Non-performing loans
Loan defaults usually make up a small percentage of total loans. But in recent times, the situation has become rather complicated and we are seeing an unprecedented surge in non-performing loans (NPL) – a fancy term for loans that are never repaid. When a borrower defaults after taking a loan and the lending FI, despite having the legal authority, is not able to recover the loan, that loan is classified as NPL. Instead of the standard transmission model described earlier, with clearly defined transmission mechanisms, there is now another transmission mechanism in practice, which is destablising our banking sector. The public pays taxes to the government in exchange for public goods and services such as roads and highways, national power grids, education and healthcare, social security, etc. But what they don’t know is, the government is using a huge chunk of this tax money to pay for non-performing loans. As such, it is an example of a one-way monetary transmission from taxpayers directly to defaulters and fraudsters.Revolving doors in banking
We know that when people deposit their money in banks, a portion of that money is lent by the banks to borrowers. In other words, depositors are indirectly lending to borrowers. If this were a direct loan from lenders to borrowers, the consequences of default would be straight-forward, as the lender would collect the money themselves. But in the financial system, banks use their own profits to pay for NPLs and if that does not cover the amount, they transfer the remaining debt to the next year. When this becomes unsustainable, the bank is driven out of the market. Whatever the case, banks always ensure repayment to depositors, so the general public is not immediately affected by NPLs and are, therefore, not very concerned about NPLs that FIs are incurring. The situation becomes interesting when the owners of financial institutions are appointed in government office – a phenomenon that is often described as a “revolving door.” When that happens, ailing FIs incurring unsustainably high losses from NPLs are artificially preserved in the market – with the help of taxpayers’ money, but unbeknownst to the average tax-payer. They just write-off the NPL amount from their balance sheet and cover the losses from public money. So, what is actually happening is that, general people are paying indirectly for NPLs, but since the transmission of money to defaulters is not visible to the general public, they are not aware of it.Bad for the country
The devastating aspect of NPL is that it takes away from essential public services that all Bangladeshi citizens have a right to. The public is basically being cheated out of their money by being forced to pay for NPLs, when that money should have been used to pay for much-needed infrastructural development, public parks, healthcare, and better education, to name a few. For our country, the impact of such transmissions is huge. We are not even getting the minimum amount of benefits -- such as roads free from breakage and traffic jams, drainage systems capable of draining the rain water, mosquito killing initiatives for preventing Chikungunya, basic utilities such as gas and electricity at a stable and minimum price and several other mentionable services. According to a report by The Asian Age that came out in February of last year, the amount written off by state-owned banks for NPL was a staggering Tk29,956 crore. This amount is greater than our entire education budget and quite close to our budget for roads and bridges for the year 2017-18. And by now, that amount has multiplied. To put that whopping figure in perspective, it is enough to pay for another Padma Bridge, establish more than five metro-rail projects like the one in Dhaka across the whole country, and upgrade our road and drainage systems. In other words, it could have ameliorated the sufferings of millions of Bangladeshis. The general public will not be ignorant of this unscrupulous one-way transmission mechanism for long; when they figure out that their hard-earned income is not being used properly, tax evasion will be even more common, jeopardising our overall development. It will further erode the people’s trust in the government and destablise our nation.Poor integrity of public banks
At present, the total amount of default loans in the country stands at about Tk80,000 crore, most of which comes from only six banks – all of them state-owned. Since NPLs reduce the lending institution’s profitability, private banks are very careful about lending, especially here in Bangladesh where it is difficult to establish the credit-worthiness of borrowers. On the contrary, public banks have been reckless with the people’s deposits. Private banks here tend to under-finance so as not to risk losing their customers’ deposits, resulting in the large amount of excess liquidity in the banking system. Consequently, real entrepreneurs are not getting their share of financial access, which constitutes a great loss for the economy. How do we rectify this dreadful one-way transmission mechanism? I can think of two ways: One is to strengthen the legal system over any other political or executive system at least for the financial sector (we can see such examples in our neighbouring countries) so that borrowers can be held responsible. The other is not to lend to defaulters in the first place. This is very do-able but it depends entirely on the integrity and willingness of the concerned parties. The private banks in our country have proven this fact. The difference in the percentage of NPL in private versus public banks (5.68% and 28.56% respectively) clearly indicates each group’s level of integrity and willingness. State-owned banks just need to follow the strategies used by private banks to stabilise the whole system. As a country, we are already facing the effects of this one-way transmission of money from the general public to defaulters. It is high time we broke free from our shackles and all we need is the mindset to follow the models that are already practiced and proven effective.Md Shakil Ahmad is the head of advisory services, United Finance Limited.
