THE government is going to implement a new loan rescheduling policy effective from early May 2019 in which ‘honest’ loan defaulters are to enjoy loan rescheduling at 7 per cent simple interest on a quarterly basis for 12 years by paying only 2 per cent in down payment.
The objective of the government is, according to the finance minister, to bail out ‘honest’ defaulters. But it will be difficult to find out who ‘honest’ defaulters are. Journalists are reported to have asked the finance minister on March 25 at the briefing, after the meeting with high government officials, how the bank would find out ‘honest’ defaulters. He answered the question with two questions — taking loans for two or 10 years, but not repaying, am I good? Making exports 10 times but not repatriating any money, am I good? He also said that there would be special audits to decide which of the borrowers are honest or dishonest.
There are now 59 scheduled banks in Bangladesh. The number of banks depends on the size of the economy, financial capacity, deposit and investment growth of a country. The number of banks in 2009 was enough for to serve the economy to Bangladesh. That time, the amount of default loan was Tk 22,481crore and now with the growth of scheduled banks, the amount of default loan increased to Tk 93,911 crore as of December 2018.
There is high concentration of banks and bank branches in Bangladesh. According to CPD, 2018:
Mexico has only 47 commercial banks even though the gross domestic product of Mexico in 2016 was 7.4 times larger than that of Bangladesh in 2016 and the total surface area of Mexico is about 13.2 times larger than that of Bangladesh.
Globally, if micro-states having a land area less than 1,000 square kilometres are disregarded, Bangladesh has the eight highest geographic concentration of commercial bank branches.
In 2016, Bangladesh had 75 branches of commercial banks per 1,000 square kilometres of land, which was the highest in the South Asia region.
It can be said that an increase in the number of banks is a reason for an increase in the number of wilful defaulters. Now, almost every large borrower enjoys excess limit with different banks compared with their actual need, which is why some borrowers do not repay the loan from business or own source to banks; they rather adjust one bank’s loan by borrowing from other.
Most of the bank defaulters in Bangladesh are wilful defaulters. They become defaulters when they divert the fund to purchase asset at home and abroad. Complete and full monitoring of the borrower for the private banks sometimes is not possible because of shortage of human resources.
The government could pay attention to the increase in the number of branches, directors and human resources for the banks, instead of increasing the number of banks, to strengthen the monitoring of borrowers as well as to strengthen the banking sector.
New, the loan rescheduling policy will increase the number of wilful defaulters. The reason is that the defaulters have already stopped negotiation with the banks and are waiting for the new policy. When bankers are asking the borrowers to repay the default loans, they are requesting a wait till May 2019 for the implementation of new policy. They will pay keeping to the policy at deducted interest rate.
But will they actually pay the default loans? History shows that after implementing the loan rescheduling policy in 2015, only two, out of 11, groups of borrowers repaid loans regularly. Moreover, the recent talk of loan rescheduling policy decreases loan recovery for the March 2019 quarter, because defaulters are waiting for May’s loan rescheduling policy.
In addition to that, we have seen the election year 2018 with less loan recovery. The total non-performing loan recovery with written-off loan recovery was Tk 11,700.22 crore in 2018 and it was Tk 10607.33 crore in 2017. It was only Tk 1092.89 crore higher in 2018 than in 2017, as Bangladesh Bank data show. But the expectations were more.
The new loan rescheduling policy may turn good borrowers into wilful defaulters. The policy may discourage them to be remain good borrowers. Ultimately, they will see that loan repayment in due time will incur much cost than to being defaulter as the payment of default loan costs 7 per cent simple interest rate, instead of 9 per cent. Only 2 per cent in down payment will not be a big deal for them. Moreover, banks will incur loss for 7 per cent interest rate as the average cost of fund for the bank was 10 per cent at the time of lending.
Banks have to strengthen loan monitoring system, increase customers call/visit, warn customers before running into special mention accounts, make allout efforts to recover dues they run into special mention accounts and increase close monitoring to see the use of fund in this critical situation.
The government can restructure or make faster the legal system to recover bank dues instead of implementing the new loan rescheduling policy. The government can establish a special tribunal and reduce the time for the completion of a case in courts.
Wilful defaulters are under strong punishment abroad. The government snatches passports of them, disconnects utilities to their houses, publishes names in newspapers. The Bangladesh government can follow them to give a better economy as banks are the lifeblood of the economy of a country.
Md Wise Al Islam Raju is a senior executive officer at Bank Asia Limited.
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