Finance Co Act draft okayed, limits family ownership in NBFIs to 15%

The cabinet has approved the final draft of the Finance Company Act 2023, which introduces new measures to strengthen the governance of non-bank financial institutions (NBFIs). The proposed law prohibits individuals or family members from owning more than 15% of the shares of an NBFI and limits the number of directors from the same family to two.

The approval came from a cabinet meeting chaired by Prime Minister Sheikh Hasina on Monday.

The proposed law is expected to be passed during the current parliament session.

The existing law does not limit individual or family shareholdings in NBFIs or the number of family members who can serve on the board of directors. The proposed law defines a family as the shareholder's spouse, children, parents, siblings, and dependents.

Analysts and financial sector stakeholders welcome the new law, saying it will improve governance and address loopholes. They emphasise its proper implementation.

Ahsan H Mansur, executive director of the Policy Research Institute, said a new, stricter law is necessary to address the extreme irregularities in Bangladesh's financial institutions.

According to Bangladesh Bank's stress test report, more than half of the country's 35 NBFIs are bankrupt due to irregularities and mismanagement. As of December 2022, 14 NBFIs were in the "Red Zone" or vulnerable position, seven were in the "Yellow Zone" and 14 were in the "Green Zone".

"All laws provide for punishments for wrongdoers and aim to develop related sectors. The question now is whether the law will be enforced impartially or according to political considerations."

Ahsan H Mansur, Executive Director, Policy Research Institute

NBFIs in good financial condition are classified as green, those in moderate condition as yellow, and those in poor condition as red.

According to central bank data, the total amount of defaulted loans in the NBFI sector increased to Tk19,951 crore at the end of June this year, accounting for 27.65% of the total loans disbursed in the sector.

Briefing reporters at the Secretariat after the meeting, Cabinet Secretary Mahbub Hossain said NBFIs are currently operating under the Finance Institution Act, 1993. However, its implementation has been challenging due to certain weaknesses in the law. This has prompted the development of a new law to update the regulatory framework.

"Under the existing law, there was no limit on the percentage of shares an individual could hold in an NBFI. The new law prohibits individuals or family members from owning more than 15% of the shares of an NBFI," he said

NBFI shareholders who own more than 15% of the company's shares will have two years to reduce their holdings to the new limit after the new law comes into effect, said the cabinet secretary.

"NBFI shareholders who own more than 15% of the company's shares can sell the excess shares to non-family members or to shareholders who own less than 15% of the company's shares. If shareholders fail to reduce their holdings to 15% within two years, the government will confiscate the excess shares," he said.

The cabinet secretary said the current law does not specify the number of directors on an NBFI board. The proposed law sets the maximum number of directors at 15, including two independent directors.

"However, if a family owns less than 5% of the shares of an NBFI, one member of the family can be a director. If the family owns more than 5% of the shares, up to two members of the family can be directors. There cannot be more than two directors from the same family," Mahbub Hossain said.

The cabinet secretary said the existing law does not specify a term limit for NBFI directors but the proposed law sets the term limit at three years, with directors eligible to serve for up to three consecutive terms.

Mahbub Hossain explained that the proposed law includes a definition of willful defaulters, which are individuals who meet any of the following three criteria: Fail to repay a loan on time despite having the ability to do so, use a loan for purposes other than those for which it was granted, and submit false or misleading documents to obtain a loan.

"The Bangladesh Bank will maintain a list of willful defaulters. If a defaulter fails to pay their dues within two months of receiving a notice, the concerned finance company may, with the approval of its board of directors, file a criminal case against them for the recovery of the related loan, advance, or dues. Money Loan Court cases will not be obstructed or hindered by such criminal cases," the secretary said.

"The Bangladesh Bank can also impose the following restrictions on listed willful defaulters — ban on foreign travel, ban on trade licence and ban on company registration with the Bangladesh Securities and Exchange Commission (BSEC) and the Registrar of Joint Stock Companies and Firms (RJSC). This means that once a person is identified as a willful defaulter, they will be prohibited from doing business or leaving the country," he said.

The cabinet secretary said banks can create subsidiary companies, but according to the proposed law, NBFIs cannot form subsidiary companies in Bangladesh without the approval of the Bangladesh Bank.

Mahbub Hossain said the existing law did not provide guidance on interest waivers. The new law prohibits NBFIs from waiving interest without the approval of the Bangladesh Bank. Full interest waivers are never permitted and the NBFIs must realise the Cost Of Funds — which refers to how much banks and financial institutions spend in order to acquire money to lend to their customers.

The cabinet secretary said the proposed law increases penalties and punishments in some cases. For example, the penalty for non-compliance with the conditions of an NBFI licence is increased from Tk10 lakh to Tk50 lakh.

He said under the existing law, NBFIs are fined Tk10 lakh for violating loan rules. The proposed law stipulates that the penalty will be Tk10 lakh or the unrealised amount of the loan, whichever is higher. This penalty applies to all directors and officers of the NBFI.

Mahbub Hossain said foreign investors must obtain approval from the Bangladesh Bank to purchase shares in NBFIs. The central bank will determine the maximum percentage of shares that foreign institutions or individuals can own. 

Additionally, financial institutions cannot be owned by other financial institutions, the cabinet secretary added.

Experts welcome proposed law

Md Kyser Hamid, vice chairman of the Bangladesh Leasing and Finance Companies Association and managing director of Bangladesh Finance, told The Business Standard, "The existing law did not specify or clarify many issues, which led to irregularities, mismanagement, and exploitation. The proposed law addresses these shortcomings and will promote transparency and accountability in the NBFI sector."

Regarding the addition of fines and punishment, he said increasing the fines in the proposed law will incentivise compliance and will not be a burden on well-managed institutions.

Ahsan H Mansur, executive director of the Policy Research Institute, told TBS that the most important thing is to implement the new law effectively. 

"All laws provide for punishments for wrongdoers and aim to develop related sectors. The question now is whether the law will be enforced impartially or according to political considerations," he said.

"PK Halder is just one example, but there are many others. The Bangladesh Bank is responsible for overseeing the financial sector, but it has failed in this duty," he added.