The central bank has proposed extensive amendments to the banking law, including changes to the definition of default loan and lenders' involvement in the capital market, to ensure better governance in the sector.

A finance ministry official said the central bank sent the 75-page proposal to the Banking Division early this month.

In line with the proposal, Bangladesh Bank (BB) will have to have the right to make public any information regarding loan defaulters in any form.

The existing law does not explicitly allow this disclosure.

The official said the government will form a committee led by a former secretary or additional secretary to scrutinise the BB proposal.

The committee will also include representatives from different ministries and the business community.

The initiative to amend the Banking Companies Act was taken during the immediate past tenure of the BNP government, but it could not be realised due to opposition by various influential quarters.

Even during the immediate past caretaker government, a law was promulgated through an ordinance but after the present government assumed power the ordinance did not get passage in parliament.

Former deputy governor of the central bank Nazrul Huda was actively involved with the formulation of the draft law when it was first introduced in 1991. He was also closely related with the amendment process.

Huda said the world economic system went through a lot of changes in recent times. In light of that, the amendments to the Banking Companies Act are essential, he said.

As per international standard, Bangladesh's banking sector requires to include the new amendments to combat risk. The amendments will also ensure good governance in the banks, he added.

As per the existing rules, if any loan remains overdue for six months, it is identified as default loan. The proposal said the BB will have the powers to redefine the word “default” as and when needed.

Also the definition of borrower will be widened to include guarantor in case the principal borrower defaults. The amended law will give highest emphasis on capital maintenance.

According to the new law, if any bank fails to maintain a minimum paid-up capital and statutory reserve for a long period, it may be closed down.

In case of banking, if any bank fails to comply with the international best practices, heavy fines, restrictions on new deposits, credits or branches will be imposed.

A new clause has also been proposed prohibiting commercial banks to engage in brokerage house, portfolio manager, and merchant banking business, or businesses that require licences from Securities and Exchange Commission.

The amended law will provide that two independent directors will replace depositor-directors. The number of directors in the board will be a maximum of 13.

If any family holds more than 5 percent share, it will have two directors and if the amount of share a family holds is less than 5 percent it will get one director, according to the proposed amendments.

If a director of a bank fails to repay loans taken from any bank or financial institution, he or she will be barred from selling the shares he or she holds until the defaulted loan is paid off. Legal challenges against any actions taken under this clause can only be lodged in a relatively higher court.

In case of subsidiary companies, specific legal provision has been suggested so that commercial banks can form subsidiaries to engage in stock brokerage or merchant banking business with prior approval of the central bank.

The definition of share-holding has been streamlined to avoid ambiguities. Several caps have been introduced to limit the exposure of banks in the capital market, including overall portfolio exposure limit of 25 percent of the banks' capital. At present the exposure limit is 10 percent of the liabilities.

The Daily Star/Bangladesh/ 4th March 2012