Non-Performing Loan Recovery

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Legal Challenges:

In Bangladesh, the foremost challenge for the financial institutes is
Non-Performing Loan (NPL) recovery. Recently the Ministry of Finance of the
Government of the People's Republic of Bangladesh informed the national
Parliament that the total amount of non-performing loan is BDT 560 Billion.
According to Bangladesh Bank, the Central Bank of Bangladesh, NPL ratio
increased by 113 basis points, reaching 9.9 percent at end of March 2016 from
8.8 percent (9.3 as per World Bank) recorded at end of December 2015. However,
the statistics is misleading as the total percentage is significantly reduced
by the better performance of the Private Commercial Banks (PCB) and Foreign
Commercial Banks (FCB), which to some extent mitigates the poor NPL ratio of
the State-owned commercial banks (SCB) and Development Financial Institutions
(DFI). At the end of December 2013, PCBs' had the lowest and DFIs had the highest
ratio of gross NPLs to total loans. PCBs' and FCBs' gross NPLs to total loans
ratio was 4.5 & 5.5% respectively, whereas that of SCBs, and DFIs were 19.8
and 26.8% respectively at the end of December 2013. The gross NPL ratios to
total loans for the SCBs, PCBs, FCBs and DFIs were recorded as 23.2, 5.7, 6.2
and 33.1 percent respectively at the end of June 2014. Even in March 2016,
SCB's and DFI's NPL were much higher than that of the overall banking industry
and it increased to 24.3 percent from 21.5 percent recorded in December 2015. 

Therefore, the true picture is that when it comes to SCBs or DFIs, the
ratio of NPLs to total loans can be three times higher than the average
percentage. It goes without saying that the presence of an alarming amount of
NPLs both in the SCBs and DFIs, along with maintenance of inadequate loan loss
provisions, diminishes the overall credit quality of Bangladesh.

It is submitted that one of the major reasons for such high ratio of NPL
is the weak legal provisions and arrangements. Lengthy legal procedures
involving disputed loans make it very difficult for banks to recover value from
NPLs or their collateral, further increasing the losses. The governing
legislation is the Artha Rin Adalat Ain 2003 (ARAA), exclusively focusing on
non-performing loan and ensuring safety and soundness of the banking system.
Some of the key challenges of the Act are analyzed below.

Redundancy of Process:

The process of non-performing loan recovery is a
redundant multi-tier system that focuses on the traditional adversarial values
and has
the effect of sidelining the main object, i.e. execution or recovery.


The inefficiency of the Code of Civil
Procedure in dealing with litigations is well established. The process allows a
long paper game through multiple applications, counter-applications and the
plaintiff and the defendant use the generous provisions for special leave with
judges accepting numerous adjournment and addendums to the plaint. Formalities
are preferred over efficiency and evidence must be presented orally, resulting
into long hearings. ARAA sought to resolve the challenges by proposing its own
procedure in some respect but in the process created another redundancy.
Ideally speaking, as facts are not often disputed, detailed trial should not be
required for recovery of loan and execution should be centre of focus.
Unfortunately, ARAA has created a two-tier system where after the initial
hearing, similar to a civil suit, a separate suit is filed for the execution of
the decree obtained.

Under the new Act, the ARAA are to
dispose cases within three months. However, in reality, that’s never the case.
The unavailability of a summary procedure, where evidence can be presented in
writing to keep hearings short and the lack of provisions for the court to
merge the hearing and execution process under a single suit, are delaying,
hence denying justice for the Banks.

Possession & Execution:

The provisions related to execution and
taking possession are also legally imperfect. Section 12(1) provides that
before selling of mortgage property the Banks cannot file a suit, meaning, the
Banks are ought to sale or try to sale the land before the suit is filed. From
practical point of view, without actual possession it would be extremely
difficult to complete the sale. Of course, under Section 33, the creditor is
entitled to the ownership of the property for selling in auction and under the
Banking Companies Act 1991, the Banks can sell the property in default of payment
within 06 months thereof, but the ownership without the possession in most
cases would add no value to the Banks. In reality, Banks face problems in
taking possession of the land after execution as there is no rule as to taking
possession given to the Banks through a certificate under section 33(5) and
33(7). Without effective possession, disposal of the land becomes difficult, if
not impossible and seems like the legislators failed to incorporate the basic
principles of property law, i.e. Ownership equals to title and possession.


Another key shortcoming of the system is
lack of priority for the Banks in case of insolvency of the defaulter. Under s.
75 of the Insolvency Act-1997, the Banks’ claims have third priority, meaning
recovery will fail if the assets of the insolvent are exhausted in meeting the
first and second heads of claims, i.e. the Government and the Employees. Also
if the distributable assets are inadequate for paying off other unsecured
debts, payments to Banks can be proportionately reduced to meet the unsecured
debts at the rate of at least 50% of the bank loans. This has the unacceptable
consequence of leaving the Banks with bare minimum to no recovery in case of
insolvency of the Borrower.

Stay Orders & Set Aside:

Another significant challenge with the
current system is the relaxed provision for obtaining stay orders from the High
Court. The High Court Division of the Supreme Court of Bangladesh interferes
with the ARAA process with wide latitude. Once the matter is dragged to the
ordinary court system and a stay order is granted, the whole process is delayed
by months, if not years. It has been observed that this gateway is often abused
by the Borrower to delay the NPL recovery process.

Furthermore, Section 19 of the Act deals
with the process for a loan defaulter’s application to set aside an ex-parte
decree. Section 19, gives right to the borrowers to redress grievances against
judgment and decree, whether ex-parte or contested. This provision is also
widely abused by the borrowers for buying more time by initially allowing
ex-parte decree and then challenging it.

Inefficiency of ADR Mechanism:

The ARAA provides for and encourages
using of alternative mechanism under Sections 22 to 25. Regrettably, due to
general mind set up, too often a defaulter facing recovery proceeding will play
the ADR card under S.22 as a delaying tactic. They abuse the system by wilfully
going through the settlement conference procedure with no intention of
settlement. They take advantage of this stage by holding the suit and by taking
a transfer of the suit to another Court. As a result, they drag the hearing of
the suit and by virtue of S.23 this can be done at any stage of proceeding.

On the other hand, the Banks do not want
to bring a positive result at this level as they rather prefer to obtain a
decree to create pressure upon the judgment debtor(s) through execution of

Furthermore, as per S.24 of the Act,
while a settlement below 5 crore can be finalized by the local bank officers,
as per S.25, any settlement involving NPL over 5 crore requires approval of the
Managing Director. In reality, S.25 has the effect of disempowering the bank
officers’ authority under S.24 as for job safety they refuse to exercise any
discretion in making the ADR process successful. All settlement attempts are
routed to the Managing Director, who himself would not use his discretion in
light of the recent corruption cases against senior bank officials, and would
refer the decision to the Board.

Consequently, the ADR mechanism is
failing from both ends to be efficient and without effective modification it
will not change the overall situation of NPLs.

Suggested Modifications:

In light of the challenges analyzed
above, the following changes in the legislation can be made:

The ARAA can be made into a quasi-legal
tribunal like India by creating a provision for recovery officer in the ARAA
for directly executing the decree without the need for filing another suit for

The ARAA should create specific provisions for issuing
Certificate of Possession in favor of the Banks in case of NPL, which should
require the law enforcement agencies, or recovering agencies (the concept is
yet to be applied in Bangladesh), to take mandatory necessary steps for
ensuring possession for the Banks and allowing it to have proper ownership.

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