Will changing bank law give more leeway to loan defaulters?

A new law is made or an existing one is amended to deal with the changing social and economic situation. But when it comes to amendment of the Bank Company Act, the first question that strikes the mind is whether it is designed to make things easier for those who violate bank rules.

The very question came from opposition lawmakers the day parliament passed amendments to the Bank Company Act in January last year. The changes extended a family's grip on a bank, allowing four members of a family to sit on the bank board at a time. They also paved the way for directors to stay on the board for nine years in a row, up from the previous six years.

Jatiya Party lawmakers walked out of the House in protest, and said the amendment would give more privilege to loan defaulters and destroy the banking sector.

AMA Muhith, the then finance minister, defended the changes in his trademark style, shrugging off all concern and criticism. Their concerns came true. 

Default loans soared to Tk1,12,425 crore in June, prompting the finance minister to give four state banks a deadline to come up with a business plan to run on their own. Tuesday's meeting was to discuss the plan.

Now, the present finance minister, AHM Mustafa Kamal, also appears to be looking for remedies to default loans by further changing the bank act. 

"Default is always an issue of concern, and we all agreed to get relief from it through the legal process by bringing changes to the bank company act," he said on Tuesday, after meeting the top executives of four state-owned banks. 

The intended changes will sharpen the law and help banks adequately cover loan risks by mortgage, as well as requiring personal guarantees from directors of a borrowing company.

He felt the need for the changes to remove 'weaknesses' in the relevant law, and to make it easy for regulators to take action against loan defaulters.

If the changes are made, it will be the ninth amendment to the Bank Company Act since it came into force in 1991.

The finance minister's hints of a further amendment followed a series of initiatives he and the central bank undertook to improve the health of the banking sector, especially of state-owned banks.

In April, Bangladesh Bank eased loan classification rules, and in May it announced a new loan rescheduling policy making loan rescheduling easier. 

Is it a need of the time?

The finance minister revealed the legal grey area. He said currently default loans are regulated by a Bangladesh Bank circular that classifies loans. There is no law to specifically deal with loan defaulters. 

Will further amendments help? Or is a completely new law needed? 

Former central bankers see no dearth of laws to deal with loan defaulters. They stress strict enforcement of existing laws to restore discipline in the banking sector.

Apart from the Bank Company Act, they refer to the Company Act 1994, the Bankruptcy Act 1997 and the Money Loan Court Act 2003.

"No country has a separate law for default loans. Central bank governors sit in Switzerland and agree on a set of rules to discipline the banking system," said Khondkar Ibrahim Khaled, former deputy governor of Bangladesh Bank.

"The problem is not with the law. The problem lies with people close to the government in power who dictate the sanctioning of loans not on merit, but on political consideration," he said. 

The existing bank company act defines when a loan becomes bad, how a director becomes liable if his company fails to repay, and how the price of mortgaged properties should be assessed. Section 28(ka) of the act stipulates that banks are free to file cases against loan defaulters. 

And no law will stand in the way if banks take legal measures to realise loans they have already written off.

The Money loan court law was enacted in 2003 to help banks recover default loans. Loan courts are empowered to dispose of cases in 90 days, and any petitions going against loan court verdicts will not be accepted in other courts.

Former governor of Bangladesh Bank Dr Salehuddin Ahmed said laws are already there. "What is missing is strict enforcement of existing laws," he said. 

Cases in loan courts are time-consuming. Steps are needed to expedite the process through enhancing facilities in district courts and dedicating separate benches in higher courts, he pointed out.

If amendments are really needed, those should be done carefully after consulting stakeholders, he suggested. Otherwise, amendments might be as counterproductive as the ones in the past, the former central bank chief pointed out, referring to the one done last year.