Wednesday | 15 January 2025 | Reg No- 06
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Wednesday | 15 January 2025 | Epaper

Where to stop loan rescheduling

Published : Saturday, 5 August, 2017 at 12:00 AM  Count : 323
Haradhan Ganguly
*** ''In FY 2017 the share of banking sector in GDP was 2.91 per cent. The contribution of other financial institutions including non-banking financial institutions and insurances was only 0.5 per cent of GDP. So in no way financial sectors could be kept behind the progress of other sectors.'' ***

It is discomfort to hear that banks have rescheduled loans amounting to about TK 70,400 crore of troubled borrowers over the last five years putting extra pressure on the financial sectors. Many sectors of the economy where showing vibrancy, banks are beset with conundrum. The banking sector is said to be the main source of funds for fuelling economic growth through short term investment.
But politically empowered big guns of all periods have been set to engulf banks. Today banks, as institution, are totally helpless to powers. As a result it is made bound to be relaxed in recovery efforts and becoming prey to financial fraudulences, political influence and lack of governance. Time has already been passing out to review, to think and rethink why the scenario of rescheduling of loans, non-performing of loans (NPL) and the extent of recapitalization are so high and ever growing in this region and not to speak of various financial scams that was ensued particularly in some state owned commercial banks (SCBs).
Very recently, Bangladesh Bank (BB) unveiled Financial stability Report where it is said, the ever growing rescheduling of loans have created extra stress on the banking system in recent times as this constitute a significant part of the banks' total loan portfolio. We are anxious at this. Our economy is becoming a role model to others but lacking governance in financial sectors is going contradictory.
BB's report said at the end of December last year, the loans that had been rescheduled at least once reached 10.5 per cent of the banks' total outstanding loans. Of the total outstanding loans of TK 673,720 crore, 75.8 per cent are unclassified. Along with over-leverage, poor diligence, influenced lending, fraud and negligence in compliance with risk management practices were treated to have been the results for the rise in rescheduled loans. At least report thinks like this.
Data shows, in 2012, about TK 5,500 crore of loans were rescheduled and from 2013 onwards the amount ranged from TK 12000 crore to TK 19000 crore. Beyond the regular rescheduling in 2015, some large loans, of more than TK 500 crore were restructured for the long term.
Many borrowers who took long term loans are now unable to repay the loans properly. The piling up of rescheduled loans seems to be a matter of concern, though the banks are expected to be cooperative in assisting viable customers to sustain during difficult times by keeping their loans performing.
Despite expected rescheduling, the high amount of rescheduled loans in the industrial sector, particularly garment and textile, in conjunction with the lack of required follow-up may create downside risks for the banking system as a whole, the report said. Most loans were rescheduled in the garment and textile sector: 22.7 per cent. Of the total rescheduled loans, private banks accounted for 51 per cent, state owned commercial banks 42 per cent, specialized banks 6 per cent and foreign banks 1 per cent.
There are some efforts to ensure an effective banking system and to bring SCBs and DFIs under strict monitoring and control mechanism. The introduction of the Bank Company (Amended) Act 2013, formation of risk management committee, implementation of credit and risk management training, spelling out the terms and references and responsibilities of the board of directors and a number of reform measures at the administrative level are among those.
Despite various initiatives taken by the central bank, the amount of NPLs has piled up. During January- March 2017 period it rose to TK 73,409 crore from TK 62,170 crore in the preceding quarter. NPL in the banking sector has a general pattern observed during the last few years which shows that towards December of each year NPL comes down, but starts to rise afterwards. This is due to bank's effort to clean up their balance sheets at the end of the year.
In December 2016, the NPL was 9.2 per cent and within the next three months it rose to 10.5 per cent. During January - March 2017 period, the total amount of NPLs I six SCBs went up to TK. 35,717 crore from TK 31,026 crore in the previous quarter. CPD shows, in regional comparison Sri Lanka and India has much lower NPL than Bangladesh. Pakistan's position is more deteriorating than Bangladesh. Here also relaxed recovery effort, financial fraudulences, political influence and lack of governance worked strongly behind ever expanding NPL in Bangladesh.
Increased NPL and lower credit to the domestic sector have hit the profitability of banks through it increased in December 2016 compared to June 2016. Decreasing trend of profitability has been still continuing. As we told before that the government has been providing generous support to SCBs in order to improve their balance sheet.
In recent years certain amount is earmarked in the national budget to make for the losses of the SCBs. In the budget of FY2017, the government had allocated a recapitalization fund equivalent to TK 2000 crore in order to meet the capital shortage of banks created by loan defaults.
But the default loan situation of the SCBs has not improved. For the last three consecutive years, i.e. FY2014, FY 2015 and FY 2016, the allocated budget funds to meet the capital shortfalls was about TK 5000 crore for each fiscal year. Such recapitalization funds were not much of a help since they could only improve the balance sheet of the ailing banks but not the overall loan default situation. Our question is it is the peoples' money.
Why it is to be given to banks for their existence for which people are not accountable. Concerned banks for their misdeeds must bear the brunt of the end result. Budgetary allocation for spoon feeding the banks is morally questionable. In a resource constraint country like Bangladesh, instead of recapitalization of banks, this resource could otherwise be utilized for the social sector where allocation falls short of the requirement. Say for education and health sector.
A sound financial sector is the key to a sustained economic development for any country as it facilitates the financial mechanisms between borrowers and lenders, helps expedite capital accumulation and makes use of resources into productive sectors.
In Bangladesh, the contribution of the financial sector has increased over the years. In FY2011, financial sector's share in GDP was 2.99 per cent at constant price which has increased to 3.41 per cent in FY2017 (BBS 2017). Commercial banks play the dominant role, possessing almost 80 per cent of the financial sector.
In FY 2017 the share of banking sector in GDP was 2.91 per cent. The contribution of other financial institutions including non-banking financial institutions and insurances was only 0.5 per cent of GDP. So in no way financial sectors could be kept behind the progress of other sectors.
So they must get rid of default culture and shun recurring loan rescheduling practices. Only power blessing could not be the criterion Credit worthiness. All criteria must be judged free from pressure and fear. For that decision makers of financial institutions need full autonomy. Otherwise carrying coals to Newcastle will not be stopped.

The writer is a freelance contributor


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