The government, for the first time, has moved to define habitual defaulters, a development that may stop delinquent borrowers from running businesses, travelling abroad, and participating in social and political activities.
As part of the move, the government yesterday decided in principal to amend the banking companies act at a virtual cabinet meeting presided over by Prime Minister Sheikh Hasina.
According to the draft law, an individual will be considered a willful defaulter if he or she does not repay a loan, taken under their individual name or for their company, to banks despite being able to pay it back.
In addition, any person will be treated as a habitual defaulter if he or she takes loans under the name of a non-existent company.
A borrower will also be defined as willful defaulter if he or she transfers any assets, kept as mortgaged in banks, to get loans without prior approval from the bank concerned.
Besides, every bank will have to form two separate bodies -- identification and confirmation committees -- to detect the habitual defaulters, according to the proposed act.
Bangladesh Bank (BB) will give instructions to banks to this end.
Also, each bank or non-bank financial institution (NBFI) will have to send the list of habitual defaulters to the BB from time to time.
The persons, who are treated as habitual defaulters by the confirmation committee of banks, can appeal to the central bank within 30 days from the submission date of the list.
The BB will make the final decision on whether the aggrieved persons will be enlisted in the list of habitual defaulters.
As per the move, the central bank will send the list to the government agencies concerned, which will impose restrictions on delinquent borrowers.
Habitual defaulters will not be allowed to travel abroad and will also be barred from registering vehicles and homes.
If required, the Registrar of Joint Stock Companies and Firms (RJSC) will obstruct habitual defaulters from forming new companies.
They will not be allowed to take part in any state programmes and also receive awards from the state.
They will not be able to be in committees which are governed by professional, business, social, cultural and political organisations.
The persons treated as willful defaulters will not be permitted to hold the post of director in any bank or NBFI up to five years since they are named in the list of delinquent borrowers, the draft says.
Banks will issue notice to habitual defaulters by giving a maximum of two months to repay their loans.
If habitual defaulters fail to repay the loans within the stipulated time, banks will arrange auction to sell the mortgaged assets of the willful defaulters as per the Money Loan Court Act 2003.
Banks will also take measures to take over the mortgaged assets and decide whether the properties will be sold or not.
Defaulted loans in banks accounted for 7.66 percent of the outstanding loans of Tk 11,58,775 crore as of December last year, data from the central bank shows, the draft law says.
The proposed act also said that directors, chairman or managing director (MD) of a bank will be removed if they are found involved in any activities to harm depositors.
Directors will have to give financial compensation to banks equal to the amount lost because of them.
The central bank or the bank concerned will be able to take measures, including freezing of accounts of the wrongdoers (directors, chairman and MD) and confiscation of their moveable and unmovable assets.
The BB will issue notice soon after the amended act will be approved finally, a finance ministry official said.
The proposed act has also defined the recovery process of weak banks and the special measures to improve the financial health of the extremely vulnerable banks.
The responsible persons for the vulnerable situation of banks will be brought under the law, said officials.
Cabinet Secretary Khandker Anwarul Islam told reporters after the meeting that the amendments had been proposed after reviewing the related laws.
"The definition in the previous law did not define habitual defaulters clearly. But the proposed act has highlighted the issue," he said.
The corrupt directors in banks will be penalised as per the new law, he said, adding that they would be brought under the criminal law.
"They will have to face institutional punishment as well," Anwarul said.
The addition of a willful defaulter clause in the amended Banking Companies Act 2021 is a step in the right direction, said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.
It signals the government's commitment to address this long-standing problem, he said.
"Hopefully, it itself will have a deterrence effect," he said.
"How this plays out in reality will depend on the details of implementation. The amended law provides guidance on what will constitute willful default. The rules will specify criteria to standardise the definition in a way as to make its application consistent across all financial institutions," Zahid said.
These criteria will have to be based on the borrower's audited profit and loss, balance sheet and beyond to account for any action the borrower has taken affecting the value of the collaterals against the loan and their credit history.
"The logic of requiring two separate committees to 'identify' and 'confirm' is not immediately obvious. Perhaps the idea is to have some internal checks and balances," Zahid said.
For those to work, membership of the two committees will have to be completely separated and the selection criteria for representation in the committees will have to be specified in a way that can be meaningfully practiced in all banks, he said.
"The need for internal checks and balances can be obviated if the criteria for identifying willful defaulters is based on objectively verifiable indicators. We need to build on the prevailing institutional arrangement to identify the defaulters so that the reform does not become unnecessarily disruptive," he said.
If the "willful defaulters" can file writs before the courts to stay the BB's adjudication on their listing, the new clause may not have the intended effects, he said.
There is need for transparency on how BB will make the adjudication, he said.
"All these need to be clarified in the implementation rules. Otherwise, we will be back to square one," Zahid said.
The proposed act, however, did not include any provision to reduce the tenure of directors and reduce the number of directors from one family.
Experts and economists have long been demanding to reduce the tenure and the number of directors from a single family in order to strengthen the corporate governance in the banking sector.
The Banking Companies Act has so far been amended at least six times before the latest initiative.
In 2018, the government amended the law, allowing up to four members of a family to be in the board of directors of a bank, up from two previously.
The tenure of directors was also increased to nine years from six years.