Banks can now transfer consumer loans directly to vendors

Bangladesh Bank (BB) has allowed banks to disburse certain consumer loans directly to vendors through electronic fund transfers, a move aimed at modernising loan settlement processes and reducing operational risks associated with paper-based transactions.

The central bank issued a circular yesterday, permitting scheduled banks to transfer loan proceeds electronically to vendors in the case of auto loans, housing finance, consumer durable loans and loans for professionals.

Previously, banks were required to make payments under these loan categories through pay orders or cheques issued in favour of vendors to ensure the proper utilisation of funds and prevent the diversion of loan proceeds.

According to the central bank, the integration of digital payment systems alongside traditional instruments will improve operational efficiency, eliminate settlement delays, reduce transaction costs and mitigate risks related to paper-based payment instruments.

The BB said digital disbursement would enable instantaneous fund transfers, accelerate asset delivery and create a more secure settlement process for banks, vendors and borrowers.

Under the new instructions, banks may transfer funds directly to a vendor’s account if it is maintained with the same bank.

If the vendor’s account is held with another scheduled bank, the disbursing bank may use the Real-Time Gross Settlement (RTGS) system to complete the payment, it added.

The central bank, however, reiterated that loan proceeds must not be credited to the borrower’s account or paid in cash unless specifically permitted under existing regulations.

To address potential risks arising from digital disbursement, BB directed banks to strengthen measures for managing operational, fraud, cybersecurity and third-party risks.

Banks will also remain responsible for ensuring that funds are transferred to the correct vendor.

The central bank clarified that electronic fund transfers would serve as an additional mode of payment and that all other provisions of its Prudential Regulations for Consumer Financing would remain unchanged.

The directive, issued under Section 45 of the Bank Company Act, 1991, came into effect immediately.