No liability of independent directors for loan default by NBFIs: Bangladesh Bank

The Bangladesh Bank has said independent directors will not be held responsible for loan defaults by Non-Banking Financial Institutions (NBFIs).

Independent directors will not be considered defaulters if the finance company defaults in compliance with Section 16(5) of the Finance Company Act 2023, said a circular issued today.

NBFIs used to appoint individuals of their choice as independent directors on their boards. However, from now on, the Bangladesh Bank has implemented a policy requiring these appointments to be made from the central bank's panel.

The central bank today issued a circular regarding the appointment of independent directors and directed all scheduled banks to comply.

The circular states that the primary responsibility of independent directors is to protect the interests of depositors and shareholders. 

"However, even when the board of directors made decisions that conflicted with the interests of the institution and depositors, independent directors did not register a dissenting note. Therefore, to ensure transparency and greater authority in the appointment of independent directors, this circular has been issued."

According to the Finance Companies Act, a financial institution can have a minimum of two independent directors.

Contacted, a senior official of the central bank said when a financial institution defaults, many capable and transparent individuals are also unfairly categorised as defaulters. Hence, the new policy ensures that independent directors will not be considered defaulters.

Under the existing rules, independent directors, though separate from the shareholding of a finance company, were deemed defaulters when the company defaulted. As a result, many skilled individuals with clean records were reluctant to serve as independent directors at finance companies.

The policy further states that for appointing independent directors, the central bank will create a panel of independent directors. Financial institutions can send names and necessary information of suitable candidates. After verifying them according to set criteria, the Bangladesh Bank will include them in the panel.

Another central bank official stated, "The financial institutions will apply for independent directors based on the panel. We will make the appointment from their applications. 

"However, the appointments will not be made from the list of names of officials the institutions send for being included in the panel."

"If the position of an independent director becomes vacant, the financial institutions must inform the Bangladesh Bank within three business days. Moreover, they must notify at least 30 business days before the current term of the independent director expires."

If any irregularities are observed within the financial institution, or if independent opinions are obstructed, or if dissenting opinions are not reflected in the board meeting minutes, the independent director must immediately inform the Bangladesh Bank in writing, the circular added.

"If necessary, the independent director will directly inform the Bangladesh Bank of their dissenting note regarding any decision made by the board. Independent directors will not sign any guarantee documents on behalf of the financial institution," it said.