Default loans: Cancer of the banking system
The country's banking sector is currently undergoing a number of challenges such as lowering lending rate to a single digit, bringing down advance-deposit ratio, tackling corruption, ensuring good governance, maintaining adequate liquidity, reviving and retaining depositors' confidence weakened by scams, frustrating deposit interest rate and rumors of bankruptcy, and recovering gigantic default loans. The biggest challenge, however, is the recovery of default loans.
The sector has been burdened with sky-high default loans for long. As of December last year, the total amount of outstanding loans was Tk 10.18 trillion (Tk 10,11,828 crore) out of which an amount of Tk 943.31 billion (Tk 94,331 crore) was classified (nonperforming) loans, according to the Bangladesh Bank report. 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. Such ratio has been swelling every year from 2011 to 2019 except 2013.
The country tops the list of loan default index in South Asia. Bangladesh's default loan ratio was estimated at 11.4 per cent 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 from the banking sector.
Banking regulators and analysts are prescribing remedies one after another. Formation of 'Banking Commission' and 'Asset Management Company' are the latest initiatives. But none seems to work. Default loan problem remains the most daunting challenge of the banking sector. Bankers are in search of remedies to default loans. No magic solution has emerged yet and there is no hope of finding a panacea overnight. The problem of default loans has turned into the cancer of the banking system.
Once banking was a top-ranking profession and bankers were acknowledged as symbol of trust and honesty. But in the current context, it has lost glory and unfortunately a few bankers had complicity with loan defaulters and plunderers of public money.
COST OF NPL: Bankers took many strategic and legal recovery actions. Yet a big portion of loan is not coming back to banks, prolonging their agony and rendering multifarious impacts on the banks and the overall economy. They include:
(i) A study shows that over three years, a 1.0 percentage point increase in the NPL ratio leads to a cumulative effect of about a 0.1 percentage point contraction of GDP (gross domestic product) growth, about a 1.5 percentage point decline in loans growth, and a 0.1 percentage point pickup in unemployment (Source: ADB Economics Working Paper Series No. 574 titled 'Nonperforming Loans in Asia: Determinants and Macrofinancial Linkages' authored by Junkyu Lee, Principal Economist and Peter Rosenkranz, Economist at the Economic Research and Regional Cooperation Department of the Asian Development Bank (ADB), March 2019).
(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 on the banking system: NPL stops bank's earnings not only from NPL itself but also curtails earnings from regular loans; because, banks have to keep the interest earned from NPLs to their interest-suspense account, instead of taking it into profit account and a good amount of interest from regular loans (performing loans) has to be kept in provision as a cushion against both performing loans and nonperforming loans (NPL).
(iii) If the income of a bank is not adequate enough to cover the provisioning requirement as per Bangladesh Bank guidelines, it 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 108 billion (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 236.12 billion (Tk 23,612 crore).
(iv) In case of writing 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 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, government taxation etc., especially banks which tend to have large NPLs.
(vii) Banks usually declare dividend only after mak.