Computing from the Bank of Ghana data, the non-performing loans of the banking industry stood at about GHc6.16 billion in 2016 and GHc8.56 billion in 2017 representing a growth rate of about 39% in nominal terms. The non-performing loans ratio was 17.3% by the end of 2016 and it increased to 22.7% as at December 2017.
Non-performing loans have rippling effects on the economy because it pushes the banks to shrink credit to the private sector and thereby reduce productivity. Total credit for the banking sector increased by 18.3% to GHc35.6 billion in 2016 but the growth in credit reduced to 5.9% (GHc37.7 billion) by the end of 2017. The lower credit growth reflects the efforts of managers of the banking system to streamline their balance sheets by addressing the high Non-Performing Loans (NPFLs).
It appears that wilful default may be a significant part of the non-performing loans of the financial services sector. In this paper, I argue that wilful default must be criminalized and this calls for support from the judiciary, regulators and trade associations within the financial services sector.
WILFUL LOAN DEFAULTERS
When you take a loan from any licensed financial institution, you have an obligation to repay the loan. Somehow some people deliberately and calculatedly default even though they have the capacity to pay the loan. This class of loan defaulters are known as wilful defaulters and may be categorized into any of the following circumstances:
- Intentionally defaulting despite the financial capacity to repay loans.
- Using the loan funds for illegal purposes.
- Diversion of loan funds other than the intended purpose.
- Illegal sale and transfer of collateral or security without the knowledge of the financial institution that granted the loan.
- Using fake documentation with the help of third parties.
- Running away or travelling to another destination to avoid paying the loan.
In Ghana now there is also the issue of serial borrowers who can be categorized as wilful defaulters. They deliberately go to specific places and use fake ID cards and documentations which are difficult to authenticate as well as stolen third party properties as collaterals such as cars or houses belonging to innocent people.
Wilful defaulters are criminals and must be dealt with as such. In genuine cases where borrowers have defaulted due to a downturn or slow growth of economic activities, or failure of the business enterprise, or defect in product, or glut in the market, or any other similar reason, then such defaults will not amount to cheating or wilful default.
The role of the Judiciary
The major problem of using the court or why people don’t use the court is the time and resources it takes to secure judgment and the difficulties inherent in executing those judgments for the realization of funds from defaulters. Some cases take up to 5 years in the courts due to several adjournments in the courts and this is a disincentive to go to court. Some wilful loan defaulters even have the gut to dare recovery managers of financial institutions to go to court because the delays in the courts favor them. It is not surprising therefore to see managers of some financial institutions behaving like “macho-men” and dealing ruthlessly with wilful defaulters.
Until we criminalize wilful loan defaulters our non-performing assets will continue to have damning consequences on our economy. Wilful defaulters must be treated as criminals and dealt with severely. This is done in other jurisdictions and it has helped to significantly reduce their non-performing assets.
The fast-track courts were set up to help expedite court proceedings and to help businesses deal with court issues expeditiously but the time of execution is still not acceptable to businesses. We probably need to create special desks at the courts for loan recoveries alone with an intention to ensure that no case lasts more than six (6) months.
The Role of the Regulator
Currently all the acts, laws and operating rules for financial institutions are geared towards protecting the depositor or client. What about wilful loan defaulters who have succeeded in crushing some banks? We need a strong regulation on wilful defaulters to salvage not only the depositors but also loan clients. For example, the Reserve Bank of India (RBI) has a Grievance Redress Committee which gives hearing to loan defaulters before they are declared as wilful defaulters or criminals for prosecution. Once that happens, you will not be able to access any kind of services or facilities from any financial institution for the next five years. You will also be barred from participating in the capital market. To prevent access to capital markets, a copy of the list of wilful defaulters is sent to the Securities and Exchange Commission Board of India by the RBI and the Credit Information Bureau (India) Ltd. Criminal action against wilful defaulters in India falls under sections 403 and 415 of the Indian Penal Code (IPC). The Indian Companies Act, 2013 was amended to include a provision on wilful default. The Serious Fraud Investigation Office has also been institutionalized under this Act and is empowered to investigate cases of wilful default and this could lead to imprisonment up to 10 years.
The role of Trade Associations
Trade associations within the financial services sector must protect their members from wilful defaulters by pushing for the right regulations to their regulators. For example, in September 2015, the All India Bank Employees Association staged a demonstration in India to put pressure on their central bank to put in extra efforts to recover the debts taken by corporate institutions and pushed for the defaulters to be declared as criminals.
Several wilful defaulters have entered into the Ghanaian financial system because the delays in our judiciary process favor them. Wilful default is an irresponsible behavior which causes disruption to the socio-economic conditions of Ghana and its reputation as a country.
As a country, what is our capability to identify, reprimand and curtail further losses from wilful defaulters? Our judicial system must show strong action on such wilful defaulters. My view is that our financial services laws should be modified to criminalize wilful defaulters through regulation.
The writer is the CEO, CIDAN INVESTMENTS LIMITED