In a rapidly evolving financial landscape, Bangladesh's Non-Banking Financial Institutions (NBFIs) are facing unprecedented challenges that could have far-reaching consequences for the sector. The recently enacted Finance Companies Act 2023 is poised to reshape the dynamics of this vital sector, but stakeholders are voicing their apprehensions and calling for a reconsideration of its provisions.
DEPOSIT LIMITATIONS - A BARRIER TO GROWTH: The Finance Companies Act 2023 introduces stringent deposit limitations within Bangladesh's Non-Banking Financial Institutions (NBFIs). While the intent is to prevent excessive concentration of deposits and irregularities, this move poses a significant challenge to NBFIs. These institutions have played a vital role, bridging the financial gap between traditional banks and the unbanked population. The Act restricts individuals from holding more than Tk 50 lakh in a single name and caps joint deposits at Tk 1 crore, with adjustments by Bangladesh Bank. These measures have raised concerns among well-managed institutions, straining liquidity management and potentially causing a liquidity crunch. This threatens the growth and stability of the NBFIs.
COMPETING WITH BANKS IN AN UNLEVEL PLAYING FIELD: The Act inadvertently puts NBFIs on an uneven playing field with traditional banks. By restricting deposit collection and curbing the ability to provide loans, NBFIs are in direct competition with commercial banks who are essentially engaging in the same type of business. This inherent contradiction threatens the very existence of NBFIs and may lead to a situation where the sector loses its relevance, ultimately harming the nation's financial ecosystem.
CHALLENGES OF SLOW RECOVERY: The recovery rate for loans in recent years has been sluggish, with many borrowers showing reluctance to repay borrowed funds. Non-performing loans have seen a significant increase. In this context, if NBFIs are restricted from accumulating deposits, they may find themselves in a precarious position. NBFIs typically invest borrowed funds in long-term projects, some extending up to 20 years. Should these regulations be implemented, it could pose significant challenges for NBFIs in fulfilling their financial obligations to depositors.
SHAREHOLDING RESTRICTIONS: The new law also enforces a cap on shareholding, stipulating that no individual or their family members can acquire more than 15 per cent of the shares of a financial institution, either directly or indirectly. Any surplus shares exceeding this limit must be transferred within two years from the enactment of this Act, with the excess shares being forfeited to the government. This measure aims to combat irregularities and corruption within the sector. However, doubt persists regarding its effectiveness in mitigating these issues.
STRICTER POLICIES ON DEFAULTERS: The legislation introduces a definition of a "willful loan defaulter." It addresses the issue of borrowers defaulting on their loans and introduces stringent consequences, including the possibility of criminal cases, travel bans, and restrictions on trade licences imposed by Bangladesh Bank. There is a need for stricter regulations for this group, including restrictions on foreign travel, blocking essential services where needed to show necessary documents like the National ID, passport, and TIN number. These measures aim to deter willful defaults and uphold financial discipline.
LOAN WITHOUT SECURITY RESTRICTIONS: Under Clause 25, the law restricts finance companies from granting unsecured loans exceeding Tk 10 lakhs, a figure subject to adjustment by Bangladesh Bank. This regulation may deter borrowers with good reputations and strong cash flow histories, potentially causing NBFIs to lose out. Such restrictions risk shrinking the business activities of NBFIs, which could have broader economic implications.
PENALTIES AND IMPRISONMENT: The law prescribes penalties for various violations, including fines for approving the waiver of interest or profit on loans without the approval of Bangladesh Bank. Moreover, the penalty for non-compliance with licensing conditions has been increased from Tk10 lakh to Tk 50 lakh. While these measures aim to ensure regulatory compliance, some view the imposition of fines and imprisonment as an impediment to the growth and development of the NBFI sector.
CONTRADICTIONS WITH BSEC: A notable concern lies in the contradictions between the new law and the regulations established by the Bangladesh Securities and Exchange Commission (BSEC) for publicly listed companies, particularly concerning shareholding and the number of directors. Such contradictions could lead to confusion and disrupt the smooth functioning of financial institutions.
NEED FOR FLEXIBILITY IN REGULATIONS: The Act's stringent regulations relating to deposit, collateral, unsecured loans, shareholding limits, penalties, imprisonment, and directorship terms may have a negative impact on the sector's ability to innovate and adapt. NBFIs require the flexibility to cater to the diverse financial needs of the economy, including supporting sectors like agriculture and micro, small, and medium enterprises.
In conclusion, while the new regulations aim to address irregularities and corruption within NBFIs, they also pose substantial challenges for well-managed institutions. Striking the right balance between enforcing discipline and ensuring sectoral growth is vital. Collaboration among regulatory bodies, stakeholders, and financial institutions is imperative to refine these regulations for the benefit of the entire financial sector and the broader economy.
KBM Moin Uddin Chisty, Chairman, Islamic Finance and Investment Limited (IFIL) & President, Victoria University of Bangladesh
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