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21 July 2024

Defaulters pose tough challenge to overcome economic crisis

Sanjay Adhikari Rony

Published: 03:40, 12 February 2024

Update: 03:41, 12 February 2024

Defaulters pose tough challenge to overcome economic crisis

Photo : Messenger

The ever-growing list of loan defaulters has emerged as a significant hurdle to overcome the economic crisis plaguing the country at present.

Economists and observers are of the view that a number of banks are on the brink of collapse due to a high percentage of loans not being repaid, which is why, Bangladesh Bank (BB) being the country’s banking sector regulator is facing mounting pressure from various international agencies to address this pressing issue.

When Bangladesh sought assistance from the International Monetary Fund (IMF) back in 2022 to alleviate the country’s dollar crisis, one of the prerequisites set forth was a reduction in defaulted loans and the implementation of punitive measures against the defaulters.

While talking to The Daily Messenger, a number of economists attributed the collapse of the country’s banking system to the prevalence of defaulted loans.

Reports suggest that a considerable portion of these defaulted loans has been siphoned out of the country illegally. Consequently, banks are grappling with an existential crisis, exacerbating the fragility of the nation's overall economic condition.

In the latest BB report, it has been revealed that during the first nine months of 2023, approximately Tk 19,000 crore worth of defaulted loans were rescheduled in the banking sector, which marks a significant increase of 63.41 percent compared to the same period in 2022.

Initially, the opportunity to reschedule or regularize defaulted loans was intended to assist affected entrepreneurs. However, it's observed that both old and new defaulters are now regularizing their loans without having to make a one-time deposit or with only a nominal deposit. Economists and bankers speculate that commercial banks are increasingly opting for rescheduling following the relaxation of rescheduling policies.

To put it into perspective, defaulted loans amounting to Tk 11,512 crore were rescheduled during the first nine months of 2022. However, this figure surged to Tk 18,812 crore during the same period in 2023, indicating an increase of Tk 7,300 crore or 63.41 percent.

Previously, regularising defaulted loans required depositing 10 to 30 percent of the outstanding amount. However, the current policy allows for regularisation with deposits ranging from 2.5 to 4.5 percent. Moreover, while the maximum repayment period for these loans used to be two years, it has now been extended to 5 to 8 years now. Additionally, the authority to approve loan regularization under special facilities, previously held by the central bank, has been delegated to individual banks.

The relaxation of loan rescheduling policies has led banks to offer customers a wide array of facilities, resulting in a significant abnormal increase in the amount of rescheduled loans within the banking sector, as noted by economists.

AB Mirza Azizul Islam, former financial advisor to the caretaker government, expressed concern to The Daily Messenger, stating that many banks are exploiting the opportunity for loan rescheduling.

He further elaborated that while the banks may appear to be in slightly better condition on the surface, the underlying reality remains unchanged. It appears that such initiatives have been undertaken to showcase improvements in the banking system to organizations like the IMF or other donor agencies.

However, Azizul Islam cautioned that the ultimate outcome may not be favorable.

According to the BB data, the relaxation of the rescheduling policy occurred on July 18, 2022. Within 15 months following this relaxation, Tk 42,131 crore of defaulted loans were rescheduled. In contrast, only Tk 19,628 crore was rescheduled in the 15 months preceding the relaxation. This indicates a staggering increase of Tk 22,502 crore in the amount of rescheduled loans.

Additionally, an interest waiver totaling Tk 308 crore was granted in the third quarter of the previous year (July-September) against rescheduled loans. This amount was slightly lower at Tk 384 crore in the preceding three months (April-June). According to Bangladesh Bank's report, the total amount of disbursed loans to the banking sector by the end of September last year was Tk 15,65,195 crore. Of this, Tk 1,55,397 crore, or 9.93 percent, had defaulted.

Dr. Salehuddin Ahmed, former governor of Bangladesh Bank, has raised concerns about the increasing number of defaulted loans within the banking sector.

He told The Daily Messenger that a significant amount of loans is being written off, surpassing the existing level of defaulted loans, yet these are not being disclosed in the balance sheets as defaulted loans. Additionally, defaulted loans are being rescheduled for different durations without being classified as defaulters, further exacerbating the problem.

In response to this pressing issue, Bangladesh Bank has unveiled a roadmap aimed at reducing non-performing loans (NPLs) by 2026. Under this roadmap, defaulters will face restrictions on engaging in new business activities and will be deprived of various privileges such as purchasing land, houses, and cars.

The roadmap, approved during Bangladesh Bank’s Board of Directors meeting on February 4, focuses on reducing classified loans in the country's banking sector and ensuring corporate governance.

According to the roadmap, the objective is to decrease the nonperforming loan (NPL) ratio of the banking sector to below 8 percent by June 2026. This entails bringing down the non-performing loans of state-owned banks to below 10 percent and those of private banks to below 5 percent.

Furthermore, the roadmap outlines the formation of a specialized unit called the 'Foreclosed Debt Recovery Unit,' which will operate under the direct supervision of the Managing Director or Chief Executive of the Bank. This unit will be responsible for the recovery of defaulted loans. Additionally, the performance evaluation of bank managing directors will be tied to the achievement of debt recovery targets outlined in the roadmap.

A senior official from Bangladesh Bank, speaking anonymously to The Daily Messenger, emphasized that the extension of the additional period for loan repayment will not be prolonged. This decision aims to alleviate the liquidity crisis faced by banks. Furthermore, revisions will be made to the definition of bank overdue loans, and necessary policies will be devised and implemented to address deliberate defaulters. Incentives, such as special allowances, will be introduced for officers who successfully recover defaulted loans.

Professor Wahiduddin Mahmud, an advisor to the former caretaker government and a renowned economist, expressed concerns about the precarious state of the country's financial institutions.

He attributed the deterioration of Bangladesh's international credit rating to weaknesses within the financial sector. Mahmud highlighted the importance of adhering to established roadmaps and criticised the influence of vested interests in deviating from these plans.

He emphasised the need for understanding the rationale behind existing roadmaps before considering revisions, cautioning that reimagining them without this understanding would be ineffective.

Messenger/Disha