NON-PERFORMING loans have become an overarching threat to the economy of Bangladesh. The plundering of money from banks is a common phenomenon in the financial sector these days. As of June 2019, the total amount of defaulted loans in the banking sector, according to the central bank, stood at 11.7 per cent of all the loans disbursed, which was 10.41 per cent in the corresponding period the year before. By the end of the 2018–19 financial year, non-performing loans stood at 4.43 per cent of the gross domestic product. In other words, if the defaulted loans were tightly controlled, the GDP growth rate would have been 4.43 per cent higher, a local think tank has claimed.
Apparently, the banking sector is in deep trouble as the number of defaulted loans is continuously rising. Due to the excessive amount of classified loans, many banks do not have the required amount of liquidity to carry out their operations. In the past financial year, the amount of sanctioned loans grew by 1.01 per cent in comparison with an increase of 0.84 per cent in deposits. Besides, the call money rate climbed to 5 per cent from 2.01 per cent in the same period, indicating that a liquidity crisis in the banking sector is on the surge. Several commercial banks and non-bank financial institutions are strangled to deposit crisis against their extended credits. Accordingly, increased borrowing from the call money market on a daily basis is pushing the inter-bank call money rate further higher.
Lately, deposits are injected into certain banks through government initiatives, which are not at all conducive to the sector. It is, rather, highly likely that underperforming banks would be further incentivised. To free the sector of the debt-ridden cycle, rules for loan classification have been relaxed. The overdue period, for instance, for non-performing loans to be classified as bad has been increased from 9 to 12 months. A special policy has been issued for rescheduling loans and a record number of loans have been rescheduled by the scheduled banks. It should be noted that while the prevailing interest rate has been 12–16 per cent, a maximum of 9 per cent is set to charge for the rescheduled loans.
As a result, both unintentional and wilful defaulters become motivated to discontinue with loan repayment. Moreover, this undue advantage to the defaulters has a ripple effect on the whole banking sector. Banks see a further decline in liquidity leading to reduced capacity to extend new loans. The window dressing has also a deleterious effect on international trade in honouring payment against the letters of credit and in losing trust in the eyes of foreign banks. Furthermore, the daunted depositors may start withdrawing savings, worsening the liquidity crisis. Thus, non-performing loans cannot be reduced through provisional and discounted measures. Incidentally, just a while ago, the government has instructed the banks to lower the lending rate to a single-digit, altering the market mechanism that is yet to be implemented.
Disappointingly, the long-standing and irresponsible non-repayment culture has reached a catastrophic level because of habitual loan defaulters. This trend of deliberate delinquency started with the tendency to become bank owners by robbing public money during the 1990s and has evolved more and more to date. Unsurprisingly, the family-led fragile democratic governments/parties have been quite successful in transforming the then thousand dollar misappropriation into a scale of billions. An interesting and, perhaps, the most plausible explanation could be the rising number of businessmen-turned-lawmakers in the parliament, coupled with their explicit political links to the governing agencies of the banks. This unholy alliance between political and business elite is paving the way for crony capitalism, crippling both the private and state-run financial institutions thwarting the development of market-led rational capitalism.
In fact, the central bank as a regulatory authority is virtually impaired to control the rush of non-performing loans because of the absence of a standard corporate governance practice. Ignoring the central bank’s reservation, the government has given approval to commercial banks, one after another, on political considerations. Moreover, the board of directors of those banks was formed on political terms. Subsequently, they overlooked the prescribed procedure while sanctioning loans and stuck up with a large portfolio, which is growing incessantly. What is more worrisome is that a large portion of the defaulted money has been smuggled abroad for years. The ramification of toxic loans in the economy is, therefore, far more severe than that can be predicted.
Given the situation, where the top-notch deliberate defaulters hold key positions in the state machine, where embezzling Tk 400 million from a state-owned bank by the bank chair does not warrant even a minimal reproach, where an individual industrialist can have ownership of a number of private banks, and where more than 60 per cent of the lawmakers are businessmen majority of whom are delinquent borrowers, recommending measures to restore sound corporate governance for streamlining the banking system would be a mere suggestion unless the statecraft truly intends to do so.
Ikhtiar Mohammad is a public policy enthusiast.
Want stories like this in your inbox?
Sign up to exclusive daily email
More Stories from Opinion