The blank cheque could be filled out except for the date. The creditor could keep the cheque as a sort of guarantee. The creditor then could fill in the date any time and present it to the bank

--By Ganesh Prasad Lath

While gossiping over tea with some friends from banking and business, one of them joked, “Financial institutions have been enjoying all sorts of privileges like Jamindars (landlords) and in contrast, those in the business sector are forced to remain like ignorant people from the 18th Century.” As soon as he said this, a tug-of-war between right and wrong began.

Some of my friends said, that’s right. It’s true. Bankers are like modern Jamindars with all kinds of muscle power given to them by the government to collect the money from their borrowers. On the contrary, people who work in business are like feudal era farmers, always working day and night to hand over the maximum portion of their earnings to Jamindars. And in case, he/she loses those earnings, he/she has to hand over everything to the Jamindars.

Some of my other friends disagreed. They argued that bankers too are businessmen since they collect the investments and re-invest in businesses. “It’s their duty to protect someone’s money,” they said.“Plus, both sectors are working with the same laws and have similar privileges. If the business sector faces problems with bad debtors, then banking too isn’t free from defaulters. In fact, it’s high time the business sector too come together to form systematic transactions.”

Things then got heated and more interesting. Various points of view and ideas were exchanged about defaulters and bad debtors. One friend stated, “Bringing defaulters within the shackles of the law is totally convenient for bankers. They would simply report them to the Credit Information Bureau (associated with NRB) and the defaulters would be black listed. All properties, whether mortgaged or not mortgaged would be frozen. Bank transactions would be stopped. Defaulters would be then sent to jail.” 

Then a business friend of mine said, “There is a huge chain of movement in how cash moves in the marketplace. Banks collect money from the marketplace in the form of shares, debentures and deposits. Banks then disburse that money to business houses etc. in the form of loans. Business houses then invest that in customers in the shape of credit sales. There is strong enough NRB monitoring and directives and laws to protect bank deposits and Investments. But unfortunately there is no such monitoring or rules to protect credit sales. As a result, the frequency of bad debts in credit sales is rapidly increasing. Ultimately, this trend is hampering free and fair business and is badly impacting the country’s entire economy.”

Another one of my banking friends replied, “You businessmen are always crying your eyes out. You guys never try to find a solution. There are lots of ways to bring bad debtors inside the shackles of the law in the business sector too.” Then another subject came up- How to discourage bad debts in business too. 

Someone recommended bank guarantees. Someone else suggested sales through L/C terms. Another person brought up the idea of post-dated cheques. All the ideas were old, tried and tested. 

Then another friend came up with a fresh idea. He said suppliers could ask for blank cheques from customers valid for six months. The blank cheque could be filled out except for the date. The creditor could keep the cheque as a sort of guarantee. The creditor could then fill in the date at any time and present it to the bank. If the cheque bounces three times, then the person who drew the cheque would be black listed.

Finally, our talk came to an end concluding that the policies applied to bring bad debtors within the shackles of the law were inadequate; although banking saw good protection in this regard. 

Our tea was over. But the subject of bad debts still haunted this columnist. Someone truly once said, thinking generates ideas and ideas generate policies. An idea struck this columnist too, as to how to reduce the frequency of bad debts in credit sales. To understand this columnist’s idea, we should here take the bank Loan borrower as Party A and the Credit Purchaser (debtors of Party A) as Party B. 

Nowadays, it is mandatory for Party A to present a periodical Aging Report of Due List to their bankers. In case, Party A fails to pay back the loan amount to the bank, the authority to collect money from Party B (debtors of Party A) will be shifted automatically to the same bank. Apart from the mortgage of properties, this kind of provision also seems strong enough to secure a bank’s investment. But in reality, it’s not performing at all.

To make such a kind of provision effective in the real sense, the Nepal Rastra Bank (NRB) has to pass a simple rule. 
As soon as this solution is executed, incidents of bad debts of Party A would be slashed down in a dramatic way. In addition, the banking sector’s investments too would be additionally safe and secure. NRB just has to declare that Party B (debtor or customer), who has been enjoying credit purchase facility from Party A (creditor or seller), would be Black Listed, in case of non-payment of their credit purchases. Such an action can be divided into three phases.

In the first phase, the bankers can list the names of those in Party B, whose debts are crossing the time limit. The bankers can keep such types of Party B at UOC (Under Observation Category) and will notify it to the concerned Party B. 

In the second phase, the bankers can sort list some debtors from the UOC list, whose over dues are at a critical stage, and despite notification there is no sign of proper response or action. The bankers can put such names in the DDC (Doubtful Debts Category) and will forward the report to the CIB (Credit Information Bureau) notifying the concerned Party B.

In the third phase, the bankers can recommend the CIB to declare some debtors from the DDC list as Black Listed Debtors. Such black listed parties from Party B would be entitled to face the same norms and consequences as other black listed parties.

At first glance, such an idea sounds almost implausible. However, as soon as we make it clearer, it becomes more workable and possible. There might be hurdles or side effects when starting it. The banking sector could see such an idea as an extra burden. Businesses could see a turbulent time for Party A and Party B. Of course, the idea still has a lot of room for growth. But still, it should be noted and discussed. And definitely there will be agreeable ways out. Let’s be optimistic. 

Anyway, this proves that gossiping over tea isn’t entirely worthless. Sometimes, it produces workable ideas.

The writer is member of the Industrial Promotion Board.