The Bangladesh Bank on Sunday instructed banks to give more emphasis on mediation for recovering defaulted loans amid the existing other policies’ ineffectiveness in addressing the issue of bad loans.
In a circular issued on the day, the central bank outlined instructions to streamline the mediation process for quicker resolution of defaulted loan cases.
The rising defaulted loans has become a focal point of discussion in the country, with borrowers acquiring substantial amounts of public funds from banks without any intention of repaying them.
Experts have criticised the central bank for its role in this matter, noting its failure to take disciplinary action against errant borrowers and bankers involved in the loan approval process.
Several initiatives taken by the Bangladesh Bank have been proven ineffective, due mainly to lack of action against large borrowers and influential bankers, they said.
This has not only undermined the moral authority of the BB, but has also led to a situation where other borrowers and bankers are less inclined to follow regulatory instructions due to perceived double standards, bankers said.
As a number of banks started collapsing due to huge burden of non-performing loans and poor confidence of depositors, the central bank declared to merge about 10 banks within a year, they said.
According to Bangladesh Bank data, the amount of defaulted loans surged to Tk 1,45,633 crore at the end of December 2023 from Tk 1,20,656 crore at the end of December 2022 and Tk 1,03,273 crore at the end of December 2021, indicating deteriorating situation.
Of the total defaulted loan, Tk 1,26,782 crore, or 87 per cent, turned into bad loans, which the central bank feared were not recoverable.
The latest BB circular directs banks to include a mediation proposal on a case-by-case basis, considering the defaulter’s ability and willingness to repay the debt, in the notice of default.
Both banks and customers, through mutual agreement, can select mediators registered with the Bangladesh International Arbitration Centre or similar institutions.
Retired judges, retirees of banks or financial institutions, lawyers or other suitable individuals with a successful track record as mediators can also be appointed for dispute resolution, the circular said.
To ensure the success of mediation and timely recovery of defaulted loans, banks are instructed to take appropriate measures, including considering existing provisions for waiver on a case-to-case basis.
The central bank has set a target for banks to achieve a minimum 1 per cent cash recovery of outstanding defaulted amounts by June 30, 2026, through alternative dispute resolution mechanisms.
A robust monitoring mechanism is to be implemented at the highest level to ensure target achievement, with progress updates provided to the board of directors for guidance.
Before initiating legal action, banks must inform the central bank about defaulted loan recovery attempts through the mediation.
In cases where mediation is unsuccessful, both parties may opt for arbitration with mutual consent.
Banks can expedite the arbitration process by signing memorandums of understanding with BIAC and other similar arbitration centres.
On April, 16, 2016, the BB encouraged banks to adopt alternative dispute resolution methods, including mediation, the success rate has been unsatisfactory, the circular said.
Reasons cited include the unwillingness of defaulters to repay debts, insufficient emphasis on mediation in debt recovery and inadequate mediator intervention in resolving parties’ differences.