Deepak Adhya: Loan default culture now a great disease in Bangladesh. Most of our bank now face this bad culture of corruption. The country’s banking sector is currently undergoing a number of challenges such as lowering lending rate to a single digit, bringing down advance-deposit ratio, tackling corruption, ensuring good governance, maintaining adequate liquidity, reviving and retaining depositors’ confidence weakened by scams, frustrating deposit interest rate and rumors of bankruptcy, and recovering gigantic default loans. The biggest challenge, however, is the recovery of default loans.
The sector has been burdened with sky-high default loans for long. As of December last year, the total amount of outstanding loans was Tk 10.18 trillion (Tk 10,11,828 crore) out of which an amount of Tk 943.31 billion (Tk 94,331 crore) was classified (nonperforming) loans, according to the Bangladesh Bank report. The ratio of gross nonperforming loans (NPL) to the total outstanding loans of the banking sector stood at 9.32 per cent at the end of December, 2019. Such ratio has been swelling every year from 2011 to 2019 except 2013.
The country tops the list of loan default index in South Asia. Bangladesh’s default loan ratio was estimated at 11.4 per cent for 2019 in the World Bank’s latest ‘Global Economic Prospects’ report. It portrays the squandering culture of public money in the name of borrowing from the banking sector.
Banking regulators and analysts are prescribing remedies one after another. Formation of ‘Banking Commission’ and ‘Asset Management Company’ are the latest initiatives. But none seems to work. Default loan problem remains the most daunting challenge of the banking sector. Bankers are in search of remedies to default loans. No magic solution has emerged yet and there is no hope of finding a panacea overnight. The problem of default loans has turned into the cancer of the banking system.
| ব্যাংক, ব্যাংকার, ব্যাংকিং, অর্থনীতি ও ফাইন্যান্স বিষয়ক গুরুত্বপূর্ণ খবর, প্রতিবেদন, বিশেষ কলাম, বিনিয়োগ/ লোন, ডেবিট কার্ড, ক্রেডিট কার্ড, ফিনটেক, ব্যাংকের নিয়োগ বিজ্ঞপ্তি ও বাংলাদেশ ব্যাংকের সার্কুলারগুলোর আপডেট পেতে আমাদের অফিসিয়াল ফেসবুক পেজ 'ব্যাংকিং নিউজ', ফেসবুক গ্রুপ 'ব্যাংকিং ইনফরমেশন', 'লিংকডইন', 'টেলিগ্রাম চ্যানেল', 'ইন্সটাগ্রাম', 'টুইটার', 'ইউটিউব', 'হোয়াটসঅ্যাপ চ্যানেল' এবং 'গুগল নিউজ'-এ যুক্ত হয়ে সাথে থাকুন। |
Once banking was a top-ranking profession and bankers were acknowledged as symbol of trust and honesty. But in the current context, it has lost glory and unfortunately a few bankers had complicity with loan defaulters and plunderers of public money.
COST OF NPL:
Bankers took many strategic and legal recovery actions. Yet a big portion of loan is not coming back to banks, prolonging their agony and rendering multifarious impacts on the banks and the overall economy. They include:
1. A study shows that over three years, a 1.0 percentage point increase in the NPL ratio leads to a cumulative effect of about a 0.1 percentage point contraction of GDP (gross domestic product) growth, about a 1.5 percentage point decline in loans growth, and a 0.1 percentage point pickup in unemployment (Source: ADB Economics Working Paper Series No. 574 titled ‘Nonperforming Loans in Asia: Determinants and Macro financial Linkages’ authored by Junkyu Lee, Principal Economist and Peter Rosenkranz, Economist at the Economic Research and Regional Cooperation Department of the Asian Development Bank (ADB), March 2019).
2. Bank’s liquidity and profitability depend to a great extent on the recovery of its advance. Banks derive most of their income from the interest they charge on loans they disburse. Interest income is usually generated from performing loans. In view of this, when such loans end up as nonperforming, the financial strength of these banks get affected. Besides, there is a twin-effect of classified loans on the banking system: NPL stops bank’s earnings not only from NPL itself but also curtails earnings from regular loans; because, banks have to keep the interest earned from NPLs to their interest-suspense account, instead of taking it into profit account and a good amount of interest from regular loans (performing loans) has to be kept in provision as a cushion against both performing loans and nonperforming loans (NPL).
3. If the income of a bank is not adequate enough to cover the provisioning requirement as per Bangladesh Bank guidelines, it has to be set off from bank’s capital, which might result in capital erosion as well as shortfall of regulatory capital of the bank. Twelve scheduled banks suffered Tk 108 billion (Tk 10,797.87 crore) in provision shortfall at the end of December, 2019. At the same time, 12 banks also failed to maintain the minimum capital requirement, and faced a shortfall of over Tk 236.12 billion (Tk 23,612 crore).
4. In case of writing off of ‘bad and loss’ accounts, outstanding amount of the loan is adjusted by the profit of the bank to erase the account from bank’s balance sheet.
5. NPLs shrink the investment/lending scope as they ultimately hamper ability of the banks in granting further loans to respective applicants as well as to fresh applicants.
6. Delinquent loans adversely affect the ability of banks to cover all expenses – servicing interest to depositors, payment of employee salaries, government taxation etc., especially banks which tend to have large NPLs.
7. Banks usually declare dividend only after making the required provision at the rate up to 100 per cent for classified loans. Consequently, classified loans could have an adverse effect on shareholders’ earnings; because, provision for classified loans reduces the net profit of banks and consequently reduces the amount of dividends paid to shareholders.
8. Overburdened NPL threatens the survival of the bank because of continued loss and lack of public confidence and customers’ patronage.
9. Rise in NPL indicates lack of corporate governance in the banks, which may attract regulatory interference from Bangladesh Bank or the government in the form of dismissal of managing director, reconstitution or abolishment of board, appointment of observer or administrator, renaming of bank, ban on fresh lending, non-permission for expansion/opening of new branches etc.
10. NPL policy tends to reduce total loan portfolio of the banks, thus affecting the interest earnings on loans.
BANKS HAVE BECOME HOSTAGE OF WILLFUL DEFAULTERS:
The finance minister has recently announced that the government has decided to lower lending rate as it can’t bear the burden of default loans any more. But both ‘default loan control’ and ‘running of banks with profit’ are essential. Interest and survival of banks should be given priority or equal consideration at least.
Besides, lowering lending rate may reduce volume of default loans but not the number of defaulters; because, a good number of borrowers are willful defaulters and another faction of borrowers remain regular by using the rescheduling and restructuring tools. Section 5(GaGa) of the Banking Companies Act, 1991 and Banking Regulations and Policy Department (BRPD) Circular number 11 dated July 19, 2012 and several subsequent circulars of Bangladesh Bank (BB) defined ‘defaulter’; but neither any law nor BB has yet formally defined ‘willful or habitual defaulter’.
As a result, banks have actually become hostage to these disguised willful loan defaulters. With the present default loans amount, as many as 235 more banks can be set up with initial paid-up capital of Tk4.0 billion (Tk400 crore) each. This indicates how much and how deep the hemorrhage is sustained by our banking sector and the economy as a whole.
So a clear clause in law or a BB circular defining and categorizing willful or habitual defaulters should be in place so that banks can easily detect them. In addition to arresting fresh default on loans, there must be some quick healing strategies for existing default loans, like tackling loan default as a national and priority problem, showing zero tolerance to willful defaulters and scamsters, setting up special tribunal or separate bench for settling all pending money recovery suits within next 3 (three) years, issuing non-bailable arrest warrants to willful defaulters, declaring notorious defaulters as bankrupt and confiscate their business and assets by the government for the settlement of bank dues.
Writer: Deepak Adhya, Baker of Janata Bank Limited.
