Banks vs banks: Suits rising, Tk16,000cr involved

Infographic: TBS

The number of cases filed by banks against other banks over the recovery of loans and other forms of outstanding payments continues to surge and experts say this trend hurts customer confidence and the stability of the financial system. 

According to court sources, the number of bank-vs-bank cases pending with money loan courts across the country stood at 6,876 as of March this year, involving a staggering Tk16,000 crore.

Currently, 3,634 cases filed by banks against other banks are under trial in the four money loan courts in Dhaka alone. These cases involve approximately Tk7,500 crore.

Besides, about 980 appeals against decrees or judgements of trial courts are awaiting disposal, and about 116 appeals are pending with the Appellate Division.

Data provided by Supreme Court sources depict a steady rise in the number of cases filed by banks against banks over the last several years, with 1,223 cases filed in 2022, 1,081 in 2021, and 838 in 2020.

About 11,000 cases are pending with the Dhaka Money Loan Court-3, of which 896 have been filed by banks against other banks. A source within the court told The Business Standard that about 70% of the bank-vs-bank cases are related to disputes regarding LC guarantee or acceptance for local and international trade.

Ahsan H Mansur, a noted economist and the executive director of the Policy Research Institute, warns that the rise in bank-to-bank disputes does not bode well for the industry. 

The continuous growth of these conflicts could erode customer confidence leading to significant negative impact on the overall banking sector in the country, he told TBS. 

Mansur urged stakeholders to take immediate action to address this growing problem before its backlash becomes too large to handle.

To illustrate the gravity of the situation, a case involving two prominent banks can be taken as an example.

In April 2001, Velvet Textile Mills Limited, a textile company, issued a letter of credit (LC) through City Bank's Principal Office in Motijheel, with an approximate value of $40,000. The LC was intended for the purchase of cotton from Square Yarn.

In this transaction, Square Yarn's bank was the Motijheel Main Branch of Mercantile Bank, acting as the LC negotiating bank. 

Once the cotton shipment was made to the customer, Square Yarn sent all the relevant documents to City Bank through Mercantile Bank. City Bank, as the LC issuing bank, accepted the documents. 

Subsequently, City Bank informed Mercantile Bank that the payment would be made within 120 days if the bill met the eligibility criteria. Consequently, Mercantile Bank reimbursed the seller with $40,000.

However, even after three years, City Bank was yet to fulfil its payment obligation to Mercantile Bank. 

In 2004, Mercantile Bank filed a case against City Bank in the Money Loan Court-1 of Dhaka to recover the outstanding amount. 

The court ruled in favour of Mercantile Bank in 2006, decreeing that City Bank owed an additional Tk35 lakh in interest. Eventually, City Bank settled the matter by paying the outstanding interest.

MA Shahjahan, former manager of the Main Branch of Mercantile Bank Limited, stated that this was the first instance of a bank filing a case against another bank for debt recovery after the enactment of the Money Loan Court (Artha Rin Adalat) Act in 2003. At that time, LCs were also conducted in dollars for local trade, he added. 

Incidentally, Bangladesh Bank made transactions in the local currency taka mandatory for local trade six months ago.

An official of City Bank commented that the customer involved in the case was supposed to deposit about $50,000 against the export at the City Bank' Principal Branch. However, the customer did not deposit the money, leading City Bank to file a case against the customer. 

The official, however, could not provide the latest status of the case against the customer.

Why are cases filed? 

Deputy Attorney General Imran Ahmed Bhuiyan, an esteemed expert on bank company laws, clarified that the Money Loan Court Act does not limit the filing of cases solely for the recovery of defaulted loans. According to him, this law allows for the filing of cases to recover any type of debt.

Expanding on the subject, he explained that local and international trade often involves transactions conducted through LCs. To open an LC, one may need to act as a guarantor for another bank, whether it is a local bank or a foreign bank in conjunction with a local bank. If the payment is not made to the negotiating bank after assuming the role of a guarantor, the negotiating bank can file a case to recover the owed amount.

Furthermore, Imran highlighted the concept of indemnity, where a bank issues a written assurance to another bank, promising to pay a specific sum of money to a customer or issue an LC bill. In cases where the customer fails to repay the funds on time, the paying bank can file a case against the indemnifying bank to reclaim the outstanding money.

The expert in Bank Company law also noted that disputes related to pay orders may sometimes lead one bank to sue another bank due to complexities arising in such transactions.

What bankers say

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, highlighted that the volume of international trade is continually increasing. 

He emphasised that LCs are essential for import and export transactions, leading to a rise in bank-to-bank disputes. For faster resolution of these cases, he suggested that the relevant government authorities should act accordingly.

Mohammad A (Rumee) Ali, former chairman of AB Bank, pointed out that apart from cases involving defaulted loan recovery, there is also a significant number of legal cases over disputes among banks regarding transactions. But the number of courts and judges in the country is not adequate to handle the volume.

He suggested that the Bangladesh Bank could play a role in resolving inter-bank disputes. 

He also mentioned that various countries have established arbitral tribunals to settle such disputes and that developed countries often mandate the use of alternative dispute resolution (ADR) methods in their courts. He suggested that Bangladesh could consider adopting similar approaches.

Additionally, the experienced banker emphasised the importance of having guidelines in place so the central bank can take appropriate action against banks.