Overvalued collateral: Cases settled, most loans unrecovered

Banks were able to recover only one-fourth of the amount that was involved in the settled money lawsuits as of December 2022, according to a report by the Bangladesh Bank.  

The number of cases settled against customers of banks in the money loan court, also known as the Artha Rin Adalat, was 150,159, involving Tk 82,297 crore, at the end of the last year, but the amount recovered by the banks was only 25.6% or Tk21,082 crore.

Analysts and bankers said overvaluation of collateral, lack of due diligence in loan processing and the closure of businesses are among the main reasons.

"Many cases are settled considering the death of the customers and the closures of businesses. Banks also have irregularities; Their taken collateral against the loans are found insufficient later compared to the value of the loans, which is another reason," a central bank official, wishing to remain unnamed, told The Business Standard. 

"Furthermore, many customers follow different tricks to have their collateral overvalued. In such cases, when the loans are classified as defaulted, the principal of the loans cannot be recovered," he added. 

Of the unrealised amount, state-run banks failed to recover Tk51,305 crore and private banks Tk27,902 crore, according to the central bank report. At the end of December 2022, there were 72,189 cases pending in the money loan court involving Tk1,66,886 crore. The number of cases increased by 3,918 in 2022 compared to that of the previous year, while claimed money surged by Tk23,192 crore. 

Of the total claimed amount, Tk71,764 crore belongs to state-owned banks, Tk2,468 crore to specialised banks, Tk88,858 crore to private banks and Tk3,795 crore to foreign banks.

"Poor recovery of money against huge case settlements indicates the weakness of our banking system," Ahsan H Mansur, chairman of Brac Bank and director of the Policy Research Institute of Bangladesh, told The Business Standard.

"Banks do not lend to good customers, which is why they see a high number of defaulters. Besides, the security [mortgage] that is kept against loans is overvalued often. In that case, banks cannot recover most of their money, when borrowers go bankrupt or die. The mortgage can provide a nominal compensation only," he added.

A total of 2,22,348 cases involving Tk2,49,184 crore were filed in the money loan court until 2022 since its establishment in 2003, according to the Ministry of Finance.  

According to a central bank report, the amount of defaulted loans in the banking sector stood at Tk1.20 lakh crore at the end of December 2022, which is 8.16% of total loans. However, the loans that are stuck in lawsuits are not shown as defaults on the balance sheets of banks. Lenders write off loans and remove them from balance sheets. But against the write-off amounts, banks have to maintain 100% provisioning at the central bank.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told TBS that no matter how many times the interest on customers' loans accrues, banks cannot claim more than three times at court. Besides, many cases of defaulted loans are not properly documented due to the manner in which the court disposes of these cases.

He also said banks are seen to show a higher value of assets when lending. But the value of the property is seen as very low when it is put up for auction with the court order. In such cases, lenders get much less money than their original loans.

In November last year, the commercial banks wrote to the Bank and Financial Institutions Division, urging it to set up the necessary number of money loan courts for quick disposal of debt recovery cases.