The elixir of a better credit management?

Media reports sometimes claim that the law for recovery of non-performing loans (NPL) as crafted in the principal law in force in this regard, the Money Loan Court Act, 2003 (MLCA) is too soft towards the borrowers. This write-up would seek to refute this claim and argue that any stance aimed at more stringent legal and administrative measures directed at the recovery of NPLs would likely fail to achieve the desired level of success.

Of course, banks and non-bank financial institutions (NBFIs) have to be vigilant for the recovery of NPLs. As the adage goes, “if few borrowers are not paying back they are in trouble if many borrowers do not repay, the banks are in trouble.” And surely when the banks are in trouble, the credit flow decreases, investment plunges, and the whole economy would feel the pinch. However, the over-emphasis on the recovery of NPLs detracts our attention from more pressing issues in the proper management of credit by banks and NBFIs in this country. In the first place, we must not lose sight of the fact that a loan being classified as NPL, triggering the recourse to legal means for forced recovery, maybe only the symptom of a whole list of problems with the bank and NBFI regime. Not all defaults in the repayment of the loans are wilful and many honest borrowers, for a variety of unforeseen commercial and non-commercial reasons, may fail to repay. Despite this element of chance in the system, a significantly high rate of NPL would normally imply that in some cases, the creditworthiness of the borrowers, the viability of the venture for which the loan has been disbursed (if the loan is a business loan), the adequacy of the security for the loan, etc. have not been properly vetted. This may also mean that more deserving borrowers may have been denied credit.

Contrary to the claim by many, the MLCA already incorporates banks and NFIs friendly provisions which are quite tough towards the borrowers. For instance, in a striking exception to the ordinary course is the civil justice system, a money loan suit would not be dismissed even if the financial institution does not appear on a date fixed for hearing and the judge would have to settle it by examining the documents presented before her/him [Section 19(6) of the MLCA]. There is also a provision that any party (other than a bank or NFI filing the money loan suit) who wants to lodge an appeal or revision against a judgment or decree rendered by the money loan court, will have to make a security deposit for that petition to be admissible before the higher court (Sections 41 and 42 of the MLCA).

Some informed and not-so-informed commentators have sometimes blamed the abuse of legal process, in particular, the tendency of filing writ petitions, by defaulting borrowers as a fundamental factor contributing to the inordinate delay in the recovery of NPLs. Writ petitions or other forms of judicial interventions are, in and of themselves, not the problem. It is only natural that the legal counsels for the defaulters would be engaged in resorting to whatever legal tactic which may suit their clients or at least buy more time for them. However, it is the job of the legal team of the banks and NFIs to defend the case of their clients and the judges to ensure that the mechanism for justice is not abused by frivolous suits. To what extent stringent legal provisions would be able to make a contribution in this regard is very uncertain.

The difference in the rate of NPL in the public and private banks would also imply that in the disbursement of loans, the same degree of professionalism has not been maintained. It is well-known in this country that often many non-career bankers have been offered positions in the board of public banks, not necessarily for their expertise in banking but as a reward for political allegiance. With none or nominal shareholding in the bank on the board of which they serve, there is little incentive for them to be scrupulous in the selection of prospective borrowers. It is possible to fathom that such a disinterested attitude in the performance of the bank may have a negative impact on the lower management of public banks too. If this culture cannot be stamped out, stringent recovery mechanism for the recovery of NPL would have little effect.

Another concern with a tougher regime on the recovery of NPL is the lack of evenhandedness. Indeed, the attitude of regulators has often been lax to the big defaulters. In the not so distant past, a special privilege to big borrowers in the form of restructuring facility of loans of BDT five billion or more was offered. The contribution of big industries to the economy is understandable, but the inequitable nature of the measure was nonetheless unavoidable. It clearly sent a message that the regulators are relaxed towards the recovery of loans from big borrowers which is not conducive for a culture of accountability in the management of credit.

The writer is an Associate Professor, Department of Law, North South University.


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