Others reduce bad loans. Why can't Bangladesh?

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Bangladesh and Sri Lanka top the list in terms of bad loans in South Asia while all other countries in the region are gradually reducing their non-performing loans.

In the global context, countries that are grappling with acute crises – like Ukraine, Iraq, and Lebanon – are now mired in a high volume of default loans.

Other nations have brought down their default loans through various initiatives, including strict enforcement of laws, increased monitoring, punitive actions, revocation of political backing, institutionalised loan collection, and closure or merger of weak banks.

Asset management companies have outperformed other means in helping reduce non performing loans. South Korea, Thailand, China, and Malaysia are among the countries that have managed to bring down their bad loans to a great extent through government-level asset management companies.

The International Monetary Fund (IMF) has now advised Bangladesh to follow the suit and form such an asset management company.

However, Bangladesh has now taken an initiative to identify willful defaulters by amending the Bank Company Act. The issue of willful defaulters does not exist in the laws of any other country in the world, except India and Pakistan. All who fail to repay loans on time are considered as defaulters globally. The court determines the reason why the loan could not be paid.

Different global studies show that the laws related to default loans are very strict in developed nations. The defaulters must appear in court, and the cases do not take much time to be resolved. If the court declares someone a defaulter, it becomes quite tough for them to lead a normal life due to a set of restrictions.

The defaulters' credit scores become so poor that they remain no longer eligible for a second loan. They find no choice but declaring themselves bankrupt.

Laws in other countries

In Singapore, the punishment for a loan defaulter is imprisonment for seven years along with a fine of USD 160,000. Australia strictly follows its Corporation Act 2001 and Bankruptcy Act 1966 when dealing with loan defaulters.

The United States keeps default loans in check through its Bankruptcy Abuse Prevention and Consumer Protection Act and Fraud Enforcement Act. The United Kingdom and Canada also have similar laws.

The United Arab Emirates (UAE) confiscates all assets, including bank accounts of defaulters. The defaulters are allowed to appear in court only when they can justify the reason behind their non-payment of loans.

China and Vietnam have the strictest laws against defaulters. They have a record of awarding death sentences for defaulting on loans and embezzling money. In China, defaulters are not allowed to use credit cards or buy air and rail tickets.

How others reduce default loans

Asian countries, especially those in East Asia, have been more successful in reducing bad loans. After the financial crisis of 1998, major reforms were carried out to reduce bad loans and salvage the banking sector from a fragile state.

During the East Asian economic crisis, the banking sector in South Korea was on the verge of bankruptcy. The country later revamped the entire banking sector to recover from the poor condition. Some weak banks were closed, while others were merged with larger ones. The government formed a state company named the Korea Asset Management Corporation (KAMCO) and entrusted it with loan management. The defaulted loans were later converted into shares.

The Korea Deposit Insurance Corporation, another state-run entity, was tasked with recapitalising weak banks by issuing bonds. The governing structure in the banks was strengthened and brought under strict surveillance. The main job of the insurance corporation was to safeguard the interests of depositors.

In Malaysia, weak banks were not closed; instead, capital was provided to them, governance was improved, and laws were enforced strictly. The country undertook three major initiatives. It formed an associate organisation of the central bank -- Danamodal -- to recapitalise the weak banking sector and restructure its operations.

The country established a corporate debt restructuring committee to restructure loans and also set up an asset management company to trade and collect default loans.

The government also implemented a policy on how to trade the defaulted loans. The first organisation was shut down in 2005, but the other two entities remained in place.

Similarly, Indonesia established the Bank Restructuring Agency (IBRA), while China reduced default loans by creating four separate asset management companies for its four big banks. Thailand also reduced non-performing loans by establishing state-run asset management companies, while the Philippines did it through private asset management companies.

What ADB says about Bangladesh

There is no asset management company in Bangladesh dealing with non-performing loans. There are some loan collection agencies in the private sector, but they are not very effective. There is a system of trading default loans, but it mostly has a negative impact.

In Bangladesh, state-run banks buy default loans from other private banks, and only influential individuals enjoy this privilege. As a result, they default again on new loans.

The market for trading default loans is more active in European countries. Several Asian countries also have similar arrangements, but there is no significant precedent of one bank buying default loans from another bank, like in Bangladesh.

The Asian Development Bank (ADB) prepared a report on the management of non-performing loans in Bangladesh just before the pandemic. Later, they prepared another research report on defaulted loans in Asia as a whole. The regional bank suggested that asset management companies be set up in Bangladesh, similar to South Korea or Malaysia.

According to the ADB, such companies can purchase default loans and sell them to another company at a realistic rate. The government can also allow state-run banks to sell default loans to good companies.

However, merely forming an asset management company is not enough. The authorities should enact necessary laws, ensure their enforcement, and demonstrate political will.

What Bangladesh is doing

Formal discussions on the banking sector and default loans began in 1986 with the formation of a national commission on finance and credit. Later, a programme was undertaken to reform the financial sector with the help of donors. The authorities took various initiatives, including legislation of a new Bank Company Act, defining default loans, and allowing interest rates to be determined by the market.

Subsequently, the Financial Loan Court Act was passed in 1990, the Bank Company Act in 1991, and the Bankruptcy Act in 1997. Despite all these initiatives, the volume of default loans did not decline significantly. Rather, defaulters were granted various privileges.

In the aftermath, the default loan volume, which was Tk 220 billion in 2009, has now risen to Tk 1,200 billion. If the IMF method is taken into account, the volume would increase further to Tk 3,500 billion.

Since 2009, influential individuals have been given benefits. In the face of pressure from them, the definition of default loans was relaxed, and the safe period was extended by three months.

Later, special benefits were given to defaulters in 2015 in the form of loan restructuring, and special concessions were arranged for loan write-offs. Lastly, special benefits were given to reschedule loans with 2 per cent installments in 2019. These concessions have led to an increase in default loans and a growing number of financial scams.

Willful VS involuntary defaulter

The concept of willful default is actually imported from India. The neighboring country formed a Central Vigilance Mission in 1964 to prevent corruption of the union government. In 1998, the mission directed the Reserve Bank of India (RBI) to identify willful defaulters and take action.

The RBI issued a policy the following year, but it didn't work well. Later, a committee was formed in this regard, and a new policy was made in 2001 based on its recommendations.

Pakistan largely followed India in incorporating willful default into the law, and Bangladesh has adopted the same definition.

According to the draft of the amended Bank Company Act, willful defaulters will not receive any honour from the state, cannot hold positions in any organisation, face a ban on foreign travel, vehicle and house registration, trade licence, and company registration.

The act is being amended to meet IMF loan conditions. However, experts have expressed doubts about its effectiveness, saying without political commitment, no action can be taken against influential defaulters.

Former Bangladesh Bank governor Salehuddin Ahmed said there is no punishment for defaulters in the country. Banks with high default loans are not being brought to book. Additionally, the actual information regarding many loans is being concealed under the pretext of loan restructuring, rescheduling, and moratorium. As a result, the actual amount of default loans in the country remains unknown.

The former central bank governor also said the real defaulters must be identified first in order to reduce default loans. Later, they should be quickly brought to trial after strengthening the legal system. The initiatives taken to provide concessions to the defaulters should also be stopped.

***This story first appeared in the print version of Prothom Alo and has been rewritten in English by Misbahul Haque