Use of ADR to ease NPL problem

The central bank's directive, issued late last week, to recover at least one per cent of the non-performing loans (NPLs) using the alternative dispute resolution (ADR) mechanism highlights its desperation for doing whatever it can about the ever-bulging toxic assets in the country's banking sector. The ADR is a globally applied tool to resolve disputes over loans and any other issues outside the court and arbitration entities having the expertise in such dispute resolution could be of great help in this respect. The Bangladesh International Arbitration Centre (BIAC) is a leading arbitration entity that is well-equipped to do the mediation, if and when necessary.

There is no denying that the volume of NPL has been on the rise for years. The reasons for such an unabated increase are more or less known to all. The loan-default culture is deeply ingrained in the banking system. Some big delinquent borrowers, who are otherwise powerful politically, have been responsible for the situation going from bad to worse. The huge accumulation of NPLs has much to do with the failure of banks to exercise due diligence while extending loans and a lack of regulatory oversight.

Not that the banks are not doing anything to get back their funds stuck up with the defaulters. In addition to persuading the borrowers to pay back, they have gone to money loan courts to retrieve their money through lawsuits. A sum of Tk 1.7 trillion was reportedly involved in 72,540 cases until June 2023. Inordinate delays in the litigation process and failure to execute court verdicts are seen as major obstacles to getting the desired outcomes. Besides funds stuck up in money loan court cases, a notable number of money suits are pending before the higher courts.

In such a situation, the application of the ADR mechanism offers some hope for banks provided the parties involved are willing to participate in it. ADR is an informal, short-cut way of dispute resolution without court trial --- one that uses processes like mediation, arbitration and neutral evaluation. Though less tedious than court procedure, the trust of the disputing parties in the mediator and mediation process is crucial for success of ADR. It is worthwhile to note at this point that the Money Loan Court Act 2003 emphasised the use of ADR for settling loan cases outside the courts to ensure the speedy recovery of the NPLs. The Act further provides that before the court passes judgment, the bank and its defaulting customer, with the permission of the court, can settle the matter at any stage of the case by means of an ADR. However, the BB directive also includes that the mediation has to be done on a case-to-case basis taking into consideration the ability or willingness of the defaulting customer to repay the loan. This latest BB directive among a series of others issued earlier to address the problem of NPLs strangling the nation's banking system is well understood. Of course, the pressure of the international moneylender IMF to this effect needs also to be taken into account. Against this backdrop, the current BB directive offers a way out of the prevailing mess in the banking sector. In that case, the provision of ADR to settle money loan cases makes sense and is worth exploring.