The Bangladesh Bank has been giving opportunities to hide the actual image of the countrys banking sector by providing various concessions. Despite the concessions, defaulted loans have increased and created a record.
Capital deficit is higher than ever before. Even though loan demand has decreased, some banks need to borrow large sums from the Bangladesh Bank and the capital market every day.
Experts believe the banking sectors distress has increased due to years of policy relaxation. Most financial sector indices have declined.
Those concerned said the biggest indicator to understand the health of the banking sector is defaulted loans.
In recent years, the central bank has introduced various ways to show reduced defaulted loans. In the first six months of this year, defaulted loans increased by Tk 35,382 crore to Tk 1,56,039 crore at the end of last June.
It is 10.11 percent of total debt. The actual situation is worse than what is shown on paper for defaulted loans.
Debts not recovered after write-offs and rescheduling to comply with International Monetary Fund (IMF) conditions have also been identified as distressed in a central bank report. Till 2022, 25.58 percent of total debt of Tk 3,78,000 crore was distressed. Around Tk 14,253 crores have been re-registered in the first six months of this year.
Excluding newly rescheduled loans, stressed loans in the banking sector are now over Tk 4,13,000 crores, about 27 percent of total loans. As of last December, uncollected debt after foreclosure and rescheduling was over Tk 2,57,000 crore.
Former World Bank chief economist Zahid Hossain said the latest 2022 report shows distressed loans exceed 25 percent. After that, defaulted loans rose by over Tk 35,000 crore this year. Without exemptions, defaulted loans would have risen more. Loan non-repayment hampers new investment, slowing economic activity including weakening institutions. Public confidence is reduced, increasing capital deficits. Even a few years ago, most banks had excess liquidity. Now it has declined, mainly due to money leaving markets from dollar sales. Again, due to lack of confidence, deposit growth is decreasing.
Bankers said leniency in loan repayments and massive discounting have left the banking sector in dire straits.
Refinancing was once allowed for maximum 36 months with 10 to 30 percent down payment. But last year, loans with just 2.5 percent down payment could be refinanced in four installments for up to 29 years. After this, last year, breaking all records, Tk 63,720 crore of debt was rescheduled, shattering previous records. However, rescheduling culture with special consideration started from 2014, when loans were refinanced with only 5 percent down payment. The next year, a major Tk 500 crore debt restructuring opportunity was given.
In 2018, it was renewed for 12 years with just 2 percent down payment. The corona pandemic started amid such special facilities. During the corona period, no one defaulted in 2020 even if they didn pay a single installment. If someone paid 15 percent of next years installments, they could show as current. In 2022 and 2023, half installments are enough to seem regular. Thus the real banking picture is obscured.
A World Bank report said distressed bank loans are rising, with low provisioning rates. As of March 2023, only 58 percent of defaulted loans were provisioned for. Capital adequacy ratio has decreased due to lax regulations and weak supervision. Many banks face liquidity crises due to large dollar sales withdrawals, slow deposit growth, reduced remittances and alleged fraud.
Rising bad loans may worsen the weak financial sector and increase liquidity pressure. The agency suggested improving management and governance to reduce distressed loans and address some banks capital crises.
Overcoming financial sector weakness is important for economic growth.
A Bangladesh Bank official said the major banking issue now is loans under fake names and money laundering, reducing money flow. Though aware in many cases, the central bank faces pressure when acting. But previously, catching major irregularities brought rewards like gold medals.
Bankers said successive benefits have created willful defaulters who have money but use it elsewhere, citing policy support if pressured. They anticipate further benefits. However, many cannot pay due to the dollar crisis, high inflation and global crisis.
Economics Professor Mainul Islam said the central banks figures don reflect reality. Due to legal cases, actual defaulters are obscured. "If the actual figure was estimated and disclosed, it would exceed Tk 400,000 crore," he said.
