Anytime a loan is not being paid, two broad reasons exist; a lack of capacity to pay, or a deliberate decision not to pay. If the borrower deliberately, intentionally, or by calculation decides not to pay his/her debt, it is considered as a Wilful default.
In this country, hitherto, it was a crime to access a loan from the bank and not pay. It was a fearful arrangement. Remnant of that fear persists, especially for those who are not aware that the law no longer exists. It existed in the United States too until 1833 when the law, was abolished. In otherwords, you cannot be sued criminally by a lender for deciding not to pay your loan. It will be a civil litigation; its between you and the Bank(or it, more appropriately phrased). A lender can, however, proxy criminality with a request for Post dated cheques from the borrower, so that upon default, and likely ‘return’ of the PDC, the state can come in. But this remains only a subjective adventure by the lender to invite state help upon default.
Non performing loans are very high in Ghana. The industrial average for Bank NPLs is idealy 5%, but average NPL as at August, 2023 was 20%.
Between 2008 and 2022, average NPL in Ghana was 14.86% (The World Bank).
As at March 2022, Non performing loan ratio in India stood at 5.8%. Indeed, it was 2.3% in 2011(all time low). Their highest has been 14.7%(before criminalization), recorded in 1999.
In furtherance, Wilful loan default in mainland China (Honkong) is a crime(malicious Overdrafts) . China’s NPL is 1.6% as at September 2023, and is close to the local mean NPL rate over the years, save 2005(12.4%, before criminalization).
Wether a correlation exists between criminalization of loan and NPL levels is not investigated as far as I searched. I have not sighted one. I have not investigated it either.
Therefore, I limit myself to a qualitative analysis of the interaction that likely exists between the two variables (criminalization of loan default as independent variable, and NPL as dependent variable).
In India, it is a crime to default on your loan wilfully. The reserve Bank of India has a Grievance Redress Committee responsible for hearing and making a determination of a Wilful default, or default emanating from a lack of capacity.
Their guidelines for Wilfulness are the following:
1. Deliberate non payment despite adequate cash flow and good returns
2. Diversion of loan or funds. ie. Using the loan other than purposes for which it was granted.
3. Falsification of records
4. Disposal or transfer of collateral without the knowledge of the bank.
You will potentially suffer a non custodial sentence if found guilty.
1. You will be bared from participating in the capital market.
2. You cannot access any banking facility for 5 years to start a new venture.
3. You cannot be on the board of any company.
4.you cannot make an open offer when you are a Wilful loan defaulter.
This is punitive!
You have an obligation to pay your debts with Lincenced institutions. That obligation is a moral and godly one.
The effect of non performing loans on the economy is negatively significant. It constricts credit; banks will generally not be willing to grant credit to businesses and households. This will imply a slow economic growth and shrinked GDP.
The current arrangement between the Lender and the Borrower relative to default settlement is amateurish. It is crap, partly because it is not a crime for the borrower not to pay. He can literally tell the lender ‘I won’t pay’.
The borrower’s ‘skin is not in the game’, so she/he can afford to say so.
Even when the facility is collateralised (skin in the game), it is costly, unmerited time wasting, and sometimes a loss, to pursue repayment at the law court. The bench is either not aware or unconcerned about the impact of NPLs on economic growth.
HELP
Lenders need state help. The state must help. Loan default that is Wilful ought to be made a crime. Even in countries with low NPLs where defaults are not crime, state supported arrangements exist to actively support recovery. Like in Canada, a defaulter’s wage can be garnisheed to pay off a loan.
If we do not make it a crime, some borrowers will continue to tell lenders ‘mentua’ (I won’t pay), some will continue to make it a business of moving from one lending institution to the other to take loans they know they intend not to pay.
Lenders will also continue to charge between 40%-120% and above to make up for the ‘mentuas’.
Note: if your advice for lenders is to ensure borrower ‘skin in the game’, then I can only doubt the volume of lending(as a stock) that the economy can report.
Wogyea, Tua!
johnhogrey@gmail.com