Associate firms can take loans if group found not wilful defaulter

Banks can extend loans to companies associated with groups that have defaulted on loans until they are classified as wilful defaulters. However, in such instances, the process will require approval from the Bangladesh Bank.

In a circular issued on Wednesday (3 April), the central bank upheld the benefits of defaulted borrowers at a time when banks grapple with the challenge of identifying wilful defaulters among their defaulting customers.

Section 27 of the Bank Company Act 1991 states that if any group of companies becomes a defaulting customer and there is a reasonable cause for the failure to repay their debts, then any other institution or company belonging to that group will not be considered a defaulter. Such institutions or companies can be granted loan facilities, subject to prior approval from the Bangladesh Bank.

The circular also mentions that if a bank or financial institution classifies a borrower as a wilful defaulter, the aggrieved party can appeal to the central bank. Unless the appeal is resolved, banks cannot apply to the Bangladesh Bank for permission to provide loan facilities in favour of any other institution belonging to the group.

The managing director at a Sharia-based bank told The Business Standard that it is a complex process to identify borrowers who have defaulted due to reasonable causes.

"All borrowers would claim that there is a local reason behind their default. In such cases, if new loans are disbursed among these borrowers, it will create further complications in credit governance in the banking sector," he expressed concern.

He also mentioned that many borrowers do not repay their loans, but numerous complications arise in classifying their defaulted loans because they wield significant influence and cannot be categorised as defaulters. In such cases, adding these borrowers to the list of willful defaulters without a specific process is a very complicated matter.

The managing director of another bank said, "Previously, banks did not provide loans to other affiliated institutions if a group defaulted. Now, with it being made even easier, they will obtain fresh loans if they are not classified as wilful defaulters. As a result, the amount of bad loans held by banks will increase further."  

He mentioned that in the central bank's circular, it is stated that in the process of identifying wilful defaulters, any person or organisation that defaults without paying the loan despite being able to repay it will be included in the list of wilful defaulters.

"How will bank officials assess the debt repayment capacity of the institution? The central bank should provide more clarification in this area," he added.

In a decisive move to rein in wilful loan defaulters, the Bangladesh Bank on 12 March directed scheduled banks to establish dedicated units within their organisations by 9 April to scrutinise and identify those deliberately defaulting on loans.

These units, dubbed "wilful loan defaulters identification units," will be under the stewardship of seasoned officials, no more than two ranks below the managing director or chief executive officer of banks. The circular delineates the methodology for identifying wilful defaulters.