Writing off default loans

Dhaka,  Monday,   2016-09-17
Published : 17 Sep 2016, 19:25:09

Writing off default loans

M S Siddiqui
Banks lend money to financially solvent borrowers or prefer to extend loan to 'known' clients. But intermediation for planned investment is a social responsibility of bankers. In many countries, there is lending with over-investment in low-return projects which often result in low profitability and poor asset quality. Directed lending may cause increase in default loan even though they ensure national/social commitment.  Prudential regulations of India and Nepal have clearly directed the commercial banks to lend a certain portion of their credit portfolio to priority sectors. 

In Nepal, banks are required to extend loans to the priority and deprived sectors up to 12 per cent of their advances but this requirement is being phased out so that by 2002-03, it was reduced to 7 per cent, by 2003-04 to 6 per cent, 2004-05 to 4 per cent, 2005-06 to 2 per cent and 2006-07 to 2 per cent. From FY 2007-08, investment in priority sector has not been compulsory. In India, all banks must lend 40 per cent of their net loan to the priority sectors, out of which 18 per cent should be given to agricultural sector, 10 per cent to the 'weaker sections' and 1 per cent of previous year's total advances is given under the Differential Rate of Interest (DRI) scheme.

Foreign banks in India must make 32 per cent of their loans to the priority sectors, out of which no less than 10 per cent should be allocated to small-scale industries sector and no less than 12 per cent to the export sector. The priority sectors broadly cover businesses or schemes to which the government wants to channel credit including agriculture, small-scale industries small business, retail trade, small transport operators, professional and self-employed persons, housing, education loans and micro-credit to achieve its social objectives.

However, the regulatory bodies in Bangladesh, Pakistan and Sri Lanka have issued no such guidelines except a small part of loan for small and medium enterprises (SMEs) or any other small sectors. The law of the land does not give any authority to exempt any loan or interest thereof but banks cleverly keep balance sheet in order to satisfy donors and international standard practice of loan provisioning etc. Banks write off the classified loans to clean up their balance sheets and release the blocked fund against classified loan amount for investment but never 'forget and forgive'. These are very specifically mentioned in the instructions of the Bangladesh Bank. As per a circular (ref: BRPD Circular no: 2 dated January 13, 2003), banks will continue efforts to recover outstanding loans and if not the issue of non-recovery already goes to courts, banks must file  cases against borrowers before write-off (sec 3). Banks will have to set up a separate debt recovery unit to collect the write-off debt (Sec 4). Even banks may appoint independent recovery unit for collection of the amount (sec 5). Banks will not mention the amount in debit account but maintain a separate ledger and mention it in the balance sheet (sec 6). Banks will report about the borrower as defaulter to the Credit Information Bureau (CIB) and he will not get any further loan in future (sec 7). 

It is interesting to note that after 10 years of the above-mentioned circular for writing off loan and filing cases against exempted borrowers, the central bank finds that the cost of litigation is higher than capital involved and interest earned in case  of small amounts. Hence, the BB allowed the financial institutions not to go for litigation for loan amount less than Tk 50,000 (as per BRPD Circular no 13, dated November 07, 2013).  

Nepal has no specific prudential guidelines on write-off of non-performing loans by the central bank and banks can write off their loss advances at their own discretion. In Pakistan, bad / irrecoverable loans may be written off by banks themselves with the express approval of their board of directors or their nominated/designated authority/committee. Before allowing write-off, all liquid assets held under lien and pledged goods should be realised and appropriated towards reduction of outstanding amount and should be legally cleared by the bank's legal counsel. 

In Sri Lanka, there are no specific prudential guidelines on the write-off of non-performing loans by the central bank and banks can write off their loss advances at their own discretion.

Real picture of classified loans is not reflected in Bangladesh as a defaulted one becomes a regular loan by rescheduling but in India, once a loan is classified, by rescheduling its status becomes sub-standard, not a regular loan. Bangladesh is used to take preventive measure regarding rescheduling by stating that 'habitual' defaulters should not get any loan rescheduling facility as per guideline.

Bangladeshi borrowers shoulder additional burden of interest on interest. In Sec 28/ka/II of the Banking Companies Act amended in 2013, the Interest was included with loan and the interest will inflate further, showing huge loan amount higher than the actual loan. 

Any respite of loans in disregard of the provisions of above sub-section, shall be illegal, and the director or the authorised officials whoever is responsible for such a respite shall be punishable with imprisonment for not more than three years or a fine of no more than Tk 3,00,000 or both as per the Banking Company Act. 

The default rate is higher in Bangladesh. Moreover, there is hardly any breathing space for borrowers for genuine cause of loss in the business. Write-off is an internationally acceptable procedure. Bangladesh, India and Pakistan have specific guideline for write-off but Nepal and Sri Lanka do it at their own discretion. The media report and 'expert' opinion are that the banks are hiding real default loan and every now and then write off loan and interest causing huge loss of banks and risk of depositors.

It is often said that defaulters are enjoying all benefits and serving in the board of directors of other banks. 

As per banking laws, particularly loan recovery laws, bankers in Bangladesh are most fortunate in the world as they have authority to extend loan with or without any liability for default loan. There is no accountability for selection of wrong borrowers or wrong feasibility of investments. The borrowers are responsible for any kind of mistakes of bankers or unforeseen business or natural environment causing loss of investment. Bankers have hardly any responsibility to recover loan and the Artho Rin Adalat Act is sufficient to hand over the responsibility of recovery of loan by court. The Act made the bankers inefficient, lazy and corrupt. The loan recovery officers are regarded as good bankers and they get additional bonus and other benefits for recovering the default loan.

Bankers in fact cannot hide real bad debt and cannot write it off due to strict laws and rules of the land. In some cases, interest may be exempted under strict rule and with approval of the Bangladesh Bank. The truth should be admitted and widely discussed.

The writer is a legal economist.


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