What can be the right exit strategy for non-willful loan defaulters?

Illustration:TBS

The recovery of defaulted loans is a pressing issue in Bangladesh's financial sector. 

Despite the existence of strict loan recovery laws like the Artho Rin Adalat Ain and a bankruptcy framework, financial institutions have struggled to address the problem of loan defaults effectively. 

In 2019, the central bank issued a special one-time exit policy for customers with loans over Tk500 crore. The policy allowed repayment over ten years with a 9% simple interest rate and a 2% down payment. However, this plan was unsuccessful from the bankers' perspective, as some influential defaulters exploited the facilities.

As of March 2024, default loans surged to a record high of Tk 1,82,295 crore, up from Tk 1,45,633 crore in December 2023, Tk 1,20,656 crore in December 2022, and Tk 1,03,273 crore in December 2021.

In response, Bangladesh Bank issued a new "Exit Policy" on 08 July 2024 (circular no 13), allowing defaulted borrowers up to three years for loan repayment with a 10% down payment. This policy applies to defaulted loans, loans with low recovery probability, and loans taken by defunct companies that are non-willful defaulters.

The policy aims to expedite loan recovery by allowing non-willful defaulters, who might have incurred losses due to uncontrollable factors, to repay loans over a period of up to three years. Islamic Shariah-based banks can also adopt these guidelines. The policy stipulates that applicants must deposit at least 10% of the loan amount upfront, and banks must settle applications within 60 working days. Borrowers utilising the exit facility are not eligible for new loans until the existing loan is fully repaid.

Banks are instructed to develop their own policies aligned with the central bank's guidelines, and these policies must be approved by their boards of directors. For principal loans up to Tk10 lakh, decision-making can be delegated to bank management. Loans under this policy can be repaid in one or multiple instalments, with a general repayment period not exceeding two years, extendable by one year for valid reasons.

The new policy is considered the minimum standard for exit facilities, and banks must maintain proper provisioning against the loans and not release collateral before full repayment. If a borrower fails to repay under the exit facility, the bank will take necessary legal action. The policy emphasises that genuine adverse financial conditions can hinder debt recovery, necessitating a uniform policy for debt recovery or adjustment.

The uniqueness of this policy lies in its applicability to both small and large borrowers, allowing both regular and defaulting borrowers to benefit. However, bankers are sceptical about its success, fearing that defaulted borrowers might exploit the facility to repay only a portion of their debts over three years.

The policy also stresses the need to identify willful and non-willful defaulters, a challenging task under existing laws. Banks are required to establish departments to categorise defaulters, but there is reluctance among bankers to do so. The goal is to reduce nonperforming loans to salvage struggling banks and maintain liquidity in the banking sector.

In the rest of the world, bankruptcy is a popular option. Modern insolvency legislation and debt restructuring practices focus not on eliminating insolvent entities but on restructuring their financial and organisational structures to enable business continuation. This process promotes prudent lending and a sound credit culture by establishing mechanisms for financial restructuring, orderly exit for failed enterprises, debt collection, and predictable enforcement of creditor rights.

During bankruptcy proceedings, the debtor's assets are assessed and used to repay outstanding debts. Successful completion of the process relieves the debtor from prior debt obligations.

However, when a bank sues a person for bankruptcy in Bangladesh, it leads to new issues. It can be observed that defaulters go to the High Court with various excuses and manage to get the proceedings stayed. Consequently, they encounter no problems even after declaring bankruptcy.

According to sources, the bankruptcy law, enacted in 1997, has overseen around 800 cases in bankruptcy courts. In these cases, 80 individuals have been declared bankrupt over the past decade, primarily due to actions initiated by various banks.

Notably, 61 of these individuals appealed the judgements, securing stays on the proceedings from the High Court. These 61 individuals owe a combined amount of around Tk3,000 crore to various banks and financial institutions.

So Bangladeshi banks rely on the Artho Rin Adalat Act, which allows them to sue debtors for the total amount of the loan, interest, and court costs. This act is favourable to FIs because the court typically rules in their favour without considering the borrower's ability to pay, often resulting in defaulters being jailed. 

M S Siddiqui is a Non-Government Adviser, Bangladesh Competition Commission, Legal Economist and CEO, Bangla Chemical. E-mail: shah@banglachemical.com

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