Effectiveness of alternative dispute resolution on the recovery of non-performing loans under Artha Rin Adalat: A study on nationalized commercial banks in Bangladesh

Abstract

Bangladesh is a densely populated country, and many people are living under the poverty line. To get them out of poverty to prosperity, people frequently take loans from different financial institutions including nationalized commercial banks. As people are poor, sometimes they cannot repay their loans in due time. As such, they have considered as loan defaulter. Finally, financial institutions or Nationalized Commercial Banks (NCBs) have to file suits to recover their loans. However, because of the absence of any specific law, the process of recovery was tedious and time-consuming for financial institutions. Therefore, a law titled Artha Rin Adalat Ain, 1990 enacted for accelerated recovery of such nonperforming

loans. Nevertheless, this law did not meet with success, due to some loopholes including very low recovery lies in the very slow execution of the decree. Thereafter, a new law enacted in 2003 for this purpose. To accelerate the process of recovery, the Artha Rin Adalat Ain 2003 emphasized on the use of Alternative Dispute Resolution (ADR) to settle disputes on non-performing loans as a mandatory procedure to resolve these disputes. ADR is the unique feature added in this new law. The issue of recovery of non-performing loans is not only crucial but also remains complex for the financial sector of Bangladesh. The legal process is costly, time consuming, complex, and sometimes corrupted. Therefore, Artha Rin Adalat Ain, 2003 has included ADR system for recovering non-performing loans from borrowers so that good relation can maintain among the borrowers and NCBs, and the latter can maintain their viability with lower operating costs. The level of non-performing loans negatively relates to bank efficiency and causes a hindrance to economic stability and growth of economics. Although trials in Artha Rin courts are contributing positively towards the recovery of NPLs, in this era of globalization, world business communities are eager to use ADR for the quick settlement of international business and trade disputes. The business community has now recognized that ADR is the acceptable mode of dispute resolution. It is felt that ADR is less costly, less adversarial and therefore more conducive to the preservation of business relationships, which is of vital importance in the business community. The use of ADR has grown tremendously in the international business in recent years. The growth has facilitated by several factors including tremendous expansion of international commerce, and increased globalization. However, in our present legal system, increasing expenses of litigation, delay in disposal of cases and huge backlogs have virtually shaken the confidence of the people in the judiciary. In this backdrop, we cannot but ponder about the device like ADR, which is potentially useful for reducing the backlogs and delay in courts. Since ADR is much cheaper and speedier than the existing formal legal system, it can greatly mitigate the suffering of poor litigants. To fulfil the objective of this research, Artha Rin Courts of Dhaka District, as well as NCBs of Dhaka Districts, have been considered. While supporting the arguments of this thesis, opinions of 30 Bankers, 40 borrowers, 20 mediators, as well as 20 experts‘ judges have taken through questionnaire survey. After data analysis, I found that Artha Rin ADR has not improved NPL resolution and recovery significantly as the enforcement of the law is not properly executed for recovery the bank loans. Furthermore, bankers are not empowered or delegated with required authority (e.g. waiver a part of interests etc.), to make a successful ADR with their borrowers. Thus, banker‘s power during ADR sessions should be provided and may be recognized through Artha Rin Adalat Ain, 2003. In addition, strong security for loans should be ensured for the success of ADR under Artha Rin Adalat Ain, 2003. Pertinently, increasing awareness of the benefits of ADR in comparison with the trial, training to judges, mediators and lawyers, the appointment of Panel mediators, and enhancing Judges‘ authority and power in conducing Artha Rin ADR could increase the effectiveness of the ADR under Artha Rin Adalat Ain, 2003. Therefore, introduction of settlement conference and/or Med-arb is suggested in this thesis. This research will be helpful for the recovery the NPLs and will accelerate the financial condition of the banking sectors of Bangladesh. Furthermore, findings of this thesis will be beneficial for the policy makers to amend Artha Rin Adalat Ain, 2003 or to enact or enforce new laws for the development of the financial sectors of Bangladesh. As financial sectors are the pillars for the development of a country, in short, I am highly optimistic that this research will also contribute to the overall economic development of Bangladesh.