors or lenders, and if they are found to be in default, a judgement may be entered against them. This could result in wage garnishment, property seizure, or other measures to collect the debt.
China penalised loan defaulters by putting restrictions on enjoying different social benefits that regular citizens are entitled to. Loan defaulters are unable to purchase air tickets, purchase tickets of high-speed trains, or serve as executive or representative of corporate entities. This blacklist contains many political bodies, legislative and government staff, of China. There are no exceptions in this punishment. They cannot even buy any real estate.
Malaysia also took punitive action against loan defaulters. Defaulters in Malaysia are not allowed to leave the country.