Reduction of Tk14,500cr default loans through negotiation – is it viable?

With a staggering Tk1.45 lakh crore in default loans as of December 2023, banks have now been directed to recover 1% of the hefty amount through arbitration but the initiative's viability has become a concern among bankers and economists.

In figures, the 1% amounts to Tk14,563 crore. 

Total loans in the banking sector amount to Tk16.18 lakh crore of which 9% is defaulted.

The central bank on Sunday (12 May) directed banks to recover the amount by June 2026 through Alternative Dispute Resolution (ADR) methods instead of suing the defaulting customers.

However, according to managing directors of many banks, though the initiative by the central bank is commendable, its success remains uncertain.

They said the target they have been given is quite big, especially considering that many of the wilful defaulters have taken loans without the intention of repayment.

So, it is quite certain that they will not want to return even with the new method, they added.

A managing director, seeking anonymity, pointed out that even though the country's money loan courts are very strong, it takes 7-8 years to get the defaulted loan amount back and, in many cases, not at all.

"Therefore, why would a customer want to negotiate with the bank when they can return the loan after 7-8 years of filing a case in the money loan court?" he said.

A policy-making officer of a commercial bank said the honesty of those who will negotiate is very important in the case of ADR, as thousands of crores of classified loans will be negotiated and if the negotiator is corrupt, the banks have to take responsibility for the loss.

At the same time, many bank officials who were or are involved in giving out the loans that defaulted would also want to disrupt the process, he added.

Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank (MTB), acknowledged that although the target for recovery of defaulted loans through ADR is big, there should be a target.

"At present, there is a long process to collect loans by suing. However, the ADR method too can prolong the loan recovery process," he, however, said.

"Banks now have to focus on proper understanding and training of this ADR process. Besides, each bank has to formulate different policies regarding ADR. So, we will try to start the process quickly," he added.

The central bank has asked the banks to take the help of the Bangladesh International Arbitration Center (BIAC) and other arbitration centres to recover the defaulted loans.

Mohammad A (Rumee) Ali, acting chairman of the BIAC board, told TBS, "The central bank has taken a good initiative. Now we have some more work to do. 

"We will sit with the banks to think about how to take this initiative forward."

Referring to the big target of reducing almost Tk15,000 crore of defaulted loans in two years through arbitration, Mohammad A (Rumee) Ali, who was also the former AB bank chairman, said, "To make this a reality, we have to start the work first, without fearing the target."

Commenting that arbitrating through any institution will be good for the future, the former banker said, "If arbitration is done through an institution, it will be possible to get information even after 5 years of negotiation. Information may not be preserved if arbitration is done by a single person."

"Moreover, the loan court is small and dealing with a lot of cases, recovery often takes years. Thus, banks need to proactively adopt arbitration to expedite loan recovery. Besides, those who are wilful defaulters should be identified and brought under punishment," he added.

Emranul Huq, managing director and CEO of Dhaka Bank, said, "It is difficult to develop a new system quickly even though the new instructions of the central bank are good." 

He said, while strong loan courts exist, they often fail to enforce repayments. So, the customers move to the High Court.

"Besides, the person who will be the negotiator, he has to gain the trust of both bank and customers. 

"Also, wilful defaulters should be forced to come to the arbitration process to recover money. In this case, if necessary, a separate law should be made, so that they are not spared," he added.

According to the central bank, the Money Loan Court Act 2003 has given more importance to the alternative dispute resolution system for the settlement of disputes outside the court for a speedy recovery of defaulted loans.

According to the law, before the court passes judgement or order, both parties can settle the case through alternative methods with the permission of the court at any stage of the case.

Skilled and seasoned mediators, including retired judges, former bank or financial institution officers, lawyers, or any other competent individual with a proven track record as a mediator, may be selected with the agreement of both the banker and the customer.

The remuneration of the mediator will be decided on the basis of mutual consent and timely payment must be ensured.

Tonmoy Modak is a Staff Correspondent at The Business Standard who covers banking and financial sector. He can be reached at tonmoy.modak403@gmail.com