Non-Performing Loans (NPL)

Legal Aspects

Non-Performing Loans in Bangladesh

Ratio of NPLs to total loan granted by Bank was still as high as 10.8% in December, 2008.

Secured Advances and NPLThe best effective means of securing recovery of NPL

is to obtain sufficient securities/collaterals with adequate margin at the time of granting the loans.

Advantage of Secured Loan:

Enforcement without intervention of Court under S.12 of Artha Rin Adalat Ain 2003;

Even in case of insolvency of Borrower, the banks

may recover the NPL by enforcing the securities without any intervention of the court or receiver;

Legal Formalities for valid Security Valid title of the Borrower/third parties over the

goods/properties/bills/shares offered as securities;

In case of Companies as Borrower, registering mortgage/ charge created over its properties with Registrar of Joint Stock Companies and Firms within 21 days of creating charge;

registering Mortgage over land with concerned sub-registrar;

Execution of requisite documents by the Borrower/third parties for creation of relevant securities;

Problems of Enforcing Securities: Entitlement of the banks under s.12 of Artha Rin Adalat

Ain 2003 is subject to the securities being in possession of the banks;

s.69 of Transfer of Properties Act- 1882 provides an alternative route for creating mortgage; but even here to be able to pass valid title and possession to the purchaser, the banks have to recover possession from the Mortgagor;

lack of possession of the securities by the Banks often lead the banks to file suit for foreclosure debarring the mortgagor from redeeming the property and to secure possession of the property under mortgage.

recovery of possession may also prove difficult for goods and machineries under hypothecation where possession may be claimed by the Bank under the charge document; another hurdle which may arise is attempt by the Borrower to dispose off its plant/machineries to frustrate any judgment which may be obtained by the banks; in such cases the recourse open to the banks is to apply for an attachment before judgment in a suit otherwise filed for recovery of loans;

dependence on Court proceedings even for enforcing securities often entail great deal of delay and unnecessary expenses;

stock exchange securities cannot be sold without recognized stock exchanges leaving the bank branches at distant parts of Bangladesh in difficult position as to enforcement of these;

securities like hypothecation over radio apparatus may not be easily enforced due to legal restrictions over the eligibility of persons who can acquire such device under Telecommunication Act-2001.

Legal recourses for recovery of NPL [Filing suits] Artha Rin Adalat Ain 2003

Provided the concerned Bank is within the limitation period, it can file a suit for recovery at Artha Rin Adalat which has been specially constituted for loan recovery suits of banks/financial institutions.

s. 10, s.19 of the 2003 Act, providing for ex parte decree, s.36 enabling the banks to recover the debts due to it from third parties, are of advantages to the banks.

Shortcomings:

Despite there being a time limit for disposal of suit, due to volume of cases, disposal of suits may prove to be an extremely time-consuming and expensive process.

Even if a decree is obtained in favour of the banks, execution of the same may not be an easy task and the concerned bank has maximum 180 days for filing suit for execution.

Unsecured Debts:

Nowadays the banks in Bangladesh are encouraged to provide advances concentrating on the purpose for which loan is to be used as opposed to the availability securities. Such approach has led the Banks to grant advances on the basis of minimum or no securities.

Unsecured Debt and Insolvency Enforcement of Security:

Where the concerned Bank has securities, under s.54 of the Insolvency Act-1997, it can enforce the securities to realize it debt. If the amount of realization falls short of the amount due to the Bank, it can apply to the court to be listed on schedule of creditors for the amount due to it under s.38 .

Alternatively, the Banks can relinquish the securities for the general benefit of the creditors and thereby prove for his whole debt to the court in accordance with s.3.

No Security: Where there is no security, the only option left to the banks is to

apply under s. 38 with sufficient proof of NPL due to it, in order to be listed on the schedule of creditors.

Discharge of Insolvents: Under s.47 of the Act, an individual insolvent may be discharged of all his debts, but NO such discharge provision is available for corporate insolvents. Hence, in unsecured debts, the banks position is comparatively stronger when the loans are advanced to corporate borrowers.

Distribution of Assets by the Receiver upon Insolvency

Under s. 75 of the Insolvency Act-1997, the Banks’ claims have third priority, meaning no recovery is possible at all if the assets of the insolvent are exhausted in meeting the first and second heads of claims.

As amongst the Banks, there shall be no priority and the assets will be distributed in proportion to the amounts due to the respective Banks.

Where the distributable assets are insufficient for paying off other unsecured debts, payments to banks may be proportionately reduced to meet the unsecured debts at the rate of at least 50% of the bank loans.

It follows that in recovering unsecured, the Bank may be left with minimal or no recovery at all in the event of the Borrower’s insolvency.

Measures to Secure LendingIn the current legal environment, the recovery of loans/NPLs

cannot be fully guaranteed. The risk remains. However, to minimize the risks, the following steps may be taken prior and post disbursement to ensure that no loan becomes NPL in the course of time:

thorough investigation into the Borrower’s nature of business, profitability and solvency

While obtaining securities, the legal entitlement of the Borrower to the securities should be ascertained and verified; in case of mortgage over land, it is strongly advisable to conduct physical verification of the land to avoid any fraudulent security;

that sufficient margins of securities are maintained and in the event of any reduction, the Borrower is immediately notified so that additional securities can be obtained to make up for the reduced margin;

that and all the formalities, including registering mortgage/charges, notifying debtor in case of assignments of book debts, obtaining Irrevocable General Power of Attorney , etc. are done on due time.

Ensuring that adequate collateral securities, such as personal guarantee of third parties, bank guarantees or corporate guarantees are obtained besides securities which might prove difficult to enforce, e.g. radio apparatus, stock exchange securities;

before disbursing loans to Borrowers with no tangible securities, besides credit investigation of the Borrower, Banks should also carefully consider the integrity , reputation and good will of the Borrower;

above all continuous follow up, supervision and monitoring by the banks of the Borrower’s use of the disbursed loan, strict compliance by the Borrower with the repayment schedule, giving timely reminder to the Borrower upon failure on a single repayment etc. all these can ensure that the Banks are secured in granting advances.