Default loans have shot up over four times in the last seven years suggesting that the buildup is going on unabated causing big erosion in the banking system. To speak precisely it shot up by 26.38 percent or to Tk 19,608 crore by the end of December 2018 from Tk 22,644 crore by the end of December 2011.
The non-performing loan (NPL) was Tk 74,303 crore by the end of December 2017. It is spilling up defying all efforts to put a brake on the defaulting process. Many believe it is directly linked to the country’s political process and unless there is the political will to end misuse the loan sanctioning process, there is hardly any way to come out of it.
Analysts blame poor lending system without proper loan evaluation, lack of corporate governance and the government’s interference in banks to make loan to people having close link to the ruling party for the rise in toxic loans in recent times.
“This is not a sudden development. The situation has emerged from lending irregularities and loan scams mainly occurring in the last seven to eight years,” Khondker Ibrahim Khaled, a former deputy governor of the central bank is reported to have said.
He said a large amount of loans had turned bad loans long ago, but many banks concealed it by rescheduling the debts over and over to avoid to be identified to protect the bank’s image. At one stage, even the rescheduling facility offered by the central bank got exhausted, pushing NPLs higher last year, he said. There is a growing fear the trend may continue.
Bad loans can be rescheduled for a maximum of three times as per the central bank’s instruction.
Khaled says both private and state-run banks have repeatedly offered loans to the unqualified borrowers. Some directors of private banks have also pursued boards to sanction the loans, playing a major role in the deterioration of the financial health of the lenders.
Among the banks, the state-run lenders are facing the worst because of repeated government intervention. The government forms the boards and appoints managing directors and directors to the state lenders. Such people can’t ignore the recommendations of the ruling party leaders or pressure by business to sanction loan bringing troubles to those banks, he said.
Classified loans at the state-run lenders stood at 57 percent of the NPLs in the banking sector. The eight state-run banks’ default loans totaled Tk 53,484 crore last year, up 25.10 percent year-on-year.
Khaled said the central bank should be given the power to dissolve and constitute the boards of the state owned banks by way of amending the Bank Companies Act 1991, with a view to improving their financial governance.
But there is no positive indication that the upward movement of the default loans will come to an end this year nor attempts are visible to bring change in many the boards and in their loan sanctioning system. , he said.
Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh and managing directors of Dhaka Bank said the classified loans had gone up last year but came down in the final quarter of the year.
He said it was a regular phenomenon. The defaulted loans go down in the last quarter of a year as banks put in a strong effort to recover loans to manage a healthy profit.