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Default loans put our banking sector at jeopardy

Published : Wednesday, 24 January, 2024 at 12:00 AM  Count : 1708
Md Abdul Mannan
The resilience of any nations economy is intricately linked to the health of its banking sector, serving as the lifeblood that fuels growth and development. In the case of Bangladesh, however, the banking sector finds itself navigating a formidable array of challenges, with the most formidable being the relentless battle against default loans.

The banking sector in Bangladesh witnessed a grim milestone in June, with non-performing loans (NPLs) soaring to a staggering Tk1560.39 billion. The withdrawal of lenient central bank policies, a sluggish business environment, and intentional non-payments contributed to this alarming record, marking the highest NPL level in the nations history. The latest data from the Bangladesh Bank revealed that NPLs constituted 10.11 percent of the total credits disbursed, reaching a disconcerting peak compared to the previous high of Tk1343.96 billion in the third quarter of the previous year. In just three months leading to June, an additional Tk244.19 billion in loans turned sour, painting a bleak picture for the banking landscape.

To curb this trend numerous remedies have been proposed, from the establishment of a Banking Commission to the creation of an Asset Management Company. However, these initiatives have failed to stem the tide of default loans, which has metastasized into the cancer of the banking system.

Once revered, the banking profession has lost its luster, tarnished by complicity between a few bankers and defaulters who have pilfered public funds. The cost of nonperforming loans is pervasive, impacting the economy on multiple fronts:

Economic contraction: Studies reveal that a 1.0 percentage point increase in the NPL ratio over three years leads to a 0.1 percentage point contraction in GDP growth, a 1.5 percentage point decline in loan growth, and a 0.1 percentage point increase in unemployment.

Financial strength erosion: The recovery of advances is pivotal for a banks liquidity and profitability. Nonperforming loans not only diminish interest income but also compel banks to set aside funds for provisions, leading to capital erosion and a shortfall in regulatory capital.

Profitability and dividends: Delinquent loans impede a banks ability to declare dividends, impacting shareholders earnings. The interest earned from nonperforming loans is kept in a suspense account, reducing net profits and shareholder returns.

Governance and regulatory scrutiny: High NPLs indicate a lack of corporate governance, inviting regulatory interference such as the dismissal of executives, board reconstitution, or even the renaming and restriction of banks.

Bank image and share price: Default scams tarnish a banks reputation, affecting share prices and eroding goodwill. Large NPLs undermine confidence among depositors and foreign investors.

Impact on GDP and development: The colossal NPL amount, equivalent to 3.71 per cent of GDP, could have funded significant infrastructure projects. Tackling default loans is crucial for fostering economic growth and achieving development goals.

International perception: Default loan malaise signals to the international business community that Bangladeshi businessmen lack creditworthiness and business integrity, potentially damaging international business relations.

Systemic risks: Default by the largest borrowers can undermine the soundness of multiple banks, leading to potential undercapitalization and even mergers or takeovers by stronger entities.

The banks, once pillars of trust and honesty, now find themselves hostages to willful defaulters. While the governments recent decision to increase policy rate by 25 basis points to 8.00 percent from 7.75 percent. The core issues of default loan control and maintaining profitability must not be overlooked.

A comprehensive definition of wilful or habitual defaulter is essential to empower banks in identifying and addressing these hidden culprits. To stem the hemorrhage inflicted by default loans, decisive actions are imperative:

Legal framework for wilful defaulters: A clear legal clause defining and categorizing wilful or habitual defaulters is necessary. This will enable banks to detect and address such individuals effectively.

National strategy for loan recovery: Default loans should be treated as a national priority, with a dedicated tribunal or bench established for swift resolution of pending money recovery suits within the next three years.

Zero tolerance for defaulters: Wilful defaulters and scamsters should face non-bailable arrest warrants, bankruptcy declarations, and government confiscation of assets for settling bank dues.

Addressing default loans is not just a financial imperative but a strategic move for fostering economic growth, job creation, and overall national development.

Steps that may help curbing non-performing loans: Consider refraining from diverting borrowed funds to different business ventures or purposes, as this prevalent practice contributes to the rise in non-performing loans. Mitigating such actions will play a pivotal role in maintaining financial stability and minimizing risks associated with loan defaults.

Prioritize the development of business acumen, emphasizing the need for borrowers to enhance their skills in managing and growing their enterprises. This not only fosters a more sustainable business environment but also aids in the prudent utilization of borrowed funds, aligning them with the intended purpose.

Implement rigorous and transparent auditing practices to ensure accountability and maintain clear financial records. This measure is instrumental in fostering trust between borrowers and financial institutions, ultimately contributing to the reduction of financial discrepancies and potential loan defaults.

Advocate for the generation of equity from profits, instilling a sense of professionalism in business operations. By reinvesting profits back into the business, borrowers not only strengthen their financial position but also demonstrate a commitment to long-term success, positively influencing their relationships with banks and financial partners.

The writer is executive vice president and head of credit division, SBAC Bank Ltd


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