The persistent increase in bad loans has crippled Bangladesh’s banking sector, mostly affecting the state-owned banks.
As of June this year, the amount of accumulated default loans stood at around Tk1,19,000 crore, which is 12% of Bangladesh’s GDP. To give a more vivid parallel, the sum is enough to construct four Padma bridges.
Economists and bank officials said the rising trend of bad debts might paralyse the banking sector and the economy. Analysts have suggested taking effective measures to rein in default loans.
Experts say loan default is an indispensable part of the banking sector as there are ups and downs in debtors' businesses and sometimes there are other problems in the loan recovery process.
They expressed concerns about defaulters who intentionally refuse to make payment on loans in spite of their abilities. This type of defaulters contributed to almost 85% of the total default loans until June 30, Bangladesh Bank (BB) data show.
Bangladesh's loan default scenario
The defaulted amount rose to Tk74,148cr on June 30, from Tk62,172cr in December last year, BB data show. The defaulted amount is 10.14% of the Tk731,000cr credit disbursed by 57 commercial banks.
The default loans of eight state-run and specialised commercial banks amounted to Tk40,098cr, while it was Tk31,729cr for private banks and Tk2,321cr for foreign commercial banks.
Experts said the figure would have been much higher if badloans had not been written off. As of June 30, banks have written off loans of around Tk45,000cr. It means, the accumulated default amount at the end of June stood around Tk119,000cr.
The defaulted loan is 12.56% of Bangladesh's GDP which is Tk947,542cr as per the constant price. The constant price of Indian GDP is $27,400cr while its defaulted loan is $15,400cr, 7.43% of the GDP.
The amount of unpaid loans has been increasing by leaps and bounds since 2011 when the total defaulted loan was Tk22,644cr, an amount equal to 6.12% of the total disbursed credit till that period.
State-owned banks have always had the largest amount of defaulted loans. But in recent times, bad debts of private banks are rising alarmingly.
In the first six months this year, the defaulted loans of 40 private banks increased by Tk2,002cr. At the end of last year, private banks’ defaulted loan was Tk29,727cr.
More loan default this year
Loan defaults in the small and medium enterprise (SME) sector have been low, BB data showed. But, the amount of defaulted loans could rise this year as floods have affected the low-lying regions of the country, experts said.
The central bank issued a circular on August 24, relaxing loan rescheduling rules and suspending loan recovery for six months from farmers and SMEs in the flood-hit areas.
According to the circular, banks will relax conditions for down payments in case of rescheduling farm loans, SME and cottage loans and micro credit. Debtors will get six months to pay instalments after rescheduling their loans.
Moreover, affected borrowers will be allowed to get fresh loans without repaying existing dues. Banks will provide new loans to farmers and small entrepreneurs under the relaxed policy until June 30 next year.
Reasons behind the default
Economists and bankers said the major reason behind default loan is the distribution of credit on political consideration, which made it quite difficult to recover the credits.
AB Mirza Azizul Islam, former finance adviser to the caretaker government, told the Dhaka Tribune: “Lack of good governance is behind the increase in default loans. For this, a large number of habituated defaulters affiliated with political parties take loans and the banks failed to recover them.”
Besides political affiliation, experts also blamed the culture of impunity, abuse of power in loan disbursement, weakness of existing laws and lack of technical expertise that help defaulters swindle money from banks.
“Default loan is on the rise since bankers did not maintain rules and regulations while disbursing and recovering loans,” Islam said. “Some vested quarters are manipulating existing laws to take loans and turn into defaulters.”
Managing Director and Chief Executive Officer of Rupali Bank Md Ataur Rahman Prodhan told the Dhaka Tribune: “In recent times, default loans have risen but the number of defaulters has decreased as we are more cautious in disbursing loans.”
He further clarified that BB had asked banks to include previously excluded defaulters in the list, making the list appear longer.
Speaking about the weaknesses of existing laws, he said, “If we sue any defaulter, that person files a writ petition against us. When the court rejects the appeal, he can file the writ again. This is a hindrance towards recovering default loans.”
Bankers also blamed the bank management. They noted that in most of the default loan-hit banks, the chairmen, MDs and directors were found abusing their power in distributing loans.
As the director of a private bank cannot take loan from his bank, he sets up a syndicate with directors from another bank and they grant each other big amounts of loan through their banks. Rules and regulations are flouted and they take the loans to be defaulters. They also siphon off the money, accrding to bankers.
“If you look at the default-hit state-owned banks’ previous chairmen or MDs, you will see that they sanctioned the defaulted loans the most,” said former BB deputy governor Khandakar Ibrahim Khaled.
He also blamed the government which offered rescheduling and restructuring facilities for default loans, saying these steps encouraged debtors not to repay the loans.
About 10% of the total bank loans were rescheduled in 2016, according to BB's Financial Stability Report.
Finance Minister AMA Muhith recently said bankers were responsible for loan defaults as they always tried to show their clients as defaulters to avoid being held accountable for loan defaults.
“When a client approaches a bank for loan, what comes first to the bankers’ minds is how to show him or her as a loan defaulter. The bankers set terms and conditions in such a way that the client becomes a defaulter. Every bank does it to avoid being held responsible for loan defaults. This is a very bad culture in our banking sector,” he said.
Chairman of the Association of Bankers, Bangladesh (ABB) Anis A Khan, also the managing director of Mutual Trust Bank, rejected the allegation. “It’s not true,” he told the Dhaka Tribune. “We have declared war against default loans. What can we do if businesses do not pay back the debt? We cannot arrest them. Many of the businesses fled the country after taking big amount of credit from banks.”
Bankers said the banks do not have enough technical expertise to properly analyse the loan files.
“Banks lack technical expertise in analysing eligibilities of individuals or companies seeking loans. Many banks do not even go through the Credit Information Bureau report to check eligibility of a client. Corruption in approving loans is another factor. The borrowers evade some of the conditions in exchange for money,” Research Director of the Centre for Policy Dialogue (CPD) Khondaker Golam Moazzem said.
Bankers said the defaulters were not being punished as the bankruptcy court was out of commission and this encouraged people to become debt dodgers.
Impact of default loans
Experts say default loans hit the banks’ profit, shrink the scope of business expansion and thwart plans for job creation.
Banks cannot turn savings into loanable funds as they have to set aside the amount equivalent to bad loans as provision. As a result, banks’ costs of funds rise while lending rates go higher and the deposit interest rates go down.
According to BB data, the average lending rate at the end of June this year stood at 9.46%, while the average interest rate on bank deposit stood at 4.84%.
Mirza Azizul said, “Default loans create trouble in money and share markets. Banks' shareholders are deprived of profit as banks have to fund provision to make up losses incurred by defaulted loans.”
Banks also have to face capital shortfall due to defaulted loans. The situation is awful in state-owned banks that require injection of capital from public money to remain functional.
BB data showed that in June this year, the total capital in the banking system was Tk89,959cr, up from Tk 84,424 crore in March this year. Of the amount, eight public banks had a capital shortfall of Tk12,683cr.
The government injected Tk13,705cr as recapitalisation fund into the state-owned banks from FY2009-10 to FY2016-17, all of it was the taxpayers’ money, according to a Centre for Policy Dialogue report.
The Finance Minister proposed to allocate Tk2,000cr for recapitalisation during 2017-18 fiscal.
Due to defaulted loans, banks are now afraid to issue big and long term loans, leading to exceeding liquidity in the banking sector. Banks currently have an excess liquidity of Tk126,000cr, according BB.
How to get rid of the curse?
Stakeholders have long been demanding reform in the financial sector to bring accuracy, accountability and good governance as well as to rein in the loan default culture.
Bad loan keeps rising despite government steps like loan rescheduling and restructuring facilities.
Experts observed that these measures are insufficient and stressed good governance in the banking sector, amending existing laws, improving expertise and ensuring punishment of the defaulters.
Bangladesh can follow India's example, they suggested. India is planning to make loan default a criminal offence and has set an example by getting back a defaulter from abroad through diplomatic channel.
Director General of Bangladesh Institute of Bank Management (BIBM) Dr Toufic Ahmad Choudhury told the Dhaka Tribune: “Good governance will not be fully established in the banking sector unless people like former BASIC Bank chairman Sheikh Abdul Hye Bacchu are punished for corruption.”
“Bangladesh’s Artha Rin Adalat Ain (Financial Loan Court Act) needs to be upgraded so that no one can take advantage of procrastination and escape unharmed. Bangladesh can declare defaulters bankrupt but it must have transparent and proper law in this regard,” CPD's Dr Khondaker Golam Moazzem said.
Rupali Bank MD Prodhan said: “We need to modernise the laws related to realising default loans.
“Political consideration in loan disbursement has to be stopped as 85% of the defaulted loans were distributed based on political consideration.”
Mirza Azizul told the Dhaka Tribune: “It is very difficult to come out of the bad culture of default loans in the absence of political will from the political parties.”
Latest BB data showed that most of the defaulted loans are big. BB Governor Fazle Kabir said, “Banking sector has to come out of the default loan culture for the sake of maintaining stability in the financial sector.”
He directed bankers to give priority to SME loans to reduce the ratio of large loans in the total credit disbursement.
BB Deputy Governor SK Sur Chowdhury asked banks to appoint good lawyers to take legal actions against big loan defaulters.
Is there any hope?
Though most of the loan defaulters are always affiliated with the party in power, it is very hard for the government to stem default loan culture, said experts.
Former BB governor Khaled said: “Political will is important to end this practice. The incumbent government apparently has no intention of stopping this like its predecessors.”
Economists, too, stressed the need for political decision to come out of the loan default culture. There is a very little scope to end the culture in near future as big businesses are involved in such anomalies, they added.
“In India, the Modi government has taken steps to stabilise the financial sector soon after coming to power. It was impossible before the election year,” an economist from one of the country’s leading independent think-tanks told the Dhaka Tribune.
“In Bangladesh's context, the time to bell the cat is gone. One has to understand the political economy in this regard,” he added.