Vanishing collaterals

Dhaka,  Mon,  25 September 2017
Published : 19 Oct 2016, 00:31:33

Vanishing collaterals

News Analysis
Shamsul Huq Zahid

The Bangladesh Bank (BB), reportedly, is planning to build a data warehouse that would help reduce mortgage-related hassles and fraudulent activities in the country's banking sector.

The quality of collaterals, received by banks against loans in the form of immovable properties such as land or buildings or both, remains a serious problem.

In the event of loans turning bad, banks, in a number of cases, find it difficult to take over and dispose of such collaterals because of fraudulence in documentation.

One of the major problems in accepting land and buildings as collaterals by banks is their inability to know the status of the assets that borrowers are offering. It is widely alleged that some unscrupulous borrowers resort to forgery while offering the same immovable assets to different lenders.

The central bank created long ago a credit information bureau (CIB) wherefrom banks and non-banking financial institutions (NBFIs) can have information relating to borrowers and the status of the money they have borrowed from banks and non-banking financial institutions (NBFIs). The information is gathered to know whether the clients concerned have defaulted on repayments of loans to banks/ NBFIs.  

But there is no way of knowing the status of the land and buildings that the clients offer as collaterals unless the officials of the banks make attempts to gather information from relevant sources.

The central bank's move to create a data storehouse on mortgaged assets has come following Finance Minister AMA Muhith's reported query whether the  BB would be able to preserve the mortgaged assets in a separate data warehouse.

Managing a data bank on mortgaged assets will involve a continuous process. However, the BB can, initially, start with the information on mortgaged assets now available with the CIB.

The proposed data bank on mortgaged assets would help the banks avoid accepting assets that have been already mortgaged. But that is only a part of the problems that the banks usually face during the period of documentation of mortgage assets.   

Fake documents of ownership over assets and over-valuation are far more serious problems that the banks usually encounter in the matters of collaterals.

Relevant rules demand that the banks should diligently scrutinise the documents involving the assets that the clients are willing to give as collaterals against loans. Every bank has its own legal section and designated officials to look into mortgage-related issues. The officials concerned are required to make on-the-spot visit to ensure physical existence of the property to be mortgaged and examine authenticity of documents. The valuation of assets is also decided on the basis of recommendations made by the relevant surveyors and bank officials.

So, the delinquent borrowers or borrowers who resort to fraudulence to siphon off money from banks are not the only persons to blame. Forgeries cannot be accomplished without the help of an unscrupulous section of bank officials.

However, no one knows how difficult the current situation is with assets mortgaged with banks. But it is widely viewed that the quality of mortgaged assets with banks is not that good.

All concerned could know the real situation had the banks decided to dispose of at one-go the assets mortgaged against the default-loans. That, obviously, would not be a pretty sight for the banks because of the questionable quality of a substantial part of the assets mortgaged with them.

Banks are legally empowered to take over the mortgaged assets in the event of loan default and put those on auction. But they hardly do that and exercise 'utmost restraint'. Banks do make attempt at getting back their money through normal banking process and offer a few sops to the delinquent borrowers for that. They offer rescheduling facilities and even make available fresh loans once the past loan is 'regularised' to help release the past stuck-up funds. In most cases, however, such attempts end in failure.

Besides, it is not that easy to dispose of the mortgaged assets. Banks failing to recover their overdue loans usually file cases with the money-loan courts and, thus, get involved in a long-drawn process. Even if the banks get verdict in their favour, getting those executed remains a major problem. In most cases, the borrowers concerned rush to higher courts and get stay orders. And yet another long-drawn legal process begins.

So, establishment of a data bank at the central bank would help solve part of the problem. But the other problems that the banks have been facing over mortgaged assets could only be solved if their officials concerned do their jobs diligently and honestly. Documentation and valuation of mortgaged assets in banks are the areas where graft reigns supreme. The central bank, banks and other financial institutions do need to devise an effective mechanism that would help reduce fraudulence in those two important areas of banking operation.
Editor : A.H.M Moazzem Hossain
Published by the Editor for International Publications Limited from Tropicana Tower (4th floor), 45, Topkhana Road, GPO Box : 2526 Dhaka- 1000 and printed by him from City Publishing House Ltd., 1 RK Mission Road, Dhaka-1000.
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