Bank being the custodian of public money cannot act negligently in disbursing credit facility to the accused or identified loan defaulter.Discuss


Banks play very important role in the economic life of the nation. Although banks create no new wealth but their borrowing, lending and related activities facilitate the process of production, distribution, exchange and consumption of wealth. In this way they become very effective partners in the process of economic development. Today, modern banks are very useful for the utilization of the resources of the country. The banks are mobilizing the savings of the people for the investment purposes. The savings are encouraged and saving rate increases. If there would be no banks then a great portion of a capital of the country would remain idle. [1]

Banks are a safe place to deposit money, also they will pay interest on a savings account, one can have their salary paid into the bank, and can get loans or mortgages from them. It has to be highly reliable and reactive to ensure that all transactions are transmitted to the market and also stored in the system.

 Bank does not have their own money. They utilize peoples’ money in other sectors to gain some benefits. For many purposes they give loan to public. But it is not right for banks to lend money to the loan defaulters. Banks are keeping others money so it is their responsibility to keep the money safe. By providing loans to the loan defaulter it creates risks.  It is illegal and it does not come under the eye of law. Though it is illegal, but some banks practice these kinds of activities. They give credit facility to the identified loan defaulters.

 Bank is the custody of public money:

Bangladesh Bank is the central bank of Bangladesh and the apex regulatory body for the country’s monetary and financial system. Bangladesh Bank maintains the foreign exchange reserve of Bangladesh in different currencies so that it could minimize the risk from widespread fluctuation in exchange rate of major currencies and irregular movement in interest rates in the global money market. Under the Bangladesh Bank there are lots of public and private banks. A separate department of Bangladesh Bank performs the operational functions regarding investment, which is guided by investment policy set by the Bangladesh Bank’s investment committee head by a Deputy Governor. The underlying principle of the investment policy is to ensure the optimum return on investment with minimum market risk.

Banking is essentially based on the debtor-creditor relationship between the depositors and the bank on the one hand and between the borrowers and the bank on the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money. The commercial banking system dominates Bangladesh’s financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system is composed of four Public commercial banks, five specialized development banks, thirty private commercial Banks and nine foreign commercial banks.[2]

Bank is the custody of public money. Public keep their money in the bank for security of their money. Banks are the medium of two parties.  People who keep their money in banks, they get an interest against the amount which is given by the bank. The people who take loans from the banks, they have to pay a charge for it to the banks. By this money banks make profit. By trusting the banks public keep their money in banks. So the banks should not lend money to anyone. They should judge the person before lending him the amount.

To sanction a loan banks should always have to consider many issues. In every bank there is specific law for the procedure of lending. Bank can not provide any type of loan to a random person. Before lending him loan bank have to go through some procedure. But in our country everything is possible by backings. Someone just needs to have a good hold. But banks are the custody of public so they should not provide loan to loan defaulter. They should be more aware of this problem.

Banks should not act negligently:

Banks negligence is a failure to provide an expected duty of care to customers and employers that causes harm. Banks should not act negligently. People deposit their assets in the banks with a very strong trust. Banks should take the responsibility and maintain it properly. The functions that banks have to play are ordered by the Bangladesh Bank. They decide everything and other banks have to obey it. The first and most important function of a central bank is to accept responsibility for advising the government on the making of the country’s financial policy, and thus to see that it is carried out. The government must decide how much money there shall been the country at a given time, and the central bank must take steps to increase or decrease the supply accordingly. Then provide money for the government during the time when public expenditure had become too expensive to be financed out of current taxation. Its business at first was the receiving of money on deposit and lending of money against satisfactory security. Now let’s look at little brief of some of them:

1. Formulation and implementation of monetary and credit policies.
2. Regulation and supervision of banks and non-bank financial institutions, promotion and development of domestic financial markets.
3. Management of the country’s international reserves.
4. Issuance of currency notes.
5. Regulation and supervision of the payment system.
6. Acting as banker to the government.
7. Money Laundering Prevention.
8. Collection and furnishing of credit information.
9. Implementation of the Foreign exchange regulation Act.
10. Managing a Deposit Insurance Scheme.[3]

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:

Default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay his or her debt. This can occur with all debt obligations including bonds, mortgages, loans and promissory notes. 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 this type of activity. The Bangladesh Bank itself interferes and sanction for loans to the defaulters. Other banks are bound to sanction loans because loan defaulters take permission from the Central bank.[4]

 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. 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 bank.

  Why banks are bound to do:

Banks are bound to give loans to the defrauders because the central bank itself is involved in these activities. Sometimes it becomes a national problem as well. There can be backings of politicians, upper management. 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:

Bank lends money collected from depositors to loaners and any default in repayment affects the money available for further lending. Hence bank need to recover the money lend and the borrowers have an obligation to repay. But sometimes there are instances beyond the control of borrowers due to which they are unable to repay and in such cases banks have to give time or reschedule the loan or can resort to lawful means.

Therefore banks should take proper verification of their client. The person who has applied for the loan, banks officials should check eligibility criteria and potential and meet the person directly for certain clarification. Banks also do need to send intimation to the concern person before the premium.

And if the banks fail to check their customer’s credibility thoroughly at the time of sanction of loan then its the bank’s fault it should not harass the customer for its own fault. But people should know that banks not meant for charity rather they are a well established financial institutions and work for profit motive.

When a small business owner comes looking for a loan, the bank will take into consideration the personal finances of that business owner, according to Phil Trumble writing on the Business Know How web site. Order your personal credit report and make sure the information is accurate and pay off any old debts that are still considered open. Business owners that own a home and have several instances of personal financial obligation that they are current on with their payments have an advantage with banks over owners that do not. Attend to your personal finances before applying for a business loan to improve your chances of getting approved.

 Loan defaulters in Bangladesh:

Loans and credits are normal phenomena in business and our daily life, but the intentionally not giving it back to the banks are crimes, but laws allow it to make it a soft unethical practices for some.

Historically loan defaulters rise up in the beginning of first three quarters and it slowed down as the December approaches, for reasons of banks extra efforts to realize the loans and the businesses have gathered their proceeds after selling products and services. The trend in percentage of loan defaulters declining but in total volume it is increased a little bit. In comparison with international standard the defaulter not yet crossed the tolerance limit yet in Bangladesh.

 Laws for Loan Defaulters:

 In 1997 for the first time, banks in Bangladesh have been armed with powers to take action against loan defaulters who have political clout and money power.

Parliament recently passed two new laws that were introduced by Prime Minister Shaikh Hasina Wajed’s seven-month-old government.

Under the ‘Bankruptcy Act’, an individual, company or statutory body that fails to repay a loan can be declared insolvent by the concerned bank. The second piece of legislation enables banks and financial institutes to sack directors who have sanctioned the loans.

Many of the big loan defaulters are directors of banks, members of Parliament belonging to both the ruling and opposition parties, and rich business people.

Lutfur Rahman Sarkar, governor of Bangladesh bank, the country’s central bank, said the banking industry was owed a total of 3.7 billion dollars in outstanding loans.According to him, the number of people owing loans above 250,000 dollars was roughly only 1,800, but because they have political clout and are socially well placed, recovery is very difficult.

Both the World Bank and the International Monetary Fund (IMF) have expressed concern over the growth of the “default culture”. The IMF in a report has recommended the closure of debt-laden banks and said loans should not be considered political largesse.

Bangladesh banks have been abused by politicians. The “default culture” goes back to the martial law regime of deposed president Hussain Mohammed Ershad, who is now chairman of the third largest political party in Parliament. During Ershad’s autocracy, bank loans were liberally handed out to industrialists and politicians in exchange for political support.

The loans were taken for establishing industries, but the plans remained on paper and the money was either sent abroad or diverted to trade, which yields quicker and higher returns than industry.

As a result industry contributes only nine percent to the GDP, and employs only seven million people, which is less than the population of the Bangladesh capital. The country remains mainly agrarian, absorbing 65 percent of the total labor force.

When Ershad was forced out of office by a pro-democracy movement in December 1990, outstanding loans totalled 2.5 billion dollars, most of which was written off as bad loans by banks.

Bangladesh’s first democratically-elected government that followed started out by trying to recover loans. But the Bangladesh National Party (BNP) soon gave up — succumbing to pressure from within the party.

At a recent meeting, Finance Minister Shah A.M.S. Kibria accused the previous government of “indulging in corruption and politicising the grant of bank loans”. He faulted the BNP for granting loans on the basis of political affiliation, rather than the feasibility and credit worthiness of schemes.

Only a fifth of the more than 50,000 cases connected to outstanding loans that were filed by banks during the BNP’s five- year term in power have been settled.

The problem is serious, and even Bangladesh President Justice Shahabuddin Ahmed has issued a call for the social boycott of loan defaulters, whose names are regularly published in the newspapers.

Bangladesh has also changed laws to bar loan defaulters from contesting in parliamentary elections, which were enforced in the selection of candidates in the last general elections in September.

Prime Minister Hasina again told participants of a seminar in Dhaka that her government was determined to restore discipline in the banking and financial sector. She has already constituted a high-powered committee to recommend reforms for the banking industry.

Independent banking experts say the government must strictly enforce banking rules and ensure managements abide by regulations or the mess in the banking sector will only get worse. The “default culture” must be eliminated if banks are to become healthy, they warn.

The new laws passed by Parliament earlier this month are indeed signals of the government’s resolve. Rules have been amended to include firms and institutions in the list of offenders, against whom banks can take action. Previously only individuals could be declared bankrupt and their assets seized by the government to repay creditors. The amendment of the Bank Company Act is expected to go a long way in ensuring accountability by management in the banking industry. The new rules say that directors can be sacked if they “fail to repay advance, loan, installment, and interest or security money within two months of serving notice on him or her by the banks or financial institutions through Bangladesh Bank.” Moreover, banks are prohibited from extending credit to declared loan defaulters.


The importance of banking in an economy is many. Banking plays the role of an intermediary movement of resources from places of surplus to places of deficit. Via this role resources are evenly distributed in the economy. In all if we look at banking industry’s history it has improved lives of all segments of society as well as supported economies at large. They should be more aware of the system of providing loan. They need to be more ethical and careful about disbursing credit facility to the loan defaulters.


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