Recovery of default loans is a major topic of discussion in the financial sector. Financial institutions failed to address the default problem despite one of the strict loan recovery laws – the Artho Rin Adalat and an effective bankruptcy law. Apart from loan recovery laws, there was hardly any exit law or policy for the non-willful borrowers. Sometimes ago Bangladesh Bank (BB) has issued an exit policy.
When a borrower defaults, they normally face severe legal action, asset seizure, and a blocked credit profile. An exit framework offers a pathway out of this gridlock. It is a structured mechanism or program provided by financial regulators or lenders that allows defaulting borrowers a final opportunity to settle their bad debts, clear their default status, and transition back into regular banking status. The other option is exit through Bankruptcy law and transfer of non-performing loans to an Asset Management Company (AMC) and free the defaulted borrower from liability. Bangladesh has a debatable Bankruptcy Act and a draft Distressed Asset Management Companies law (DAMC) pending for passage by the Parliament.
The bankruptcy process begins with a petition filed by the debtor or on behalf of creditors. Unfortunately, Bangladesh’s FIs don’t apply to court to declare any debtor bankrupt. FIs prefer to go to court for recovery of loans under the Artho Rin Adalat Act. Banks can sue debtors for recovering entire amount of loan, interest thereof and court costs. The court doesn’t consider the ability of borrower and only disposes of the case to pay the outstanding loan and interest or go to jail. FIs consider beneficial to file case under Artho Rin Adalat Act as the law the favorable for them.
In 2019, the central bank issued a special policy regarding a one-time exit for customers with loans over Tk500 crore. According to the policy, loans are to be repaid over 10 consecutive years with a grace period of one year, at 9% simple interest, with a 2% down payment. The plan could not yield a good outcome from the banker’s point of view. Some of the powerful big defaulters took some undue facilities.
Again, Bangladesh Bank (BB) has issued a new ‘Exit Policy’ aimed at expediting the recovery of defaulted loans, allowing defaulted borrowers up to three years for loan repayment with a 10% down payment. BB formulated such a policy for the first time. The exit policy applies to defaulted loans, loans with a low probability of recovery and loans taken by defunct companies, non-willful defaulters. Non-willful defaulters might incur losses due to uncontrollable factors, leading to hindered debt collection activities and insufficient cash flow for loan repayment; consequently, such loans are classified as defaults but not as willful defaults. Islamic Shariah-based banks can also adopt these guidelines for recovering or adjusting their regular and classified investments.
Banks have been instructed to develop their own policies in line with the central bank’s guidelines, incorporating similar conditions. The bank’s board of directors or executive committee must approve the exit facility. However, for principal loans up to Tk 10 lakh, the decision-making authority can be delegated to the bank’s management. Under the policy, there will be no change in the quality of the loan until it is fully repaid, and customers utilising the exit facility will not be eligible for new loans during this period. Applicant borrowers must repay the entire loan within a maximum of three years. Banks will determine the loan instalment period, allowing borrowers to clear the dues through multiple payments within three years.
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. As per another circular, banks can extend loans to companies associated with groups that have defaulted on loans until they are classified as willful defaulters. In such instances, the process will require approval from the Bangladesh Bank.
The policy also emphasised that genuine adverse financial conditions could reduce the chances of debt recovery. There is a need for a uniform policy to facilitate debt recovery or adjustment through the exit mechanism, as banks have been following varied procedures. In this context, the new policy aims to maintain liquidity flow and reduce defaulted loans in the banking sector. Regular loan exit facilities may be granted for recovering adversely classified loans with poor recovery prospects or in cases where projects or businesses have closed due to uncontrollable reasons.
Defaulters will continue to be identified as such according to existing regulations, and their credit information will be reported to the Bangladesh Bank’s Credit Information Bureau based on previous classifications, and borrowers will be ineligible for any new credit until the existing loan is fully repaid. However, if the exit facility is provided for a regular loan, it must be reported as an exit.
The proper provisioning must be maintained against the loan, and collateral must not be released before the loan is fully adjusted. However, if the bank, customer and buyer agree, the mortgaged property can be sold through a tripartite agreement to settle the loan. If the borrower fails to repay under the exit facility, the bank will take necessary legal action to recover the loan.
Until now, each bank has followed different rules. In the absence of a policy, banks used to follow different criteria for the exit mechanism for the collection and adjustment of loans, according to central bank officials. Under this facility, interest can be waived according to the policy of the central bank. However, if the loan is not repaid within the stipulated time, the waived interest will accrue, and the exit facility will be cancelled.
The Bangladesh Bank has unveiled yet another exit strategy to tackle the NPLs and bring them under control within 18 months through stronger supervision, loan restructuring, legal reforms and quicker recovery of distressed assets. It allows one-time settlements with a full interest waiver for defaulters. Its strategy includes formation of Asset Management Companies (AMCs) and other legal reforms and stronger supervision till the end of the year 2027. It proposed a combination of stronger supervision, capital restoration, restructuring for viable borrowers, quicker loan recovery through courts, emergency liquidity support, and implementation of the new Bank Resolution and Deposit Protection Acts. As part of its bid to bring NPL under control to comply with the International Monetary Fund’s new loan requirements.
Following the Asian financial crisis, South Korea created its AMC named KAMCO to purchase distressed loans, while Malaysia established Danaharta to restructure viable borrowers and dispose of unviable assets. Both helped banks clean up balance sheets and resume lending. International experiences suggest that the AMC is not a cure by itself if it is not backed by a comprehensive national strategy involving strong bank supervision, operational independence, legal reforms, out-of-court debt restructuring and development of a market for distressed loans.
The exit policy may allow both willful defaulters and non-willful defaulting business customers to settle their industrial loans by paying off the outstanding loan. The target should be to reduce the non-performing loan below a certain percentage to salvage ailing banks and free the entrepreneurs from liabilities.
The views expressed in this article are solely those of the author
The writer is the CEO of Bangla Chemical and legal economist. Email:
