Can IMF's strict conditions finally bring Bangladesh's default loans down?

IMF also recommended that the definition of NPLs should be as per international standards

With the end of the post-pandemic policy relaxation involving loan repayments, better known as loan moratorium, it seems there is no way to bring default loans under control. 

But one of the conditions for obtaining the International Monetary Fund's (IMF) $4.5 billion loan was to reduce the amount of these loans in the banking sector.

IMF delegates also recommended that the definition of non-performing loans (NPLs) should be amended and raised to international standards.

According to international standards, the default loan ratio of up to 3% is deemed tolerable, while in Bangladesh, this ratio is about 9%.

But according to Bangladesh Bank's latest data, six state-owned banks -- Sonali, Janata, Agrani, Rupali, BDBL and Basic Bank -- have a default rate of 28.66% of their total disbursement. 

This has become a major headache for the overall banking sector, as even the IMF team asked Bangladesh Bank what strategy they had to bring down state-owned banks' bad loans down from 28.66% to 10%. 

According to central bank data, as of last September, default loans amounted to Tk134,386 crore, of which the default loans of six state-owned banks were more than Tk60,000 crore. 

Basic Bank accounted for the majority of those default loans, at 59%. 

BDBL's defaulted loan was 40%, Janata Bank had 28%, Agrani Bank 19%, Rupali Bank 17.5% and Sonali Bank 17%.

What experts say

Economists and data analyses said that the country's banking sector was not at ease with rising defaulted loans, especially after the Covid-induced loan moratorium ended. 

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told Dhaka Tribune: “Defaulted loans have risen sharply since January after the moratorium facility was withdrawn by the central bank. As a matter of fact, economic reforms are more necessary for us, because if money comes, it will be spent again.”

He was, however, wary about the reduction target of 10% defaulted loans given by the IMF. 

“In developed countries, the rate of default loans is 1-2%. For countries like Bangladesh, it is adequate to be 3-4%. I don't know under what consideration the topic of 10% came up.”

The former IMF economist also explained: “The IMF loan will actually give a small relief from the ongoing crisis on the one hand. If an overall positive economic reform happens, it will be more sustainable for our economy. In that case, this IMF loan will be even better for our macroeconomy.”

Former Bangladesh Bank governor Salehuddin Ahmed, however, said that the IMF advice was nothing new.

It is unfortunate for the government to overlook the burning issues like bad loans and good governance despite repeated warnings by economists in the past, he lamented.

Data also revealed that NPLs soared to Tk125,257 crore in FY22 against Tk99,205 crore in FY21.

Regarding the continuous rise of NPLs, Fahmida Khatun, executive director Centre for Policy Dialogue (CPD) said: “It has been argued that NPLs increased due to global economic challenges, high inflation and post-pandemic circumstances -- making it difficult for borrowers to pay back loans. This logic is very weak, since NPLs have been high for several years. Also, there was a moratorium on loan classification during the pandemic, meaning the current level of NPLs may actually be an underestimation.”

“Clearly, the problem is deep-rooted. Lack of good governance and accountability have encouraged willful defaulters – people with power and political backing have taken advantage of the system to get away with swiping depositors' money while policymakers not only look the other way but treat big-time borrowers with respect. If this does not change, the problem of NPLs may never disappear from Bangladesh,” she also added.

A team headed by Rahul Anand from IMF held a two-week-long visit in Dhaka from October 26 to November 9 as part of providing a loan of $4.5 billion to Bangladesh. 

One of the major conditions that the multinational lenders visiting team discussed with Bangladesh Bank regarding the development of the banking sector was the issue of rising defaulted loans.

At those meetings, Bangladesh Bank assured them that by June 2024 they will be able to reduce the defaulted loans.