Banks have been encouraged to recover defaulted loans through Alternative Dispute Resolution (ADR), but there has been little response.
Banks and financial institutions have been leaning towards the courts despite the long process of settling the cases in the courts.
According a Bangladesh Bank (BB) statement issued in September 2023, recovery of at least Tk2.12 lakh crores is pending due to cases of banks and financial institutions pending with Aurtho Reen Adalat and other courts.
According to BB 2,42,096 cases await decision by courts across the country.
BB records show that Tk2,09,456 crore in loans remained stuck against 2,08,059 cases till June 2023.
At a recent meeting BB held with Managing Directors of all banks, chaired by BB Governor Abdur Rauf Talukdar and attended by all the Deputy Governors and other senior officers of the central bank, macroeconomic situation, the liquidity crisis of commercial banks and the dollar crisis was discussed.
The meeting also discussed action needed to solve the issues.
The meeting discussed with due importance the issue of restoring good governance in the banking sector for the recovery of defaulted loans.
BB asked commercial banks to settle the loan issue with the borrowers out of court as the courts take long time to settle them, though there has been little response to this initiative.
In many cases there has been little recovery through alternative dispute resolution due to lack of qualified mediators.
It was in this backdrop, banks were advised to approach Bangladesh International Arbitration Centre (BIAC) to resolve the issue.
According to a central bank report, the mediation system could not play a proper role in debt recovery.
Even then, BB advised commercial banks to depend on Alternative Dispute Resolution (ADR) before suing the defaulted borrowers.
BB said commercial banks can encourage borrowers to repay by providing discounts, if necessary, for speedy recovery of defaulted credit.
Apart from this, institutions like the BIAC or retired judges, retired officers of banks or financial institutions, lawyers or other suitable persons can be selected as mediators with the consent of the concerned bank and the borrowers to make the mediation effective.
However, legal action can be taken if the borrower is not interested in the ADR. According to the report, the amount of defaulted loan increased despite the decrease in cases pending in courts during July-September.
During this period, the number of cases decreased by 3, 763, but the defaulted loan money increased by Tk 2, 701 crore.
During June-September, Tk 788 crore were recovered through courts out of defaulted loan worth Tk 8,442 cases.
During the same period, 7, 432 new cases were filed to recover defaulted loans worth Tk 11, 191 crore.
The BB report provides a comparative picture of lack of interest in ADR.
Until June 2023, against 72, 540 cases pending in courts the defaulted loan was worth Tk1,78, 000 crore.
Till June 2023, banks used the ADR system to solve 13, 199 pending cases and 10,545 cases have been settled, resulted in recovery of Tk 996 crore.
BB told commercial banks that it would go for merger using the recently introduced Prompt Corrective Action (PCA) framework if the weak banks fail to improve their financial condition by 2025.
Under this policy, if a bank is in crisis, Bangladesh Bank can go for compulsory merger. This policy will be effective from March 2025.
Under this policy commercial banks will be divided into four categories, depending on their paid up capital, non-performing loans, use of corporate governance and liquidity status.
Depending on their performance banks would face restrictions. BB Executive Director and Spokesman Mezbaul Haque told The Daily Observer that defaulted loans must be recovered without further delay.
However, banks and financial institutions were advised use ADR before going for litigation.
