“Bank being the custodian of public money cannot act negligently in disbursing credit facility to the accused or identified loan defaulter- point out your argument in the global context.”


Introduction:

It is necessary to establish a central bank in Bangladesh to manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value and maintaining a competitive external par value of the Bangladesh Taka towards fostering growth and development of country’s productive resources in the best national interest.[1]

Bank is the custody of peoples’ money. People keep their deposits in banks mainly the purpose of security. There are some benefits also to keep their money in bank. So “Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise. ) “Banking company” means any company transacting the business of banking in Bangladesh, and includes all new banks and special banks.[2] Banks are advised to assess their capital position on half-yearly basis i.e., on 30 June and 31December each year and report the same to the Off-site Supervision Department of Bangladesh Bank within one month from the end of respective half-year. Banks are also advised to contact Banking Regulation and Policy Department (BRPD) of Bangladesh Bank in case of any clarification.

Under the Bangladesh Bank there are lots of public and private banks. But all of them are controlled by the central bank. People keep their deposits in the bank to get interest. Bank does not have their own money. They utilize peoples’ money in other sectors to gain some benefits. So, it plays a third party role. They lend to people for many purposes. But it is not right for banks to lend money to the loan defaulters. It is illegal and it does not come under the eye of law. Though it is illegal, but some institutions practice these kinds of activities. They give credit facility to the identified loan defaulters. Here, some of the political factors influence to do these sort of activities.

 In my project I will discuss about the issues regarding these topic and why it is illegal in the eyes of law.

Bank is the custody of public money:

Bank plays a great role for us. Sometimes we deny it but actually without banks we cannot prosper in our lives. Banks play like the medium of two parties. The people who keep their money in banks, they get an interest against the amount. The people who take loans from the banks, they have to pay a charge for it to the banks. Here, banks lend to the loan takers by other people’s money. The amount banks charge for the lenders is the profit incurred by the banks. This is the way banks make money. By this way banks fulfill our needs as well as they are continuing their business. The Bank is authorized to carry on and transact the several kinds of business hereinafter specified, namely: the accepting of money on deposit from and the collection of money for the Government, foreign Governments, domestic and foreign banks, domestic and foreign financial institutions and local authorities with or without interest.[3] So, bank is called the custody of public money. For being a custodian, banks do not have the right to lend money to anyone. There are some procedures for loan sanction. But in our country some identified loan defaulters borrow money from banks, though they do not have the ability to pay back it. Only because of some political affluences make them powerful and they ask money from banks.

In the law of banks, they always have to consider many issues to sanction a loan. They maintain some procedures. Banks can’t provide any types of loan to a loan defaulter.  It is against the banking law. But in our country it is highly practiced by many banks. If banks are the custody of public money, they can’t disburse their credits to a loan defaulter.

Banks should not act negligently:

“When a public authority has promised to follow a certain procedure, it is the interest of good administration that it should act fairly and should implement its promise, so long as implementation does not interfere with its statutory duty.”[4] People deposit their assets in the banks with a very strong trust. Banks should take the responsibility and maintain it properly. They cannot act negligently. The functions that banks have to play are ordered by the Bangladesh Bank. They decide everything and other banks have to obey it.

The main functions of the Bank shall be: (a) to formulate and implement monetary policy; (b) to formulate and implement intervention policies in the foreign exchange market;  (c) to give advice to the Government on the interaction of monetary policy with fiscal and exchange rate policy, on the impact of various policy measures on the economy and to propose legislative measures it considers necessary or appropriate to attain its objectives and perform its functions; (d) to hold and manage the official foreign reserves of Bangladesh; (e) to promote, regulate and ensure a secure and efficient payment system, including the issue of bank notes; (f) to regulate and supervise banking companies and financial institutions.[5] These functions are same for all other banks. They are the administration who should keep their promises to the public. If we consider the global context, banks always keep their trust. Sometimes loan defaulters, fraud and cheat people try to abuse the banks activities. But if the regulations of banks are strict, if the Central Bank of any country plays key role in controlling the activities it is not easy for anyone to breach the rules and make some profit. So, here Central Bank of each country needed to be strong keeping in their mind that they are the custody of public money.

 Loan defaulters’ further demands to the banks:

The people who take loans from banks by showing many purposes and after that they fail to return money back to the banks are called loan defaulters. In other countries loan defaulters cannot abuse banks because for loan sanction they have to show many things. The procedure is also very hard. Hardly people can cheat with banks. But in our country it happens frequently. People take loans by showing many business purposes, but they do not pay back loans to the banks. When banks demand for his fixed assets or mortgages, there they also find various problems and banks fail to get back their money. Here, banks have nothing to do. In the context of Bangladesh loan defaulters demand for loans further to the banks. Some political issues influence banks to do these type of activity. The Bangladesh Bank itself interfere and sanction for loans to the defaulters. Other banks are bound to sanction loans because loan defaulters take permission from the Central bank.

How banks practice these illegal activity in the context of Bangladesh:

The policies, strategies, procedures etc. in respect of appraisal of loan/investment proposal, sanction, disbursement, recovery, rescheduling and write-off thereof shall be made with the board’s approval under the purview of the existing laws, rules and regulations. The board shall specifically distribute the power of sanction of loan/investment and such distribution should desirably be made among the CEO and his subordinate executives as much as possible. No director, however, shall interfere, directly or indirectly, into the process of loan approval. The board shall frame policies for risk management and get them complied with and shall monitor at quarterly rests the compliance thereof. As a prudential measure intended for ensuring improved risk management through restriction on Credit concentration, Bangladesh Bank has from time to time advised the scheduled banks in Bangladesh to fix limits on their large credit exposures and their exposures to single and group Borrowers.

In general, and as practiced internationally, exposure ceiling is derived from a bank’s total capital as defined under capital adequacy standards (Tier I and Tier II Capital). Following the same Practice, Bangladesh Bank issued BRPD Circular No. 08 dated March 18, 2003, recommending Uniform exposure limits for both local and foreign banks.[6] In order to enable the banks to improve their credit risk management further, Bangladesh Bank is issuing this circular by consolidating all the instructions issued so far and incorporating some amendments to the previous circular. Although banks have rules not to provide any further loans to any loan defaulter, but Bangladesh Bank itself influence other banks to sanction loans to ask for defaulters. Political interference always plays a vital role here. Banks do not have anything to do. Internationally it is strictly prohibited that loan defaulter can never ask for further loans to banks.

 Why banks are bound to do:

 Banks are bound to do these kinds of activities because the Central bank itself is involved here. And also sometimes it becomes a national issue. Many people are employed to many companies or firms which are owned by loan defaulters. So if banks do not sanction their further loans, companies will be shut down and unemployment will change the entire scenario of the country. Thus sometimes banks are bound to do these for the betterment of the country. But it is not proper and it is against the rules. Because public money should not be given to loan defaulters. If banks do these that means banks are not acting perfectly.

  Some issues Banks should consider:

To get rid of these problem banks should follow some steps or recommendations. Banks should collect the large loan information on their borrowers form Credit Information Bureau (CIB) of Bangladesh Bank before sanctioning, renewing or rescheduling large loans in order to ensure that credit facilities are not being provided to defaulters.

While sanctioning or renewing of large loan, a bank should judge its borrowers overall debt repayment capacity taking into consideration the borrower’s liabilities with other banks and financial institutions. A banks shall examine is borrower’s Cash Flow Statement, Audited Balance Sheet, Income Statement and other financial statements to make sure that its borrower has the ability to repay the loan. For the loans that have already been disbursed with the approval of Bangladesh Bank, and that have exceeded the limit as stipulated in Section 01 (mentioned above), banks shall take necessary steps to bring down the loan amount within the specified limit. In order to accomplish this condition, banks may, if necessary, arrange partaking with other banks. However, for continuous loans, the limits have to be brought down as per Section 02 within December 2005. For term loans, the deadline is December 2006 and the deadline for both continuous & term is December 2006.[7]

Banks shall submit the monthly statement of large loan in the specified format (Form-L) to Department of Off-site Supervision of Bangladesh Bank within 10 days after the end of respective month.

Conclusion:

Banks always play a vital role and they give us many facilities to improve our lifestyles. At earlier there were few banks. But now-a-days there are lots of banks. They create lots of chances for us. They are supported by us. That why they are surviving. So they should always keep in their mind that they are only for public not for a defaulter. They need to be more ethical and careful about disbursing credit facility to the loan defaulters. They should not help a single loan defaulter by the public money.

Bibliography

  1. Bangladesh Bank (Amendment) Act, 2003
  2. C.K. Takwani, Lectures on Administrative law,(1998), p. 280
    1. Ceiling raised vide DBOD Circular No. 11 dated August 29, 1995
    2. BRPD Circular No. 16 dated November 16, 2005
    3. BRPD Circular No. 7 dated August 5, 1999(also applicable for Alternate Directors vide BRPD Circular No.19 dated October 24, 2001).
    4. Sealy, LS, Cases and Materials in Company Law, 5th edn, 1992, London: Butterworths
    5. Ibid


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[1] Substituted by the Bangladesh Bank (Amendment) Act, 2003

[2] BRPD Circular No. 7 dated August 5, 1999(also applicable for Alternate Directors vide BRPD Circular

No.19 dated October 24, 2001).

[3] Substituted by the Bangladesh Bank (Amendment) Act, 2003

[4]C.K. Takwani, Lectures on Administrative law,(1998), p. 280

[5] Added by the Bangladesh Bank (Amendment) Act, 2003

[6] Ceiling raised vide DBOD Circular No. 11 dated August 29, 1995

[7] BRPD Circular No. 16 dated November 16, 2005