The cabinet yesterday cleared the draft Bank Company (Amendment) Act, 2023 that would usher in major consequences for habitual loan defaulters and restrict the influence of families on the bank board.

The draft act, which has been in the works since 2019, will now be placed before the parliament for final approval -- a longstanding demand of the multilateral lenders.

For instance, a $250 million loan from the World Bank as budget support is hanging in the balance because of this, according to finance ministry officials informed on the proceedings.

Meanwhile, the International Monetary Fund has stipulated submitting the draft law before the parliament by September as a part of its $4.7 billion loan.

"Now the banking activities are run under the Bank Company Act, 1991 -- the amendment proposal was brought to make it a modern and time-befitting one," said Mahmudul Hossain Khan, a secretary of the cabinet division, while briefing reporters after the meeting.

As per the draft act, which was approved at the meeting chaired by Prime Minister Sheikh Hasina, habitual loan defaulters will not be allowed to run businesses or travel abroad.

A maximum of three members of a family can serve on the bank board, down from four in the existing law. But the tenure of the directors, which was increased to nine years from six years in 2018, remains the same.

The bank directors and their family members must provide collaterals, bonds or securities for taking loans from the bank as per a new provision incorporated in the draft law.

The banks will publish their lists of wilful defaulters on their websites and newspapers, as per the draft law, which has been stuck in the vetting stage with the law ministry since May 17, 2021, when the cabinet approved it in principle.

An individual will be considered a wilful defaulter if he or she does not repay a loan taken in their name or their company's name despite having the means to pay it back.

In addition, any person will be treated as a habitual defaulter if he or she takes loans under the name of a non-existent company.

A borrower will also be defined as a wilful defaulter if he or she transfers any asset kept as mortgaged in banks to get loans without prior approval from the bank concerned.

Banks will inform the Bangladesh Bank about wilful loan defaulters and the central bank can issue a ban on their foreign travel, obtaining trade licence, and companies' registration to the joint stock and security exchange commission, Khan said.

Besides, they have to wait for five years after their name is removed from the list of wilful defaulters to become a director of a bank or financial institute.

If any director of a bank becomes a wilful loan defaulter, the central bank can declare his or her post vacant.

A provision was included to allow the BB to regularly inspect different institutes and foundations run under the law.

Besides, every bank will have to form two separate bodies -- identification and confirmation committees -- to detect habitual defaulters, according to the proposed act.

BB will give instructions to banks to this end.

Also, each bank or the non-bank financial institution will have to send the list of habitual defaulters to the BB from time to time.

The persons, who are treated as habitual defaulters by the confirmation committee of banks, can appeal to the central bank within 30 days from the submission date of the list.

The BB will make the final decision on whether the aggrieved persons will be enlisted in the list of habitual defaulters.

As per the move, the central bank will send the list to the government agencies concerned, which will then impose restrictions on delinquent borrowers.

Banks will issue notices to habitual defaulters to repay their loans within two months.

If habitual defaulters fail to repay the loans by then, banks will arrange an auction to sell off the mortgaged assets as per the Money Loan Court Act 2003.

In the proposed act, there is a provision for mergers and restructuring of banks.

"The addition of a wilful defaulter clause in the amended Banking Companies Act 2023 is a step in the right direction," said Zahid Hussain, a former lead economist of the WB's Dhaka office.

It signals the government's commitment to addressing this longstanding problem.

"Hopefully, it itself will have a deterrence effect. How this plays out in reality will depend on the details of implementation."

For instance, if the "wilful defaulters" can file writs before the courts to stay the BB's adjudication on their listing, the new clause may not have the intended effects, he said, adding that there is a need for transparency on how BB will make the adjudication.

"All these need to be clarified in the implementation rules. Otherwise, we will be back to square one," he added.