Relieving the economy of non-performing loans

The central bank's latest report on defaulted loans, though alarming, underscores the urgent need to devise ways for rescuing the struggling banking sector. Bangladesh Bank data reveal that by the end of June this year, non-performing loans (NPLs) had surged to Tk 2.11 trillion, representing 12.56 per cent of the total Tk 16.83 trillion in disbursed loans. This marks the highest ratio of non-performing loans to total disbursed loans in the past 16 years. Till June last year, default loans stood at Tk 1.56 trillion, BB data showed. These loans soared by over Tk 290 billion in three months from March 2024 when the volume of classified loans was Tk 1.82 trillion.

No wonder, the major share of the NPL burden falls on state-owned commercial banks (SCBs). The volume of outstanding loans of the SCBs stood over Tk 3.13 trillion until June this year, of which Tk 1.02 trillion or 32.77 per cent got defaulted. The volume of such default loans surged by 5.77 percentage points in June from 27 per cent recorded over the March-end period. As regards the private commercial banks (PCBs), their share of NPL increased by 0.35 percentage points to 7.94 per cent or Tk 992 billion against their disbursed loans worth Tk 12.59 trillion. The share of NPL of foreign commercial banks (FCBs) dropped to 4.74 per cent (Tk 32.29 billion) from 5.20 per cent against their outstanding loans of Tk 681 billion until June.

Bankers and economists, however, are of the opinion that the actual size of the stressed assets in banks would be much higher than the NPL amount if the volumes of loan rescheduling, under-trial disputed loans, and write-offs are taken into account. According to a former economist of the local World Bank office, non-performing loan figure represents the lower bound of distressed assets in the banking system. The reported amount is based on lax NPL-recognition criterion, where loans are considered overdue after 180 days or more. The amount would be significantly higher if the 90-day rule was applied. The fact that the NPL amount is so high even under this lenient criterion exposes the severity of the problem.

For years discussion on mounting bad loans and scams were in the public domain with no proactive or reactive move to rein in the repeated and blatant violation of banking practices. It is now pretty well known that the system itself offered numerous opportunities for unscrupulous borrowers to exploit loopholes, aided by the notorious Bank Company Act, absence of provisioning, and the so called rescheduling of default loans. The role of the Financial Institutions Division (FID) of the Ministry of Finance (MoF) is also largely responsible for causing a lot of malgovernance in exercising its authority over the central bank. Additionally, granting licences to new banks without assessing the country's needs and propping up failing banks have further weakened the banking sector. Clearly, it was the sheer lack of political will on the part of the ousted government to safeguard the banking industry that led to the dismal situation. The interim government has daunting challenges before it to put things on the right track.