Long arms of law too short for willful loan defaulters : Unbelievable but a sordid reality in Bangladesh
The Financial Express - August 25, 2002 (See post-script at the end)
The Governor of the Bangladesh Bank (BB) said the other day that "no one has so far been put behind the bars for committing any economic crime in the country". Though it is unbelievable, still it has been the reality in our country. Though it is unbelievable, still it has been the reality in our country.
Economic or financial crimes, inter-alia, include loan defaults, particularly the willful ones, in the country's banking sector, money laundering, manipulations in the stock market, fraudulent presentations of corporate accounts and tax evasions (income tax, value added tax and custom duty etc.).
Of all such financial crimes, the BB is mostly concerned over default culture in the banking sector. Default culture has virtually crippled the sector, nay the entire economy. It has been one of the main impediments to efficient and optimal allocation of resources to productive investments and economic development.
In many cases, the willful defaulters have not made any investments. Rather, they are responsible for diverting the borrowed funds to elsewhere for personal benefits. As a result, not only the concerned banks have incurred loss, the economy as a whole has also been forced to share the burden of it through its performance much below the desired level. If the borrowed funds were invested as desired, then the economy would have been benefited though the individual banks would have suffered loss. Because a distressed financial sector cannot help the real sectors of the economy, their growth has, therefore, suffered leading to less than potential performance of the economy.
The non-performing loan (NPL) in the country's banking sector, now at 3l.0 percent, has been historically very high by any standard. It is 37.0 per cent in the nationalized commercial banks (NCBS) and 17.0 per cent in the private commercial banks. The high level of non-performing loan in NCBs resulted from directed lending in the post-independent Bangladesh. Directed lending played a vital role in economic development of Japan and the Republic of Korea in post Second World War period. In Bangladesh, it failed miserably because of faulty design and poor implementation, coupled with political and bureaucratic interventions, poor and corrupt corporate culture, inefficient and corrupt bank management, inadequate legal and institutional framework and, of course, collusion between corrupt management , sponsors and borrowers. All such factors have resulted in a vicious circle of default culture.
There are some efficient and honest politicians, bureaucrats, sponsors, borrowers and bankers in the country. But they are so few in numbers that they cannot reverse the process. When private sector banks (PCBs) started operations in 1980s, then the default culture infected them in one way or another including insider lending. So far the new generation banks - established in the 1990s - have not been that much affected by default culture. In our banking sector, incentives have always been biased towards default culture. There are genuine sick industries or defaulters who have become so for circumstances beyond their control or because of lenders' faults, changes in government policy or other internal or external factors. But most of them are willful and habitual defaulters. Tens of billions of Taka have been exempted by the country's banking companies.
The relevant laws are otherwise inadequate and their enforcement is poor and sluggish. It is almost impossible to recover any loan through the legal system. The defaulters know it well that they are beyond the reach of even the long arms of law. They can get away with anything even with criminal offences in the form of diversion or misappropriation of funds. That is why they do not care and they know for sure, after sometime they will get large exemptions. So why should they bother?
So long incentives continue to be biased towards defaulters and legal system is not strong enough to punish the defaulters (particularly the willful ones) severely and quickly, the banking system can never get out of default culture. There should be adequate law for quick disposal of cases for foreclosure and bankruptcy including criminal proceedings for criminal offences. Unlike the present conditions, every borrower should be forced to think that the money he/she is taking should be returned including interest thereon in time. Otherwise he has to face severe consequences; there is no other way out.
Successive governments have done nothing significant to reverse the process because, regardless of political affiliations, defaulters are one of the main sources of political donations. It makes perfect sense for defaulters. If a defaulter can get Taka 500 million as exemptions, he can easily donate Taka 50 to 100 million to the political party, and the profit margin is still 80 per cent to 90 per cent. It is beneficial and essential for the political parties. It is only detrimental to the nation and general public. But then, who cares for them?
In many cases, assets and equities of the borrowers are overstated to take bank loans and once the loans are taken, the funds are diverted out of the company, leaving little or no stake of the borrowers in the respective companies. In fact, the amount of diverted funds may be manifold than the value of the respective stakes of the borrowers. Based on weak and slow legal system, the borrowers then take a 'don't - care' attitude towards refunding, appreciating the fact that the banks can take legal actions that will continue for years after years. After that, even if their relevant assets are sold, only a fraction of the loans can then be recovered, In any case, the delinquent borrowers have nothing to lose. They can never be touched and their personal property will remain un-affected even after having diverted funds.
There is no reason why willful loan defaults and related activities (diversions and misappropriations of funds, manipulations of accounts by overstating profits, assets, equities and values of securities before taking the loans and understating profits after taking the loans to show the companies or projects sick) should not be considered criminal offences. These are pure frauds, deceptions and breaches of contracts.
Few months back there was a news item in the Far Eastern Economic Review that an Indonesian citizen was sentenced for 18 years for diversion of funds borrowed from a bank. We have never seen any such news item in our country.
By changing the existing laws or enacting a new law, willful loan defaulters can be prosecuted under the criminal laws. In that case, once a case is filed and after preliminary investigation, willful default can be suspected, the defaulter should be immediately put behind the bar with a practical condition that he cannot get out until the case is settled and the loan is fully paid back. If that can be done, in many cases loans can he recovered within 24 hours. Because many willful defaulters have indeed more than sufficient money to repay the loans and they will not be interested to stay even a single night behind the bars. Then it will be practically possible to free the banking sector from the clutches of the default culture.
It is indeed much easier to prove a case of willful loan default than let us say, a murder case. In case of murder, usually there is no written record but in case of a loan, there are supposed to be records everywhere. If and when there is not sufficient record, then the matter itself can be a ground for prosecution. If assigned, any professional accountant or financial expert can easily trace the movement of the loan and intention of the borrower.
Will the government make necessary changes to bring willful loan defaults within the purview of the criminal laws and turn the tables on the faces of the willful defaulters? Willful defaulters are criminals and criminals are monsters. Therefore, they should be burning in hell.
Post-script (23 May, 2019)
This news analysis was published in the financial express 17 years back. Three of the paragraphs were as follows:
“The relevant laws are otherwise inadequate and their enforcement is poor and sluggish. It is almost impossible to recover any loan through the legal system. The defaulters know it well that they are beyond the reach of even the long arms of law. They can get away with anything even with criminal offences in the form of diversion or misappropriation of funds. That is why they do not care and they know for sure, after sometime they will get large exemptions. So why should they bother? “
“Few months back there was a news item in the Far Eastern Economic Review that an Indonesian citizen was sentenced for 18 years for diversion of funds borrowed from a bank. We have never seen any such news item in our country.”
“By changing the existing laws or enacting a new law, willful loan defaulters can be prosecuted under the criminal laws. In that case, once a case is filed and after preliminary investigation, willful default can be suspected, the defaulter should be immediately put behind the bar with a practical condition that he cannot get out until the case is settled and the loan is fully paid back. If that can be done, in many cases loans can he recovered within 24 hours. Because many willful defaulters have indeed more than sufficient money to repay the loans and they will not be interested to stay even a single night behind the bars. Then it will be practically possible to free the banking sector from the clutches of the default culture.”
After 17 years, nothing has changed or improved rather the default culture has aggravated manifold. That’s why this news analysis is still equally, if not more, relevant today.