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VOL 23 NO 222 REGD NO DA 1589 | Dhaka, Saturday, June 25 2016

http://print.thefinancialexpress-bd.com/2016/06/25/144994

Forced loan - an imposed liability


M. S. Siddiqui
A newspaper report revealed that the Rupali Bank sanctioned 'forced' loan amounting to Tk. 270 million between
September 2008 and September 2010 to ensure payments against recognised overdue local LC bills payable by a
company. Similarly, the borrower concerned had unpaid overdue import bills worth Tk. 465 million until the end of
April 2012. The industrial loan department of the Rupali Bank on May 15 last sanctioned a 'forced' loan of Tk. 250
million to settle the import bills. But, a Bangladesh Bank (BB) probe report said, the bank had no control over
goods imported by the client.
Historically, forced loan has been different in nature. The first regular financial institution was established at Venice
nearly eight hundred years ago in 1171. The government of the Republic of Venice was engaged in war and got
forced loans as it was in dire need of funds. The government of Venice extracted forced loans from wealthy citizens
who were required to contribute to a loan. Instead of the delivery of bonds to the citizens as certificates of
indebtedness of the Republic to them the amounts in specie which were received from them were placed to their
credit in a book or ledger. The citizens of Venice began exchanging ownership of these government obligations to
transact business, turning these obligations into a circulating medium of exchange like any other form of money.
Money transactions settled by entries in books were much more convenient than coined money transactions,
particularly when large amounts were involved. The citizens of Venice soon voluntarily deposited specie with the
bank in return for book entry deposits that could be transferred to other depositors in any amount.
The then Venice government kept a record book that showed the amounts it owed individual citizens but otherwise
issued no bonds, promissory notes (IOUs), certificates of indebtedness, or other proof of indebtedness. The
government's creditors received 4.0 per cent interest per year, but the government did not pay the principal on the
loans.
The current forced loan is different. The government also takes loan from banks but that is not forced but some of
loan from national obligation to support the government projects. But the modern-day bank is used to impose loan
liability over their clients for certain transactions.
All loans and advances are usually grouped into four categories for the purpose of classification, namely (a)
Continuous Loan (b) Demand Loan (c) Fixed Term Loan and (d) Short-term Agricultural and Micro-Credit.
Demand loan is a loan with no fixed term or set duration of repayment. It can be recalled upon the lenders'
request, assuming the notices required by the provisions of the loan are met. The loans that become repayable on
demand by the bank will be treated as Demand Loan. If any contingent or any other liabilities are turned to forced
loan (i.e. without any prior approval as regular loan) those too will be treated as Demand Loan, such as, forced
loan against imported merchandise, payment against document (PAD), foreign bill purchased, and inland bill
purchased etc. Demand loans are forced loans.
PAD is a kind of post-shipment import trade finance given by the bank to the importer. After receiving the
concerned negotiated bill from the negotiating bank on behalf of the exporter, the issuing bank has to check the
documents very carefully within a stipulated time (say within 3 days). If the bank finds those shipment documents
without any discrepancy, the bill has to be paid to the exporter's bank and create a loan in account of the importer,
which is the direct liability of the importer. The bank is used to convert a short loan for PAD into forced loan if the
importer doesn't pay to the bank on time or when the importer does not come to the bank for retiring the bill, the
bank has to clear the imported goods from the Customs authority under the bank's authority by creating a loan
against imported merchandise (LIM) Account in the name of the importer, which is known as forced LIM.
Apart from LIM, the bank also extends short- term loan for inland bill purchase (IBP), foreign bill purchase (FBP),
free shipment credits (FSC) and finally convert these loans to forced loan if the clients failed to pay back on time.
These loans are for a very short period and are a part of services extended to the clients for smooth business
transaction against a very high interest rate.
Very often banks use to create a complex transaction for exporters like readymade garment industries (RMG) as

the transactions involved export of RMG and import of raw materials against the master export LC. Recently, the
inspection team of the Bangladesh Bank (BB) has detected serious breach of banking rules in opening letters of
credit (LCs), creating forced loans to make LC payments, allowing borrowers to use the same account for export
and import transactions and counting interest on overdue loans and showing the same as income in the balance
sheet of the branch.
Forced loans refer to a type of lending which banks make to clients regardless of necessity of the loans in business.
According to the BB inspection team report, one customer was allowed to use the same account, opened with the
local branch of the Rupali Bank, for export-import transactions, which is a gross violation of the banking rules.
Banks now extend forced loan to clients reportedly without their need for loan. This is an allegation against newly
established banks in private sector. In recent times, branch managers of different banks alleged that they were
given a time-bound target to distribute loans, which made them take refuge in forced loans to meet the targets.
"The Bangladesh Bank should impose a bar on such practices to stop forced loan distribution and issue a guideline
to fulfil the target," said a branch manager of a private bank.
The forced loan is a kind of loan which banks provide to their clients without judging the actual need of the
business. The banks' main intention behind such loans is to make good return and fulfil the loan distribution target
within a deadline to distribute loans. As a result, they have to pursue different ways including offering forced loans
to different corporate houses or individuals from an obligation of fulfilling targets.
The short-term trade finance is a part and parcel of banking business. It should not be converted to NPL as a
regular loan like commercial and agricultural loans. There should be an end to providing 'forced loans' to
entrepreneurs as a lot of big lending as forced loans is becoming classified and increasing the load of nonperforming loans.

The writer is a legal economist.


mssiddiqui2035@gmail.com