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Dhaka Tribune

300% spike in NPLs in a decade

Weak BB, absence of political directions, bad governance instrumental for skyrocketing toxic loans

Update : 29 Nov 2018, 10:12 PM

Non-Performing loans (NPLs) in the banking sector have seen a whopping rise of 300% in the last decade as bad governance plagued the financial sector in absence of a strong central bank, and political direction.

The culture of impunity, political interference in approving loans and professional ineptness of bankers to deal  with the pressing issue have aggravated the already battered banking industry, economists and senior bankers said.

In reining the trend of the uncontrolled toxic loans, they urged the government to stop trade facilities such as cash incentives and tax waivers in favour of loan defaulters to effectively create pressure on them.

In 2008, total NPLs in the country's banking sector was Tk22,481 crore, and stood at Tk89,340 crore as of June 2018, up by Tk66,860 crore or 297%, Bangladesh Bank (BB) data showed. 

Default loans were 10.41% of the country’s total loan disbursement of Tk8,58,522 crore as of June 2018.

Of the Tk89,340 crore, NPLs of State-owned Commercial Banks(SCBs) were Tk42,852 crore, state-owned specialized banks were Tk5,241 crore, private commercial banks - Tk38,975 crore and NPLs of foreign commercial banks wereTk 2,271 core. 

Why default loans go unabated

Talking to the Dhaka Tribune, experts blamed the lack of good governance, corruption, political interference in approving loans and culture of impunity for the endless journey of NPLs in the sector.

“In the last one decade, the country encountered no big disaster that could have made business people unable to repay the loans. The economic growth rate increased and there had been macroeconomic stability in the country,” Zahid Hussain, lead economist of the World Bank, Bangladesh Office told the Dhaka Tribune. 

But the number of willful defaulters has increased. This is because of the lack of good governance in the banking sector, culture of impunity, political interference in approving loans and inefficiency of bankers in dealing with the issue, said the economist.     

He said the banks cannot avoid their faults and responsibilities for the soaring default loans as they are giving the loan approvals without having proper diligence and not considering the repayment capacity of borrowers.

Former Bangladesh Bank (BB) governor Salehuddin Ahmed said it is the prime duty of the banks to justify the eligibility of a company in getting loans as well as its capacity to repay. But this is absent in approving loans as thebankers are sometimes involved in the corruption and give loans resorting to irregularities.

Besides, he said: “The bankers often approve loans of big amounts without taking into consideration thecollateral. In many cases, banks provide loans to bank defaulters bypassing the BB’s directions”.    

“So, banks are largely responsible for the rise in default loans.”

However, the central bank has opined that due to economic growth, the default loans increased as the amount of loans disbursement went up to meet the demands of funds from businesses.  

“Loan disbursement has increased in line with the growth of the country’s economy. Since the disbursement has gone up, the default loans also went up proportionately,” Bangladesh Bank spokesperson Sirajul Islam told the Dhaka Tribune.

Besides, the state owned banks have to provide loans to specialized sectors such as jute, leather and agriculture for the development of these sectors. Sometimes, they become unable to repay and banks cannot go for stern action to recover considering the sensitivities, added Islam.

Syed Mahbubur Rahman, president, Association of Bankers, Bangladesh (ABB) said in many cases, bank managements have to approve loans when directed by board members of banks; some bankers join hands with them.

How to get rid of default loans

Since lack of good governance and corruption are blamed largely for the default culture, business communities as well as experts want punitive action and suspension of trade facilities to defaulted firms.

In restrain the default loans, the government has to stop trade facilities such as cash incentives against export and tax waiversto defaulters to create pressure on the willful defaulters, said Zahid Hussain.

In addition, the government has to increase the institutional capacities of ArthaRinAdalat, BB and professional capacitiesof bankersinvolved in the loan process.

There are numerous cases pending with the ArthaRinAdalat due to shortage of manpower, which makesthe process lengthy and the banks suffer.

As a regulator, BB is very strict and has taken stern action such as removing corrupt officials from banks. On the other hand, against the default loans, the banks have to keep provision, creating pressure on the bank’s profit abilities, said the BB spokesperson. 

“Banks should be made accountable for their roles in default loans, while surveillance and supervision of the central bank have to be strengthened,” Md. Jashim Uddin, FBCCI director told the Dhaka Tribune.

Impacts on business and economy

Stakeholders, particularly business leaders, economists and bankers are very anxious regardingthe unusual rise in default loans as it hurts the economic growth and squeezes fund flow.

If the financial sector remains weak or there exists capital scarcity, businesses would not march forward. In Bangladesh, finance is a problem in expanding businesses or to start a new ventures, said Zahid.

“Default loans increase cost of credit as the banks have to keep provisioning against it, which cast shadows on new investments and new entrepreneurs, pushing the cost of doing business,” Dhaka Chamber of Commerce and Industry (DCCI) president Abul Kasem Khan told the Dhaka Tribune.  

The default loans has a definite adverse impact on the business environment of a country since there is no better alternativesto secure local fund, said Khan.

In addition, the default loans squeezes fund flows into the banking sector as huge amount of money remained stuck in the hands of defaulters, discouraging good borrowers and depositors alike.

It is the people’s money that helps the country by providing funds for the business. Crisis in banks makepeople fear in depositing with banks, which in turn reduces fund flow, FBCCI president Shafiul Islam Mohiuddin told the Dhaka Tribune.

As a result, banks have to offer attractive rates to rope in depositors, which eventually shoot up bank lending rates. Therefore to keep the business in operation, the government and the central bank must take stern action against the willful defaulters, said Shafiul.

The apex trade body leader urged the banks to help defaulters, who are victims of disaster or any untoward incidents.       

SCBs holds largest share in default loans

State Owned Commercial Banks (SCBs) are the largest contributors to the default loans.  

According to the latest dataup to June 2018, default loans at six SCBs stood at Tk42,852 crore, which is 47.96% of total default loans of Tk89,340 crore in the sector. 

Among the SCBs, Sonali Bank tops the chart with default loans of Tk13,139 crore, followed by Janata Bank with Tk9,879 crore.

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