The issue of defaulting on loans continues to be the biggest trouble for the banking industry. At the end of March 2024, total disbursed loans stood at BDT 16,40,000 crore, of which BDT 1,82,000 crore were in default, the highest in the history of Bangladesh. Currently, 11.11 percent of disbursed loans have turned into NPLs.

In the banking and finance sector, NPLs and loan defaults are related terms that belong to slightly distinct circumstances. While both NPLs and loan defaults involve borrowers not meeting their repayment commitments, the remedies that banks have at their disposal for handling these situations can differ based on the particulars and the overarching regulatory environment. Loans that are seriously past due—typically 90 days or more—are referred to as NPLs. Whereas, when debtors fail to make the agreed-upon payments under the contractual obligation of principal and interest on time, it is considered that they have defaulted on their loans.

Banks may also use techniques such as pledge enforcement, hypothecation enforcement, or mortgage foreclosure to uphold security interests. Alternatively, to expedite repayment, they might choose to use negotiation techniques, such as settlement agreements or loan restructuring.

Several things can lead to defaults, such as unexpected events that affect borrowers' capacity to repay debt, company failures, financial difficulty, or even sheer negligence and unwillingness to repay on part of the borrowers. Certain industries— such as manufacturing, agriculture, and textiles— are more vulnerable to loan defaults. Another reason behind the increase of NPLs in Bangladesh's banking industry is inadequate or poor governance.

To overcome these obstacles and restore the health of the banking industry, rule of law, accountability, and transparency must be reinforced. When dealing with loan defaulters in Bangladesh, banks have a variety of options at their hands, e.g., civil litigation and looking to specialist tribunals like the Artha Rin Adalat. Banks may also use techniques such as pledge enforcement, hypothecation enforcement, or mortgage foreclosure to uphold security interests. Alternatively, to expedite repayment, they might choose to use negotiation techniques, such as settlement agreements or loan restructuring. Cross-default clauses may increase the pressure on defaulters and cause defaults on other loans. Banks may also report defaulters to credit bureaus, which might have an impact on the defaulters' credit scores and future credit availability.

To properly negotiate the complexity of loan defaults, both banks and borrowers must have extensive knowledge on these remedies. Artha Rin Adalat Ain section 22 permits the Artha Rin Adalat to appoint mediators to help parties settle their differences through mediation. These neutral third parties promote the value of a compromise in the settlement of disputes by facilitating negotiation and working to encourage consensual resolution outside of formal judicial proceedings. Finally, to effectively tackle the problems caused by NFLs and loan defaults in Bangladesh, a comprehensive strategy encompassing governance improvements and efficient application of legal and alternative dispute resolution procedures is needed.

The writer is student of law, LCLS (South).