Key highlights:
- In a significant effort to combat financial misconduct, the Bangladesh Bank (BB) has implemented a new directive on March 12, 2024, which prohibits foreign travel for intentional defaulters.
- On February 4, the Bangladesh Bank unveiled a roadmap aimed at reducing default loans to below 8% by June 2026, down from 9% in 2023.
- Any willful defaulter will be ineligible for national awards or honors, and those repaying loans after being listed as willful defaulters will be barred from bank directorship for 5 years.
In a significant move to combat financial misconduct, the Bangladesh Bank (BB) has implemented a new directive on March 12, 2024, which prohibits foreign travel for intentional defaulters. This directive is part of a comprehensive strategy aimed at tackling the increasing problem of non-performing loans within the banking industry.
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The guideline was formulated to identify and address intentional defaulters and outline the necessary actions against them. This initiative was prompted by widespread irregularities among certain lenders, undue interference by directors, and a surge in bad loans within the banking sector.
On February 4, the Bangladesh Bank unveiled a roadmap aimed at reducing default loans to below 8% by June 2026, down from 9% in 2023, while also ensuring enhanced corporate governance in the banking sector. To execute this roadmap, the BB has introduced 17 initiatives.
As of January 2023, Bangladesh has a total of 786,000 defaulters, with the top 20 among them collectively owing Tk 16,587.92 crore to various lenders.
In contrast, apart from Bangladesh, various countries perceive willful defaulters differently and impose varying punishments on them.
Who are Willful Defaulters?
Willful loan defaulters are individuals who knowingly opt not to repay their loans, either despite having the means to do so or intentionally refusing to fulfill their obligations.
Additionally, actions such as obtaining loans under false pretenses by fabricating non-existent organizations or companies, engaging in forgery, deception, or providing false information, diverting loan funds for purposes other than those stated during the application, or transferring borrowed funds improperly will also be classified as willful defaults.
What’s the New Guideline?
Individuals who default on loans, engage in foreign travel, apply for trade licenses, or operate companies registered with the Bangladesh Securities and Exchange Commission (BSEC) and the Registrar of Joint Stock Companies and Firms (RJSC) will have their names forwarded to the Bangladesh Bank for restrictions.
Simultaneously, concerned organizations will submit the list of defaulters regarding vehicles, land, houses, flats, etc., for relevant authority registration and enforcement. Any willful defaulter will be ineligible for national awards or honors, and those repaying loans after being listed as willful defaulters will be barred from bank directorship for 5 years.
Directors found willful defaulters will have their positions terminated. No more than 15% of shares can be held by a single family; up to 15 directors are allowed, including 2 independents. Families holding less than 5% of shares are entitled to one director, while those holding more than 5% can have a maximum of 2 directors, but not more than 2 from the same family.
Directors can serve up to 3 years and for 3 consecutive terms. However, financial institutions in Bangladesh cannot create subsidiary companies without approval from the bank, according to the new law.
Fines have increased; non-compliance with license conditions incurs up to Tk 50 lac. Violating loan rules demands a penalty of Tk 10 lac or the current loan value, whichever is higher, paid by all involved directors and officers.
Regulations for Directors and Financial Institutions in Bangladesh
- Directorial Limits:
- Max 15 directors, 2 independents.
- 3-year term, 3 consecutive terms.
- Fines for Non-Compliance:
- License conditions breach: Up to Tk 50 lac.
- Loan rules violation: Penalty of Tk 10 lac or current loan value, paid by directors and officers.
Around the World in Defaulters’ Penalties
In India, banks or financial institutions may designate individuals as willful defaulters if they fail to repay loans, potentially leading to their inclusion in a public database of defaulters. This can significantly impact their creditworthiness and ability to secure future loans, with potential legal repercussions including criminal charges.
India recorded over 10,306 cases of willful defaulters in 2022. The peak occurred in the period of 2020-21 with 2,840 reported cases. Scheduled commercial banks (SCBs) wrote off bad debts totaling Rs 10.09 lac crore over the past 5 years.
Creditors or lenders can take legal action against willful loan defaulters, potentially resulting in a court judgment against them in the United States. Consequences may include wage garnishment, seizure of assets, or other measures to recover the debt.
From October 2007 to April 2021, a total of 22,645 lawsuits were initiated to recover defaulted student loans in the US. Annually, approximately 1 million student borrowers default on nearly $20 billion in federal loans.
India:
- 2022: 10,306 willful defaulters
- Peak in 2020-21: 2,840 cases
- SCBs wrote off: Rs 10.09 lac crore in 5 years
United States:
- Lawsuits (Oct 2007-Apr 2021): 22,645
- Approx. 1M student borrowers annually
- Defaulting on: Nearly $20B federal loans
China:
- 2023: 8.54M defaulters aged 18-59
- 50% surge from 2020: 5.7M defaulters
Malaysia:
- Default estimate (end 2024): 3.8%-4% of banking system loans
- Over 6 months behind: 137,000 borrowers nationally
China imposes penalties on loan defaulters, restricting their access to various social benefits enjoyed by regular citizens. They may be prohibited from purchasing air or high-speed train tickets and are ineligible to hold executive positions in corporate entities.
This blacklist encompasses political figures, legislators, and government personnel without exceptions, extending to real estate transactions. By 2023, 8.54 million individuals aged 18-59 were identified as defaulters for failing to repay loans and were placed on the government’s blacklist in China. The number of willful defaulters surged by 50% from 5.7 million at the beginning of 2020.
Similarly, Malaysia enforces punitive measures against loan defaulters by preventing them from leaving the country. Bank Negara Malaysia warns that between 3.8% and 4% of banking system loans could face default by the end of 2024 under adverse income and employment scenarios, owing to insufficient financial buffers among borrowers. Nationally, around 137,000 borrowers are over 6 months behind on payments.
Against the backdrop of a worldwide struggle with deliberate loan defaults, Bangladesh takes a proactive stance, highlighted by the latest directive issued by the Bangladesh Bank, emphasizing its firm resolve to tackle financial misconduct head-on. With a suite of stringent measures, including constraints on international travel and punitive actions against intentional defaulters, Bangladesh’s bank is poised for a significant overhaul towards greater transparency and accountability.
