Loading...

Flawed corporate guarantee results in defaulted loans

Analysts tell BIBM roundtable


FE Report | Published: July 18, 2019 09:54:11 | Updated: July 18, 2019 13:47:59


Picture used for illustrative purpose only — Collected

Bankers and academics at a discussion stressed the need for distinguishing rightly 'corporation' and the 'business group' in Artha Rin Adalat (money loan court) law to help secure bank loans against corporate guarantee.

They blamed the loopholes in corporate guarantee and the opaque definition of corporate and business group in the law for the rising volume of non-performing loans.

They said the banks cannot provide loan only on mortgage as land or other conventional mortgage is over-priced.

The banking professionals said financial reporting system and the central bank's Credit Information Bureau (CIB) should be strengthened so that banks can rely on reports and provide loans against corporate guarantee.

The bankers said relevant laws and clauses need to clarify how to encash a corporate guarantee in case of failure of a corporate borrower to repay bank loans.

The fear was expressed at a roundtable discussion organised by Bangladesh Institute of Bank Management (BIBM) in Dhaka on Wednesday.

A team led by BIBM Assistant Professor Md. Mosharref Hossain prepared and presented a paper titled 'Corporate Guarantee: Does It Work in Recovery of Loan" at the roundtable.

Speaking at the programme, former Supernumerary Professor of BIBM Yasin Ali said the definition of business group should be included in the ‘Artha Rin Adalat Ain’.

He said the Artha Rin Adalat law also needs to be amended to update some of its clauses and sections.

However, he said the law seemed revolutionary when it was first formulated.

"But banks do not get benefits from the law. There are thousands of cases pending before the court," he said.

Mr Ali said the government should be willing to resolve these pending cases.

According to the study, proper assessment by the bank before accepting the guarantee is crucial.

Banks should accept the guarantee provided by a credible and solvent entity only. In the absence of this, the guarantee will not be effective in recovering loans in case of non-repayment by the principal borrower.

Former managing director of Pubali Bank and Supernumerary Professor of BIBM Helal Ahmed Chowdhury said there are many flaws in the process of corporate guarantee in the country.

He also blamed bankers for not having enough and transparent knowledge about corporate guarantee.

Mr Chowdhury said bankers should learn how to say 'no' when they are under pressure.

He said since the country's economy has grown a lot, banks have to provide loans against corporate guarantee.

"Now everybody has to work on minimising the risk of corporate guarantee," he added.

He called for specific amendment to the Arta Rin Adalat on corporate guarantee.

BIBM Muzaffer Ahmed chair Professor and former Professor of Dhaka University Barkat-e-Khuda said guarantees-whether issued by individuals or corporations, form an essential feature of doing business and creating or receiving credit.

He said there can't be massive defaulted loans without "unholy alliance" among bankers, board members and borrowers.

Bangladesh Bank deputy governor S.M. Moniruzzaman said it is important that banks apply due diligence for the guarantee to be an effective means of loan recovery.

He said with many other securities, giving a corporate guarantee to banks/lenders by a company other than the borrower is a usual practice in course of conduct of trade and commerce.

He said it is a harsh reality that the growing trend in NPL in the banking industry in Bangladesh is a major concern for policymakers and the stakeholders.

He said the NPL has an adverse effect on the banks' day-to-day operations and profitability.

"Banks have to keep excess provisions against defaulted loan, which directly affects the net profit. Similarly, with increasing NPLs, Risk-weighted Assets (RWA) would increase; which, in turn, would create pressure on maintaining the regulatory capital," he said.

Director general of BIBM Md. Nazimuddin said there is everything in the law, bankers should only follow due diligence.

He said this study will help explore the enforceability and effectiveness of corporate guarantee in recovering loans in Bangladesh.

bdsmile@gmail.com

Share if you like