Smart strategy to tackle willful defaulters

Md. Anisuzzaman

Needless to say, the pervasive loan default culture is a curse for our bank centric economy. Year after year NPL is increasing indomitably. Financial sector is heavily burdened with large amount of NPLs.

At December, 2018, NPL stood at tk. 93,911 crore which is 10.30% of total outstanding loans. Gradual increase of NPLs has been shown below:

2011→ 6.12%, 2015→ 8.79%, 2016→ 9.23%, 2017→ 9.31%, 2018→ 10.33%

These piled up, unproductive NPLs are eroding the capital base of the banks & FIs. NPL causes the economic & financial implications such as- loss of interest income, high loan loss provision, erosion of banks capital, high loan price, low rate of investment, low economic growth, economic slowdown & financial crisis etc.

NPLs are also viewed as a typical byproduct of financial crisis as well as an accidental occurrence of the lending process. If NPLs are not addressed properly, there will be a long flow problem of bad loans. Besides, NPL creator bad borrower may create a negative psychological impact on good borrowers to delay their payments.

For Prudential management of NPLs, it is utmost important to determine whether the defaulter is willful defaulter (fake defaulter) or a genuine defaulter. Willful defaulters are actually habitual defaulters who take loans from banks/FIs with malafide intention not to pay back the loans. Very often banks/FIs can not properly identify these hypocrite, shrewd people. Willful defaulters are the propagators of loan default culture. They are infecting other borrowers like one sickly sheep infects its flock.

We are witnessing here the practical application of Grasham’s law where these bad borrowers are driving good borrowers out of the financial market. These willful defaulters are polluting the credit environment immensely. Their strong presence in financial arena is aggravating the culture of impunity. Thus causing a potential threat to our economy.

It’s a matter of shame that there is no guide line to detect willful or habitual loan defaulters in Bangladesh. We have no statistics on willful defaulters. Besides, percentage of willful defaulted loan is not known to us. Recently the IMF has expressed interest to know about the definition of willful defaulters which would be used for identifying them legally.

In this regard, Bangladesh Bank is working on this issue. However, our neighboring country India has been dealing strictly with willful defaulters. The Reserve Bank of India (RBI) had issued a master circular on willful defaulters to disseminate credit information pertaining to willful defaulters as on 01.07.2015 for cautioning banks/FIs so as to ensure that further bank finance is not available to willful defaulters.

At the direction of the Supreme Court of India- the Reserve Bank of India (RBI) has released a list of 30 major willful defaulters.

Willful defaulters in India cross Rs-1.5 trillion in 2018-2019. Number of willful defaulter in nationalized banks of India up 60% in 5 years.

The RBI has defined willful default in four ways:

A willful default would be deemed to have occurred if any of the following events as noted:

(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.

(b) The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

(d) The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/ lender.

{Note: Unit- The term ‘unit’ includes individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In case of business enterprises (other than companies), banks/FIs may also report the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise.}

Besides, the Reserve Bank of India (RBI) has clarified that individuals or corporate entities acting as gurantors to loan could be identified as willful defaulters for refusing to clear the dues despite having means to do so.

A prolific guide line on willful defaulters should be made immediately by Bangladesh Bank to help fight against willful defaulters legally. At present there is no specific law for taking legal action against willful defaulter.

However, we can redefine the existing legal frameworks related to recovery of willful defaulted loan & their limitations.

The following smart strategies can be taken to combat willful defaulters:

1. Further additional facilities should not be granted by any bank/FI to the identified/listed willful defaulters.

2. If the willful defaulters are identified by bank/FI for committing siphoning/diversion of funds, mispresentation, falsification of accounts & fraudulent transactions should be debarred from institutional finance from the scheduled commercial/specialized banks/FIs. In this regard, the central bank should make a black list of these willful defaulters.

3. Willful defaulters & companies with willful defaulters as promoters/directors should be debarred from accessing capital market to raise funds.

4. Credit Information Bureau (CIB) must have a database on willful defaulters & should disseminate the information pertaining to suit filed accounts of willful defaulters on their respective websites.

5. Banks/FI may initiate criminal proceedings if it is found that the willful defaulter has committed misappropriation of property, breach of trust & cheating under section 403, 405 and 415 of Bangladesh Penal Code, 1860.

6. Willful defaulters should not be allowed to take up director/board position in any company & those who are on board should be removed.

7. Willful defaulters who divert/ siphoned their fund or willfully default loan can be brought them under Anti-Money Laundering Act-2012 for committing money laundering. In this regard, Section-4 of Anti-Money Laundering Act-2012 is deemed to be applicable for punishment.

8. A Vibrant & Proactive Asset Management Company should be formed to deal with the growing NPL of banks/FIs particularly willful default loans. The Asset Management Company will purchase these NPLs/willful default loans from banks & sell them off individuals or corporate entities.

Md. Anisuzzaman is the Deputy General Manager of Karmasangsthan Bank. He is a voluntary campaigner for sustainable