Looking back 2019: Nothing tames bad loans

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Non-performing loans rose by Tk22,377cr

All measures of generosity on the part of the government — from nominal down payment installment, single digit interest to extended repayment time — have failed to arrest the steady growth of stressed assets in the banking sector. 

The non-performing loans (NPLs) rose by Tk22,376.91 crore during January to September this year, according to Bangladesh Bank data. 

In January, Finance Minister AHM Mustafa Kamal had made a strong-willed announcement that the figure of defaulted bank loan would not increase any further, not even “by a single taka”.

But defying all these, the amount of stressed loan soared to Tk1,16,288.31 crore as of September this year, the amount being the highest in the country’s history.  

The NPLs account for 11.99% of the total outstanding loans in banks, up from 10.30% in December 2018.

Senior bankers and economists think the non-performing loans are rising as the government and the central bank have continued to encourage defaulters by being lenient.

Talking to Dhaka Tribune, former Bangladesh Bank governor Salehuddin Ahmed said: “The rescheduling policies adopted recently by the government and the central bank for banking sector went wrong. The defaulters were given leverage by these policies. Good borrowers are now feeling discouraged to pay debts.”

The central bank must be rigorous when it comes to reducing the default loans and all the facilities extended to the defaulters should be scrapped immediately, he suggested. 

Besides, he mentioned, it was the prime responsibility of the banks to look into the eligibility of a company to get loans as well as its capacity to repay. 

But in practice, while approving loans, these things were not considered actively as the bankers were sometimes involved in corruption and extended loans resorting to irregularities, Salehuddin Ahmed commented.

As per finance ministry instruction, on May 16, the central bank unveiled a huge waiver for loan defaulters to reduce the high amount of non-performing loans. As per the new policy, defaulters are allowed to reschedule classified loans by providing only 2% down payment, instead of the existing 10-50%.  

A maximum 9% interest rate is set on the rescheduled loans, lower than the existing 12-16%. The time for repayment was also generously set at 10 years with a grace period of another year, according to the policy. 

According to Bangladesh Bank data, NPLs of banks rose by Tk16,962 crore during January to March period; by Tk1,551 crore in April to June quarter and by Tk3,863.14 crore in July to September quarter. 

The rise in default loans created crisis in the private sector, bringing down the credit growth in the sector alarmingly in recent times, said World Bank, Bangladesh former lead economist Zahid Hussain.

Private sector credit growth dropped to a nine-year low at 10.04% in October, according to the central bank data. 

Zahid Hussain said that in the last decade, the country did not encounter any disaster that could have prevented business people from repaying their loans.

“But despite economic growth and economic stability in the country, the number of willful defaulters increased,” the economist noted.

He said the banks in no way could avoid the blame and responsibility for the soaring defaulted loans, as they were approving loans without “due diligence” or “considering the repayment capacity of borrowers.”

In December 1 this year, Finance Minister had said the high interest rate was responsible for the rising trend of default loans. 

“If the interest rate goes down, the amount of non-performing loans will also come down,” he had said at a meeting with chairmen and managing directors of all the banks.

On the day, the central bank formed a seven-member committee headed by SM Moniruzzaman, a deputy governor of the Bangladesh Bank, to bring down the interest rate to single digits following an instruction from the finance ministry. 

However, Zahid Hussain suggested that the government and the central bank rather focus more on reducing the high amount of defaulted loans. 

Interest rates on lending would be reduced if the high amount of defaulted loans was lessened, he added.