Anonymous loans and loan frauds are now two much-discussed issues in the banking sector. To address the concerns, the authorities are making further amendments to the Bank Company Act and revising the definition of willful defaulters, in addition to other changes.
Thanks to the amendment, the central bank would be empowered to ban the foreign trips of deliberate defaulters and their directorships in the banks for five years.
Finance minister AHM Mustafa Kamal on Thursday presented the Bank Company (Amendment) Bill-2023 in Parliament. Opposition Jatiya Party MP Fakhrul Imam objected to the bill, saying that it was prepared complying with the conditions set by the International Monetary Fund (IMF).
In response, the finance minister clarified that the amendment was not proposed based on external recommendations. It is rather aimed at establishing an up-to-date and timely banking system.
However, his objection was invalidated in a voice vote, clearing the way for presenting the bill in the parliament. Later, the bill was sent to the parliamentary standing committee on finance ministry for further scrutiny. The committee has been stipulated seven days to submit a report on the bill.
The cabinet had given the nod to the draft amendment in March, taking into account the recommendations of the World Bank and the IMF. The Bank Company Act has been amended seven times in the last 32 years.
The recent amendment in 2018 allowed up to four individuals from the same family to serve as bank directors consecutively for a period of nine years. This amendment is claimed to have ensued from the pressure of bank owners.
Identification of willful defaulters
For the first time, the bill proposed to curtail the benefits enjoyed by willful defaulters, in addition to revising their identification parameters.
According to the bill, clients who intentionally choose not to repay loans despite having the capability and those who secure loans through fraud, misrepresentation, and deception will be marked as willful defaulters.
Also, the borrowers who use the loan funds for purposes other than the declared one and transfer collateral without the bank's consent will be considered defaulters.
According to the bill, all board members and their relatives must provide collateral when applying for a loan. The banks will submit a list of willful defaulters to the Bangladesh Bank. Later, the government may impose restrictions on foreign travel, trade license, and some other services to willful defaulters.
The bill also stipulates that individuals or institutions listed as willful defaulters cannot become directors of banks or financial institutions within five years of their exemption from the list. Besides, the central bank may slap a Tk 5 to 10 million fine to the banks if they do not submit the list to the banking sector regulator.
Salehuddin Ahmed, former governor of Bangladesh Bank, said the prevailing issues of the banking sector require extensive reform measures through amendment to the law.
He expressed some reservations over the bill, saying, “After learning the substance of the bill, I could not be entirely optimistic. It will be difficult to prove the willful defaults. The provision preventing bank directors from simultaneously holding the same position in financial institutions and insurance companies is a positive point.”
Who and how many directors?
According to the existing law, up to four individuals from the same family can serve as directors on a bank's board consecutively for nine years. However, the proposed amendment limits the number of directors from the same family to a maximum of three.
Before approving the USD 4.7 billion loan proposal, an IMF team, during its meeting with the Bangladesh Bank and the financial institutions department, raised concerns about the provision that allows four family members from the same family.
Under the amendment bill, a bank will have a maximum of 20 directors, with a minimum of three independent directors. An independent director is defined as a person who has no past, present, or future interest in the bank or any related entities.
The bill has a new provision regarding the alternate directors. If a director remains abroad for three consecutive months, the board can appoint an alternate director for a maximum of three months. Earlier, there was no provision for appointing alternate directors in banks.
According to the current law, a bank director cannot simultaneously be a director of another bank or financial institution. But, he or she can become a director of insurance companies for two terms. The amendment bill restricted the way to become directors of insurance companies too.
The bill also said without prior approval of the Bangladesh Bank, no interest or profit can be waived for directors, their family members, or any institution controlled by them.
Scope for merger
The bill has incorporated a scope for merger of weak banks with stronger ones. According to the bill, the Bangladesh Bank will be empowered to issue instructions regarding a bank's activities, operation, and management to implement immediate corrective measures to ensure sound management.
If a bank fails to implement the recovery action plan and continues activities deemed detrimental to depositors, the Bangladesh Bank will take measures for its merger with another bank or its restructuring.
Anis A Khan, former chairman of the Association of Bankers, Bangladesh (ABB), said it seems the authority of merger between strong and weak banks remains under the central bank. It would be good if the law was detailed and clear.
He expressed hope that the Bangladesh Bank would take the initiative to issue rules or notifications in this regard since there is no necessity for banks, insurance companies, or financial institutions with weak credentials in the country.