New strategy to nab top 20 loan defaulters

The Finance Ministry has instructed all state owned banks to develop an “individual loan recovery strategy” to recover money from the top 20 loan defaulters. The main reason behind the banks’ crisis is the dominance of loan defaulters. A large portion of loans at most banks is stuck with major borrowers.

At the same time, “cash recovery teams” will be formed to recover money from defaulters and strict monitoring will be imposed on intentional defaulters.

These initiatives are part of a roadmap being prepared for state owned banks to recover the fragile banking sector. Banks have been given 14 to 18 months to implement the roadmap.

The decisions were made by the Financial Institutions Division (FID) at a recent meeting with the chairmen and managing directors of state owned and specialized banks. The information was found in the minutes of the meeting.

The meeting was chaired by FID Secretary Nazma Mobarek. She said the amount of defaulted loans must be reduced to strengthen the banking sector. She said boards of directors and executives would be able to recover and reduce defaulted loans by taking specific measures.

Former Senior Finance Secretary Mahbub Ahmed told Agamir Somoy that the entire banking sector is trapped in a web of defaulted loans.

“A large portion of this was created by intentional loan defaulters and money laundering. That money is no longer in the country. Therefore, even though the Financial Institutions Division has prepared an 18 month roadmap and formed teams to recover defaulted loans, implementing it will be extremely difficult. Besides, it will not be possible to reduce the banks’ high interest rates unless they can get out of this cycle of defaulted loans,” he said.

Individual plan: Recovery of defaulted loans by state owned banks has not been very effective. To overcome this crisis, the Finance Division has instructed banks to introduce a “bank account based resolution strategy” for each loan.

Under the strategy, each major customer’s outstanding loan, collateral, legal status and recovery prospects will be analyzed. At the same time, specific teams will be assigned to conduct recovery operations.

An official of the Finance Division said that until now banks had tried to recover loans by treating everyone in the same way. This was not effective.

“From now on, banks will have to develop separate strategies for each of the top 20 defaulters by maintaining individual files. How much money is owed by each person, what collateral is available and what is the status of any case or legal proceedings will be examined. The money will be recovered according to a specific plan. Designated officials will be held accountable for this,” the official said.

Formation of loan recovery teams: The meeting discussed how the huge volume of defaulted loans is the biggest tool destroying profits, capital and the financial capacity of the banking sector.

To overcome the situation, banks were instructed to work simultaneously on two fronts. One is actual “cash recovery” from old defaulted loans and the other is preventing the creation of new defaulted loans.

For this, every bank will have to form a “loan recovery team.” The teams will have specific monthly cash recovery targets and their work will be evaluated at the branch level.

Cash recovery and prevention of defaulted loans must also be included in the annual performance evaluations of officers and employees.

The boards of directors will regularly monitor the progress of the recovery teams and branches.

Cash recovery: The Finance Ministry has instructed banks to place the highest priority on actual “cash recovery” rather than artificial accounting.

It also said loan recovery does not simply mean adjustments on paper, rescheduling, restructuring or regularization. Although these methods have their own legal and procedural importance, there is no alternative to cash recovery to resolve banks’ liquidity crisis, increase income and strengthen their capital base.

The meeting also discussed the “exit method” for defaulters.

It said loan rescheduling, restructuring and exit facilities are available in the banking sector. The purpose is to allow customers who are facing difficulties but have the ability to run a viable business to repay their loans in installments. Another objective is to increase the recovery of bank funds.

However, it has been seen in the past that these facilities were misused to conceal bad loans or repeatedly extend repayment periods. They were even used to make defaulted loans appear lower by making accounts look better through false or artificial means.

To prevent this situation, instructions were given to allow rescheduling only to those who are genuinely facing difficulties but have the ability to repay.

For suitable customers, a one time exit facility must be provided to quickly recover outstanding money.

No concessions will be given to those who intentionally refuse to repay loans, have laundered money or are not cooperating. Direct and strict legal action has been ordered against them.

It was also said that bank boards must ensure that these facilities are not used in any way as loopholes to conceal defaulted loans.

Before granting an exit facility, banks must assess how much money could be recovered from legal expenses or by selling collateral. A final decision can then be made.

Changes in the role of boards: A major change is being introduced in the role of boards of directors under the roadmap as part of establishing good governance.

Until now, board members often intervened in the day to day operations of banks. From now on, the main responsibilities of the boards will be formulating strategic policies, determining risks, ensuring internal controls and ensuring accountability of management.

Focus on organic capital generation: According to sources from the minutes of the meeting, several state owned banks are currently facing severe capital shortages due to defaulted loans and provisioning shortfalls.

To address this shortfall, banks have been instructed to focus on “organic capital generation” from their own income rather than relying on government assistance.

Banks have been instructed to strengthen their capital base by improving customer services, collecting remittances and increasing fee based income through digital banking to generate profits.

The banks have also been instructed to reduce expensive deposits and increase low interest stable deposits to lower their cost of funds.

Focus on quality of loans: The roadmap places greater emphasis on the quality of loans rather than simply increasing loan disbursement or the number of loans.

In particular, banks have been instructed to increase quality credit flows to cottage, micro, small and medium enterprises, agriculture, women entrepreneurs and productive sectors to keep the rural economy and employment active.

Each branch has been given a target of disbursing at least two eligible CMSME loans every month.

However, banks must ensure that the loans are used in the proper sectors. They must also consider whether borrowers have the ability to repay the loans.

The total amount of defaulted loans in the country’s banking sector has exceeded Tk 606,555 crore.

According to reports based on international standards, the rate of defaulted loans at state owned commercial banks remains extremely high.

The amount of defaulted loans at the banks has exceeded Tk 148,000 crore.