BANGLADESH: Debt-laden Banks Prepare to Crack Down on Defaulters

By IPS Correspondents Reprint | | Print |

Tabibul Islam

DHAKA, Mar 21 1997 (IPS) - For the first time, banks in Bangladesh have been armed with powers to take action against loan defaulters who have political clout and money power.

Parliament recently passed two new laws that were introduced by Prime Minister Shaikh Hasina Wajed’s seven-month-old government.

Under the ‘Bankruptcy Act’, an individual, company or statutory body that fails to repay a loan can be declared insolvent by the concerned bank. The second piece of legislation enables banks and financial institutes to sack directors who have sanctioned the loans.

Many of the big loan defaulters are directors of banks, members of Parliament belonging to both the ruling and opposition parties, and rich business people.

Last month at a meeting in Dhaka, Lutfur Rahman Sarkar, governor of Bangladesh bank, the country’s central bank, said the banking industry was owed a total of 3.7 billion dollars in outstanding loans.

According to him, the number of people owing loans above 250,000 dollars was roughly only 1,800, but because they have political clout and are socially well placed, recovery is very difficult.

Both the World Bank and the International Monetary Fund (IMF) have expressed concern over the growth of the “default culture”. The IMF in a report has recommended the closure of debt-laden banks and said loans should not be considered political largesse.

Bangladesh banks have been abused by politicians. The “default culture” goes back to the martial law regime of deposed president Hussain Mohammed Ershad, who is now chairman of the third largest political party in Parliament. During Ershad’s autocracy, bank loans were liberally handed out to industrialists and politicians in exchange for political support.

The loans were taken for establishing industries, but the plans remained on paper and the money was either sent abroad or diverted to trade, which yields quicker and higher returns than industry.

As a result industry contributes only nine percent to the GDP, and employs only seven million people, which is less than the population of the Bangladesh capital. The country remains mainly agrarian, absorbing 65 percent of the total labour force.

When Ershad was forced out of office by a pro-democracy movement in December 1990, outstanding loans totalled 2.5 billion dollars, most of which was written off as bad loans by banks.

Bangladesh’s first democratically-elected government that followed started out by trying to recover loans. But the Bangladesh National Party (BNP) soon gave up — succumbing to pressure from within the party.

At a recent meeting, Finance Minister Shah A.M.S. Kibria accused the previous government of “indulging in corruption and politicising the grant of bank loans”. He faulted the BNP for granting loans on the basis of political affiliation, rather than the feasibility and credit worthiness of schemes.

Only a fifth of the more than 50,000 cases connected to outstanding loans that were filed by banks during the BNP’s five- year term in power has been settled.

The problem is serious, and even Bangladesh President Justice Shahabuddin Ahmed has issued a call for the social boycott of loan defaulters, whose names are regularly published in the newspapers.

Bangladesh has also changed laws to bar loan defaulters from contesting in parliamentary elections, which were enforced in the selection of candidates in the last general elections in September.

Prime Minister Hasina again told participants of a seminar in Dhaka that her government was determined to restore discipline in the banking and financial sector. She has already constituted a high-powered committee to recommend reforms for the banking industry.

Independent banking experts say the government must strictly enforce banking rules and ensure managements abide by regulations or the mess in the banking sector will only get worse. The “default culture” must be eliminated if banks are to become healthy, they warn.

The new laws passed by Parliament earlier this month are indeed signals of the government’s resolve. Rules have been

amended to include firms and institutions in the list of offenders, against whom banks can take action. Previously only individuals could be declared bankrupt and their assets seized by the government to repay creditors.

The amendment of the Bank Company Act is expected to go a long way in ensuring accountability by management in the banking industry. The new rules say that directors can be sacked if they “fail to repay advance, loan, installment, interest or security money within two months of serving notice on him or her by the banks or financial institutions through Bangladesh Bank.” Moreover, banks are prohibited from extending credit to declared loan defaulters.