How NBFIs charge additional interest on loans that violate covenants
Hasina Begum, a resident of Siddhirganj in Narayanganj, approached Islami Finance and Investment Ltd in 2013 for a home loan. The institution approved a loan of Tk80,000 from its Naryanganj branch and set the term of the loan at 10 years and the amount of the monthly installment at Tk1,52,000.
The loan sanction letter did not mention the win rate, but eight years later it was found that the loan win rate is 20% as Hasina is obligated to pay Tk 1.82 crore, including principal and profit, in 120 installments.
The financial institution has paid the client Tk 55,000 in irregular installments since December 22, 2013 for house construction and repair work. The remaining Tk25,000 was collected by the branch in loan installments but the lender informed the client that she had given this Tk25 lakh as well. However, unable to get her hands on that 25,000 Tk, the client was unable to complete the construction of her house and was therefore deprived of the income from the house rentals.
Speaking to The Business Standard, Hasina said the loan sanction letter was written in English, and because she wasn’t educated enough, she didn’t understand the letter. Also, officials at the financial institution did not properly inform her of the terms and conditions, she said, adding: “Had I known the amount of the unwritten and confidential gain, I would not have taken the loan and therefore could have done this crisis on life and limb.” avoided death.
Hasina has paid the lender Tk 97,81,029 in principal and profit payments in various monthly installments over the last eight years – which means that she has already paid Tk 17,81,029 more than the actual loan amount. The interest rate from the start of the loan was 20%. Hasina said she requested a rate cut, but the lender refused.
A recent review of interest rates on deposits and loans from non-bank financial institutions (NBFIs) shows that some NBFIs’ financial expenditures have increased unreasonably as they have been taking deposits at high interest rates. As a result, NBFIs are forced to charge high lending rates, which negatively impacts the overall economy by reducing consumers’ ability to repay their loans, increasing the size and rate of defaulted loans, and hampering production.
In this situation, in April this year, the central bank set the maximum interest rate on deposits in NBFIs at 7% and the maximum lending rate at 11%, which will apply from July 1.
According to a Bangladesh Bank inspection report, four NBFIs collected deposits at more than 12% interest in the last year.
In addition, six NBFIs have accepted deposits at interest rates between 12% and 13% over the past three years. These institutions are Bangladesh Industrial Finance, Fareast Finance and Investment, First Finance, Hajj Finance, Peoples Leasing and Union Capital.
Meanwhile, an analysis of loan disbursements shows that eight financial institutions’ lending rates ranged between 17% and 18%.
This list of such NBFIs includes Midas Financing, Phoenix Finance & Investments and Premier Leasing, in addition to the institutions mentioned above.
A senior Bangladesh Bank official told TBS that some financial institutions are lending at higher rates after taking deposits at higher rates. As a result, many of them are finding it difficult to get their loans back and many borrowers are becoming defaulters, he added.
In addition, some institutions charge higher interest rates than the fixed rates without mentioning the interest rates of the loans in the loan sanctions documents, which has even made many clients hostage to some reputable NBFIs.
Hasina Begum, Islami Finance’s aggrieved customer, said she applied to the company’s chief executive for a margin reduction in 2017 and 2019, but went unheeded both times. “If the win rate on my loan is calculated at the rate set by the government or at a reasonable rate, the amount I currently owe will be reduced to half of the current amount.”
Hasina said the lender has filed 10 lawsuits against her and her husband after they failed to pay installments for a few months during the Covid pandemic, which forced them to leave their home and spend their nights in other people’s homes .
“Right now the debt is like a noose around my neck. The cost of handling the case left us helpless and incapable,” Hasina said.
Also, another client of Islami Finance and Investment Limited, Nur Mohammad, told TBS that he received a Tk1.5 billion home loan at 15% interest.
Shihab Uddin of Moulvibazar took out a loan of Tk20,000 from IDLC on October 20, 2016 at 10% interest for 10 years. He repaid the loan regularly in monthly installments of Tk 25,300. It was decided to charge 10% interest on the company.
After reviewing the lender’s bank statement, Shihab was last informed on July 18 that he was being charged 16.50% interest, which violates the loan disbursement policy. Shihab said he requested IDLC’s sanction letter agreement paper, but the institution refused to give it to him.
Hasibur Rahman, a resident of Gate No. 1 in the capital’s Jatrabari, raised a $2 million home loan from National Housing and Investment Limited in 2017.
“I took out the loan at 11% interest. After making a few installments and taking a bank statement, I saw that the interest rate was actually 14%. I applied for an interest rate cut in 2018. The problem was not solved, I applied again in 2019 but again received no response.
“Even back then, I regularly paid the loan installments. In the meantime all my shops were closed and even the tenants of the house could not pay the rent after the outbreak of the Covid pandemic in early 2020. My tenants left the house Although there was an instruction to stop the installment collection in the Covid period, this institute has deposited the installment checks over and over again and since the checks were not cashed by the bank in question, it showed the defaulted installments in my account with compound interest.”