Default Loans: Curse for the country
Today's banking sector is burdened with sky-high default loans. And, with the passage of time it has become the unturnable stone of the banking sector. As per Bangladesh Bank report, as of December last year, total outstanding loans of the banking sector was Tk 10,11,828 crore out of which Tk 94,331 crore was classified (nonperforming). That is, the ratio of gross nonperforming loans (NPL) to the total outstanding loans of the banking sector stood at 9.32 per cent at the end of December, 2019. In fact, in the recent past it has been swelling up every year from 2011 to 2019 with an only exception in 2013.
We always take pride in surpassing other nations in many development indexes. But it makes us neither proud nor happy when we hear that Bangladesh tops in default loans in South Asia. Among the South Asian countries, Bangladesh has the highest percentage of default loans--11.4 per cent as estimated for 2019 in the World Bank's latest 'Global Economic Prospects' report. It portrays the squandering culture of public money in the name of borrowing in banking sector.
Banking regulators and scholars are prescribing remedies one after another. Formation of 'Banking Commission' and 'Asset Management Company' are the latest ones. But none seems to be heading towards the intended destination. As a result, default loans problem still remains the much-and-long talked issue of the banking sector. Like many banking critics, bankers are also in search of remedies to default loans. But actually no magic remedies have emerged yet; and there is no hope of getting any panacea overnight to recover these massive and long-lived soured loans.
Indulged over the years and getting continued patronage from the political parties in power from time to time, default on loans has become an unstoppable and notorious culture of the country. With the passage of time, amount of default loans and number of defaulters are multiplying and defaming the banking sector as a bottomless basket and bankers as collaborators of public money embezzlers.
Like a long sustained disease turns into cancer, the incurable default loans problem has also transformed into the cancer of the banking sector and gradually devouring all its energy and thus crippling its moving power.
Once banking was a top ranking profession and bankers were acknowledged as symbol of trust and honesty. But in present context, preference for banking as a profession has downgraded and society's outlook towards bankers has downturned; and gradually bankers are being poured into the bucket of the hateful professionals. And, this is obviously for the few bankers being accomplices to loan defaulters and public money looters.
Actually default loans have turned into ocean; and, the common bankers are not getting any harbour to this default ocean. Despite taking many strategic and legal recovery actions by bankers, a big portion of loan is not coming back to bank aggravating and prolonging agony of bankers and rendering multifarious paralysing impacts on the banks and economy.
(i) A study shows that over 3 years, a 1 percentage point increase in the NPL ratio leads to a cumulative effect of about a 0.1 percentage point contraction of GDP growth, about a 1.5 percentage point decline in loans growth, and a 0.1 percentage point pickup in unemployment .
(ii) Bank's liquidity and profitability depend to a great extent on the recovery of its advance. Banks derive most of their income from the interest they charge on loans they disburse. Interest income is usually generated from performing loans. In view of this, when such loans end up as nonperforming, the financial strength of these banks get affected. Besides, there is a twin-effect of classified loans in the banking system.
(iii) If the income of a bank isn't adequate enough to cover the provisioning requirement as per Bangladesh Bank guidelines, it then has to be set off from bank's capital, which might result in capital erosion as well as shortfall of regulatory capital of the bank. Twelve scheduled banks suffered Tk 10,797.87 crore in provision shortfall at the end of December, 2019. At the same time, 12 banks also failed to maintain the minimum capital requirement, and faced a shortfall of over Tk 23,612 crore.(iv) In case of write-off of 'bad and loss' accounts, outstanding amount of the loan is adjusted by the profit of the bank to erase the account from bank's balance sheet.
(v) NPLs shrink the investment lending scope as they ultimately hamper the ability of the banks in granting further loans to respective applicants as well as to fresh applicants.
(vi) Delinquent loans adversely affect the ability of banks to cover all expenses-- servicing interest to depositors, payment of employee salaries, govt taxation etc, especially banks which tend to have large NPLs.
(vii) Banks usually declare dividend only after making the required provision at the rate up to 100 per cent for classified loans. Consequently, classified loans could have an adverse effect on shareholders' earnings; because, provision for classified loans reduces the net profit of banks and consequently reduces the amount of dividends paid to shareholders.(viii) Default scams erode the image and positioning of the bank. For instance, Hallmark scam has become a defamatory example for Sonali Bank Limited.
(ix) Overburdened NPL threatens the survival of the bank because of continued loss and lack of public confidence and customers' patronage.
(x) Rise in NPL indicates lack of corporate governance in the banks, which may attract regulatory interference from Bangladesh Bank or govt in the form of dismissal of managing director, reconstitution or abolishment of board, appointment of observer or administrator, renaming of bank, ban on fresh lending, non permission for expansion/opening of new branches etc.
(xi) NPL policy tends to reduce total loan portfolio of the banks, thus affects the interest earnings on loans.
(xii) Credit and CAMELS rating of the bank worsen.
(xiii) If loans become bad, banks will fail to make profit and cannot serve interest to depositors and meet their expenses. Ultimately they will incur loss and there will be bank failures.
(xiv) Most banks are unable to remain competitive in the turbulent financial sector/industry due to high default rate.
(xv) NPL scams demolish the reputation and goodwill, and thus negatively affect the share price of the bank.
(xvi) Large NPLs could lead to dwindling confidence level of both depositors and foreign investors who may adopt strange position against the banks which might result in a negative signal and liquidity problem.
(xvii) The cost of doing business is high in our country in comparison with many other countries in the region due to high lending rate. Banks do not earn interest income from nonperforming loans. And to recuperate this loss they charge high interest on fresh lending.
(xviii) The loan default culture in Bangladesh is so acute that the banking system needs billions of taka capital injection from taxpayers' money every year when it needs billions of dollars of investment for basic infrastructure development for achieving the high economic status.
(xix) Apprehending bankruptcy and deposit loss, customers will try to withdraw their entire deposits from banks and there may be a run on banks. If similar situation happens in all banks, the entire economy will be affected.
(xx) At the end of last FY 2018-19 size of GDP stood at Tk 25,42,482 crore. NPL of the banking sector is eating up 3.71 per cent of this GDP. Three Padma Bridges can be constructed with this NPL amount. It is estimated that GDP will go up by as much as 1.20 per cent (Source: Wikipedia) and GDP growth by 2.20 per cent (Source: BBS) once Padma Bridge is completed.
(xxi) Default loan culture of the country gives an alert to the international business communities that Bangladeshi businessmen are not creditworthy and lack in business integrity; and thus shrink their business tie with international traders.(xxii) A bank may face its ultimate fate. When NPL reaches at an alarming point accompanied by corruption, bad governance the bank may even face the fate of merger with other strong banks or FIs. Even the govt may takeover the bank. And, if everything fails the bank may ultimately be liquidated.
Recently the finance minister commented that the govt has decided to lower lending rate as it can't bear the burden of default loans any more. But it is also true that both 'default loan control' and 'running of banks with profit' are essential. Destroying banks for saving the defaulters would never be a right move. Interest and survival of banks should be given priority or equal consideration at least.
Besides, lowering lending rate may reduce volume of default loans but not the number of defaulters; because, a good number of borrowers are wilful defaulters and another faction of borrowers remain regular by using the reschedule and restructure tools. Section 5(GaGa) of the Banking Companies Act, 1991 and BRPD Circular number 11 dated July 19, 2012 and several subsequent circulars of Bangladesh Bank (BB) defined 'defaulter'; but neither any law nor BB has yet formally defined 'wilful or habitual defaulter'.
As a result, banks have actually become hostage to these disguised wilful loan defaulters. With the present default loans amount 235 more banks can be set up with initial paid-up capital of Tk.400 crore each. This indicates how much and how deep the haemorrhage is sustained by our banking sector and economy as a whole.
So a clear clause in law or a BB circular defining and categorising wilful or habitual defaulters must be in place so that banks can easily detect wilful or habitual defaulters. In addition to arrest fresh default on loans, there must be some quick healing strategies for existing default loans, like tackling loan default as a national and priority problem, showing zero tolerance to wilful defaulters and scamsters, setting up special tribunal or separate bench for settling all pending money recovery suits within next 03 years, issuing non-bailable arrest warrants to wilful defaulters, declaring the notorious defaulters bankrupt and croaking their business and assets by govt for the settlement of bank dues.
Default loans have curtailed money flow in the economy and growth in the private sector. Thus it is diminishing employment opportunity and pulling back GDP and development growth of the country. So tackling the defaulters with an iron hand is must to give the banking sector and economy a better shape and a sustainable pathway to make the country a developed one by 2041.
The writer is banker