Finance ministry defines ‘habitual defaulter’, proposes punitive actions

The term habitual defaulter is often thrown around casually, without any proper definition. But the government has now spelt out what habitual default is in a draft act, in what can be viewed as a commendable act by Finance Minister AHM Mustafa Kamal. 

For long, finance ministers made proclamations that they would toughen up on habitual defaulters. But those turned out to be just lip service as the criteria for a habitual defaulter has been missing until now.

In simple terms, any borrower who fails to pay back his/her loans despite his/her ability to do so will be termed a habitual defaulter, as per the draft prepared by the finance ministry for non-bank financial institutions.

The draft for ‘Finance Company Act 2020’ has been uploaded on the finance ministry’s website on Sunday for the opinion of the general public.

The act will replace the existing one -- the Financial Institutions Act 1993 -- as part of the government’s time-befitting measures to ensure corporate governance in the financial sector.

Besides, a person takes loans by giving false and fake information in favour of his/her non-existent companies will also be considered habitual defaulters as well as those who divert loans by not investing in the sector mentioned in their credit proposals.

NBFIs will also consider those habitual defaulters who hand over his/her mortgaged assets by dodging the institutions.

A list of habitual defaulters will be prepared by NBFIs, which will be sent to the central bank.

The Bangladesh Bank will subsequently submit the list to the government to take punitive measure against them.

NBFIs will have to take legal action within one month after enlisting a habitual defaulter.

If required, criminal cases will be filed against wilful defaulters with prior approval from the respective NBFI’s board.

The government will soon impose embargo on habitual defaulters from travelling abroad after it receives the list from the central bank.

Habitual defaulters will not get any trade licence and they will not be allowed to register their home and vehicles.

Besides, they will not hold any post of executive committee of political, social, professional and business organisations.

Habitual defaulters will also be barred by the Registrar of Joint Stock Companies and Firms from opening new companies.

The draft act also said a person or his/her companies will be collectively allowed to hold a maximum of 15 percent shares of a NBFI from the previous ceiling of 20 percent.

The central bank, however, will take decision for a foreign entity or a person on how much shares they can hold.

The BB will also permit NBFIs to merge with each other. A NBFI will have to hand over a portion of its business to another one for completion of the merger.

The government has moved to revise the draft act at time when the country’s NBFI sector is struggling to survive from the rising default loans due to a lack of corporate governance.

At present, 33 NBFIs are running their business, of which at least 10 are finding it impossible to repay their depositors money.

In July last year, the BB was forced to start the process of liquidating People’s Leasing and Financial Services as the NBFI failed to repay depositors’ money despite maturity of funds.

On September 30 last year, Rupali Bank alleged that 10 NBFIs have failed to pay back its funds amounting to Tk 933 crore.

The bank has repeatedly asked them to repay the money, but they were unable to. Subsequently, the state-run bank sought the central bank’s intervention.

At the end of September, the total defaulted loans in NBFIs amounted to Tk 6,838 crore, up 25.23 percent from six months earlier, according to data from the central bank.

“This is a good initiative,” said Salehuddin Ahmed, a former governor of the central bank, while calling for such initiatives for banks as well.

The NBFIs’ owners and management, who are alleged to be involved in fraudulent activities while disbursing loans, should also be brought to book, he said.

There have been many provisions in the existing act to take punitive measures against them, but those articles were never implemented.

He went on urge the authority concerned to follow the rules and regulations against the vested quarters responsible for the existing haphazard situation in the financial sector.

Ahsan H Mansur, executive director of the Policy Research Institute, echoed the same.

“In principle, the move is commendable. But we know that many habitual defaulters take part in the election frequently by using loopholes of the act. So, the act will have to be implemented properly to tackle them.”