Rethinking loan recovery problems

Bangladesh appears to be stuck in a vicious cycle of loan default culture that has plagued its financial sector for over a decade now. This does not come as a surprise since policies taken thus far have abetted, rather than mitigated the siphoning off bank money. According to a report carried in this newspaper, default loans from both private and state-owned financial institutions are caught in endless legal battles which drag on for years and this gives a green signal to parties that it is easy to get away with bank loans taken without paying back.

Reportedly more than Tk2.0 trillion default loan is caught up in litigation as of March this year. Indeed, as of March, 2023, some 214,282 cases are pending with the courts that involve financial institutions' vain efforts to recover this huge amount of loans. Over the three-month period from December 2022 to March 2023, default loans increased from Tk1.66 trillion to Tk2.07 trillion, an increase of 24.6 per cent. It seems that as the country draws near the next general elections, unscrupulous business interests are cleaning out the banking system. On the contrary, recovered loans amounted to a paltry Tk44.34 billion over the same period, while alternative dispute resolution (ADR) yielded another Tk67.89 billion.

Why has the situation been allowed to deteriorate to this stage? For that one must look at the disastrous decision taken nearly a decade ago when banking rules stipulated that several members of the same family could sit on the board of a bank. That decision essentially changed the character of a financial institution. Where one particular family wielded so much power at decision-making level essentially chucked out whatever checks-and-balances were there regarding prudent measures that acted against giving bad loans. Suddenly, banks became family business and it paved the way for a spree of sanctioning loans to familiar faces rather than on the merits of the business entity. Not much thought was given to whether bank loans being handed out could potentially be recovered.

The undue pressure from bank directors on bank management has aided in this ballooning of bad debts in the financial system. Soon, loans were being handed out without adequate collateral, a fundamental prerequisite for loan sanctioning. On top of all this, there have been cases where forged documents and/or overvalued mortgaged property were used. Both wilful indifference to and breach of banking rules have been responsible for sanctioning loans to dubious parties. Of course, connivance at the top was aided by a section of management people in banks' hierarchy without whose collaboration such blatant loots of bank money couldn't have taken place.

So, as banks find themselves in loan recovery courts, they find themselves with assets that are valued at a fraction of their actual value. Selling them off will only recover a fraction of the loan value, but even before getting to that stage, with such a massive backlog of cases pending with various courts, it may be years (if not decades) before a ruling comes through. The fact of the matter is that it is not merely a question of having enough loan courts or simplifying the proceedings, rather it has everything to do with the government's willingness to put the brakes on the malpractices that plague the banking sector's governance. Without that happening, the exponential growth in bad loans is set to continue.

mansur.thefinancialexpress@gmail.com