The cabinet of Bangladesh has recently approved the draft Bank Company Act 2023 with the aim of enhancing financial governance in the country. The act, which has been under development since 2019, is now slated for presentation to parliament for final approval, a demand that has been made by multilateral lenders for several times.
The successful implementation of this act could have far-reaching consequences, particularly for those individuals who have wilfully defaulted on loans, as well as the way bank boards are formed and managed. This has been a long-overdue measure, and failure to implement it properly could have significant implications. For example, officials in the finance ministry have stated that a $250 million loan from the World Bank, intended as budget support, may be at risk if the act is not implemented.
What the act includes?
According to the proposed Bank Company Act 2023, approved by the Bangladeshi cabinet, banks will be required to notify the Bangladesh Bank about wilful loan defaulters, and the central bank will have the power to ban them from foreign travel, obtaining trade licenses, and registering companies with the Joint Stock and Securities Exchange Commission. Additionally, the number of family members who can serve on a bank board has been reduced from four to three under the proposed law, although the maximum nine-year tenure for directors, previously established in 2018, remains unchanged.
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Another provision of the draft law requires bank directors and their family members to provide collateral, bonds, or securities when obtaining loans from the bank. The proposed law also mandates banks to publish lists of wilful defaulters on their websites and in newspapers, a measure aimed at improving transparency.
Banks will issue notices to habitual defaulters to repay their loans within two months, and if they fail to do so, the banks will arrange an auction to sell off the mortgaged assets in accordance with the Money Loan Court Act 2003. Finally, the proposed act includes provisions for mergers and restructuring of banks.
According to recent reports, non-performing loans in Bangladesh’s banking sector increased from Tk 1,03,273 crore in 2021 to Tk 1,20,656 crore in 2022, a rise of Tk 17,383 crore. The increase has been attributed mainly to wilful loan defaulters who allegedly have political backing.
As a consequence of various alleged scams, irregularities, and the piling up of non-performing loans in the banking system, renowned international credit rating agency Moody’s Investors Service downgraded its outlook on Bangladesh’s banking sector from “stable” to “negative.” Such a rating could erode the confidence of investors and foreign institutions in the country’s banking sector, making it more challenging to attract foreign direct investment.
Who will be regarded as a defaulter?
The draft law has been in the vetting stage with the law ministry since May 17, 2021, after being approved in principle by the cabinet. Under the proposed law, individuals who fail to repay loans taken in their name or their company’s name, despite having the means to do so, will be considered wilful defaulters. Additionally, those who take out loans under the name of a non-existent company or transfer mortgaged assets to obtain loans without prior approval from the bank will be treated as habitual defaulters.
In addition, individuals who have been removed from the list of wilful defaulters will need to wait five years before becoming a director of a bank or financial institution, while directors who become wilful loan defaulters will have their posts declared vacant by the central bank.
The proposed law also includes provisions for regular inspections of institutes and foundations under the purview of the Bangladesh Bank and requires banks to establish two separate committees to detect habitual defaulters. The Bangladesh Bank will provide instructions to banks in this regard, and banks and non-bank financial institutions will be required to send lists of habitual defaulters to the central bank from time to time.
If individuals are designated habitual defaulters by the confirmation committee of banks, they can appeal to the central bank within 30 days, which will make the final decision on whether they should be listed as habitual defaulters. The central bank will then send the list to relevant government agencies, which will impose restrictions on delinquent borrowers.
What experts are thinking about it?
Experts have been discussing the need for amendments to the Bank Company Act, 1991 for many years, and finally, the government has decided to act on it. The government has taken a loan from the World Bank, and the International Monetary Fund has stipulated that the draft law must be submitted before parliament by September as part of their loan agreement.
Mahmudul Hossain Khan, the secretary of the cabinet division, stated in a briefing with reporters after the meeting that the current banking activities are being run under the Bank Company Act, 1991. He emphasised that the proposed amendment is necessary to bring the act up to date.
Zahid Hussain, a former lead economist of the WB’s Dhaka office, believes that the addition of a wilful defaulter clause in the amended Banking Companies Act 2023 is a step in the right direction. He believes that it shows the government’s commitment to addressing the longstanding problem of wilful defaulters.
Selim RF Hussain, the chairman of the Association of Bankers Bangladesh (ABB) and managing director of Brac Bank, has lauded the recent amendments to the Bank Companies Act regarding wilful defaulters, stating in a report that it is a positive initiative if it is properly enforced. However, he noted that it is yet unclear whether the banks or the central bank will identify the wilful defaulters.
Hussain also commented on the challenges banks face in recovering loans from defaulters, including wilful ones, due to a weak legal framework that allows large defaulters to exploit the system and obtain stay orders from courts.
Will it really work?
The draft act proposes to broaden the role of the central bank in investigating rule-breaking. According to experts, the Bangladesh Bank has a history of flouting its own rules and regulations, resulting in undue benefits for a few at the expense of many. Therefore, the government’s sincerity in addressing the problems will be judged by the effectiveness of the implementation.
Economic analysts are also saying that, if the government is serious about improving the banking sector, it must ensure that the ownership of a well-run bank does not change overnight in a five-star hotel. It is also essential to ensure that a CEO of a bank is not forced to resign or be replaced during odd hours. Therefore, an updated Bank Company Act needs to be accompanied by an all-out reform in the banking sector, including the introduction of a detailed bankruptcy or insolvency law. However, if wilful defaulters can file writs to stay the BB’s adjudication on their listing, the new clause may not have the intended effect. Therefore, there is a need for transparency in how BB will make the adjudication
