The dilemma of implementing the willful defaulter guideline: A banker's perspective

The recent guideline introduced by Bangladesh Bank on Willful Defaulter Identification, Finalisation, and Reporting is a significant step towards ensuring financial discipline in the banking sector.

The primary objective is to curb strategic loan defaults and hold borrowers accountable. The implementation of this policy presents a set of challenges for bankers, leading to a complex dilemma. On one hand, there is a pressing need to prevent willful defaults; on the other, practical banking realities create significant hurdles in enforcement.

Non-Performing Loans (NPLs) have long been a burden on Bangladesh's banking sector, threatening financial stability. The persistent rise in NPLs has not only weakened the financial stability of banks but also hampered economic growth by reducing credit availability for productive sectors. Banking Regulation and Policy Department (BRPD) of Bangladesh Bank has issued a Circular No-06 dated 12/03/2024 on the identification, finalisation and reporting of willful defaulters and awarding punishment to the identified defaulter borrowers. According to the circular, a willful defaulter means an individual/organisation/company who/ which (i) fails to repay a loan taken in his/her favour, his/her family members, or persons of his /her interest, organization/company despite having the ability to do so, or  (ii) if a borrower obtains credit through fraud or forgery or by providing false information in his favour, in favour of his family member, person, office or her interest, organization or company or (iii) uses the loan for the purposes other than the purpose of the loan was taken, or (iv) transfers collateral without written permission from loan giving bank/financial institution. 

Banks must submit a list every three months to the central bank and report defaulters to the Credit Information Bureau (CIB) to show the borrowers as willful defaulters (WD). If a borrower is finalized as a willful defaulter, punishment to be imposed like travel bans, license revocation and restrictions on company registrations and even after repayment, willful defaulters face restrictions on serving as directors of a Bank/Financial Institution and shall not be entitled to have interest waiver facility or loans rescheduling and taking over of the loans as per the aforesaid BRPD circular. Branches, Sub-branches and another business units will play a vital role in this identification process. However, despite these good intentions, banks are now grappling with multiple operational, legal, and financial challenges in executing this directive.

Challenges in implementation: The bankers' dilemma

1. Subjectivity in identifying willful defaulters

One of the key challenges bankers face is the subjectivity in classification. Banks must carefully distinguish between borrowers who fail to repay due to genuine business downturns and those who intentionally default despite having financial means. Unlike standard defaulters who fail to repay due to genuine financial distress, willful defaulters deliberately withhold payments. However, distinguishing between the two is often not straightforward. Business downturns, market volatility, or policy changes can lead to defaults that might appear intentional but are actually circumstantial. If bank officials misclassify a borrower, they risk severe legal repercussions and damage to their credibility. Conversely, failing to identify an actual willful defaulter means continued financial loss and regulatory scrutiny. This fine line between prudent assessment and regulatory compliance puts bankers in a tough spot.

2. Risk of credit contraction

With stricter default classification, banks may become overcautious in approving new loans. The fear of regulatory backlash may push lending institutions to tighten credit access, particularly for businesses that require large-scale financing. This could slow down industrial growth, entrepreneurship, and employment generation, contradicting the government's economic expansion goals.

3. Legal and procedural complexities

Once a borrower is labeled a willful defaulter, a series of legal battles are likely to follow. Influential business entities may challenge their classification in court, delaying enforcement actions. Moreover, banks will have to ensure airtight documentation and evidentiary support to withstand legal scrutiny. This increases administrative burdens and extends the time required for debt recovery. Misclassification could result in unwarranted legal battles, while failure to act against actual willful defaulters could further deteriorate financial discipline. 

4. Resistance from borrowers and strategic defaults

Borrowers, especially those with significant financial influence, may deploy strategic tactics to escape classification. Borrowers, particularly influential business groups, may exploit legal loopholes, use political connections, or transfer assets strategically to evade being tagged as willful defaulters, making enforcement a cumbersome process.  Banks, in turn, must navigate these challenges without jeopardizing client relationships or triggering potential reputational risks.

5. Pressure on bank officials

A critical yet often overlooked aspect is the personal risk faced by bank officials. Classifying a borrower as a willful defaulter, especially a powerful business group, may expose bank executives to undue pressure, threats, or even legal harassment. This discourages proactive identification and enforcement, undermining the effectiveness of the guideline.

A pragmatic approach: Striking a balance.

Given these complexities, a balanced approach is crucial to ensure that the policy achieves its intended objective without creating unintended disruptions in the financial sector. To enhance its effectiveness and to avoid misjudgment, a transparent, well-defined and data-driven classification system should be adopted, supported by robust legal enforcement frameworks that safeguard banks against undue litigation. Strengthening inter-bank coordination and establishing a centralized database of willful defaulters would help financial institutions take collective action against habitual offenders. Moreover, regulatory bodies should provide adequate training and resources to equip bank officials with the necessary tools to assess borrowers' repayment behavior accurately.

Precautionary measures

As a part of precautionary measures to prevent a borrower from being a willful defaulter, the bank will take the following steps:

• The above conditions of being identified as WD should be included in Sanction Advices.
• Branches, Sub-branches, CBD and relevant Divisions of Head Office will strengthen monitoring of the borrower, the business and repayment status of loan meticulously.
• Business wings of the bank will regularly communicate with the borrower.
• If any discrepancy is observed in any borrower, the business end will immediately warn the customer/customer concern in writing. 
• Moving forward with caution

While the Willful Defaulter Identification Guideline is a necessary reform, its successful implementation requires a balance between regulatory enforcement and practical banking operations. Stricter rules must not come at the cost of credit availability and economic growth. A fair and structured approach will ensure that genuine businesses thrive while deliberate defaulters face the rightful consequences. The road ahead is complex, but with collaborative policy refinements, Bangladesh's banking sector can foster a disciplined yet growth-oriented financial environment.

Forhad Sarker. Photo: Courtesy

Lt Cdr Forhad Sarker, (G), PPM, BN (Retd.) is Senior Vice President at NRBC Bank PLC. He is a Certified Expert in NPL Management and Investment (CENPL) from Frankfurt School of Finance & Management, Germany. 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.