Summary:

Rather than suing the defaulting consumers, the central bank has instructed banks to use Alternative Dispute Resolution (ADR) to collect defaulted loans. The Bangladesh Bank issued an order on May 12, 2024, requiring all banks to recover at least 1% of their defaulted loans through alternative dispute resolution (ADR) by June 30, 2026. To carry out the program, the banking regulator has also mandated surveillance from the top tier of institutions. 

Context:

The Bangladesh Bank issued an order on May 12, 2024, requiring all banks to recover at least 1% of their defaulted loans through alternative dispute resolution (ADR) by June 30, 2026. The central bank claims that in order to expedite the recovery of defaulted loans, the Money Loan Court Act of 2003 placed greater emphasis on the alternative dispute resolution process for resolving conflicts outside of court. The 1% is equivalent to Tk 14,563 crore in total. In accordance with the central bank’s instruction, recovery of defaulted loans must take into account the customer’s ability or willingness to repay the loan and should offer mediation on a case-by-case basis. With the consent of the banker and the client, professional and experienced mediators such as retired judges, former officers of banks or other financial institutions, attorneys, or any other qualified person with a track record as a mediator may be chosen. The mediator’s compensation shall be determined by mutual agreement, and prompt payment must be guaranteed. Though the central bank’s initiative is praiseworthy, managing directors of numerous banks assert that there is still uncertainty over its success. They claimed that the goal they have been assigned is very large, particularly in light of the fact that a large number of willful defaulters have taken out loans with no intention of paying them back. They continued by saying that even with the new approach, it is quite likely that they won’t want to go back. A commercial bank’s policy-making officer stated that since thousands of crores of classified loans will be negotiated in an ADR case, the honesty of the negotiators is crucial, and if they are dishonest, the banks will bear the damage. He continued, “many bank officials who were or are involved in making the defaulted loan distributions would also want to sabotage the process.” The total amount of defaulted loans in the nation’s banking industry as of December 2023 was Tk1,45,633 crore. By December 2022, the total amount of defaulted loans was Tk 120,656 crore. As a result, in just one year, the amount of defaulted loans has climbed by Tk24,977 crore. 

Picture and Article Sources: The Business Standard & The Dhaka Tribune