Being a big loan defaulter pays!
THE recent circular issued by the Bangladesh Bank (BB) on loan restructuring does not seem to be equitable because it is giving a special facility only to a certain group of people. BB is entrusted with the responsibility of looking after interests of all the customers of all the banks, not just a few. It is difficult to recall another example of according special privilege to big defaulters. This has set a bad example before us.
The policy is not evenhanded because the restructuring facility will be applicable to only those who have loans of Tk. 500 crore or more. And the percentage of such defaulters will not be more than 4%-5%. So, 95% of the customers will be deprived of this benefit. The small borrowers have also been suffering the same difficulties like the large borrowers. When these general customers approach the banks for loan restructuring they are generally refused. Thousand of certificate cases are pending in various courts. The cases were filed against poor farmers who failed to repay the loan, which hardly goes above Tk.30,000. In some cases, the bank acquires their properties and even puts them behind bars to recover the debt.
And what about the big defaulters? They enjoy the best facilities of the country and lead luxurious life but do not repay their loan. Their debt amount is unthinkable. But no bank dares to ask them for repayment. This is ridiculous. Shouldn't they be put under the legal framework of the country?
The next point at issue is that BB has given the restructuring facility of 12 years for term loan and 6 years for demand loan at cost of fund plus 1% with moratorium period of 12 months. BB also allowed only 1% down payment for outstanding loans over Tk.1,000 crore and 2% for outstanding over Tk.500 crore. They have not suggested any restructuring strategy for outstanding loans below Tk.500 crore. This policy of the central bank defies logic.
BB has stated that the affected large borrowers have significant importance from the socio-economic and employment generation perspective. That's why they have been given the special dispensation. What about the small and medium enterprises? They are the worst sufferers. Why not give them the same facility? If large industries cannot sustain the pressure how can small and medium entities survive? This is a question that needs an answer from BB.
Loan restructuring has become a culture in the country. This happened in the past also. And banks went bankrupt and directors were imprisoned. But the defaulters were out of reach. In 1996, big loan defaulters raised money from capital market but did not repay the loan.
Sometimes big companies approach a bank for rescheduling and put pressure through various political quarters. But our bankers should have the courage to say no when such exceptional request comes from powerful individuals/groups.
Defaulters can go for bond market and IPO for raising money or find equity partners to run their business. Why from the bank? This is the money of depositors. If someday any bank says to its depositor that it cannot give him money then what will happen? These things happened in the past. Banks failed to pay the depositors on demand. This practice severely damages the economy.
If such policy of large loan restructuring exists, it will create a non-payment cycle. Those who have previously taken huge amount of loans from different banks are now enjoying the restructuring facility. After restructuring, they can again draw money from the banks. So the cycle of nonpayment and restructuring will go on.
Our weak legal structure is a major reason behind such malpractices. In our country, there is Artha Rin Adalat where a bank can sue a customer and foreclose his or her property without any intervention from the court. But here the customer goes to court and takes stay order. So the Artha Rin Adalat has little effectiveness in this respect. There is an important point to consider in this regard. If the customer goes to the lower court he is supposed to deposit 25% of the debt and ask for stay order. But if the customer goes to the High Court he can get stay order without giving any deposit. The policy makers were repeatedly requested to rectify this law, without success.
Besides malpractices by some willful defaulters, especially a few such large borrowers, there are also other reasons behind loan default. In Bangladesh, banks charge very high interest rate. This is also not proper because for the development of industry and business, loans should be given if possible at single digit interest rate. In this case, the regulatory authority should try to bring down the interest rate through moral persuasion. There are also other problems like weak infrastructure, fall of price in international market, etc. behind loan default.
Bangladesh Bank has taken some excellent initiatives for financial inclusion of various groups of people. It deserves credit for that. But giving special privilege of loan restructuring to some specific groups tarnishes the Bank's good reputation. It should immediately reconsider the policy or extend the facility with acceptable down payment as per cash flow and security arrangement to all eligible customers of all banks for similar period.
The writer is a former Managing Director & CEO, Agrani Bank Limited, Bangladesh. He served in national and international banks at various capacities.