Tackling default culture in banking sector

The size of the distressed assets in the country's banking sector, as shown in the Bangladesh Bank (BB)'s latest Financial Stability Report (FSR), is bound to stir up concern afresh. Commendably enough, the central bank has prepared the FSR for 2022 in line with international best practices. But given the volume of the risky loans that the banks have accumulated over the years, as shown in central bank's FSR, it hardly speaks of a sound health of the country's banking sector. Consider the amounts of the distressed assets' figure that includes nonperforming loans (NPLs) of around Tk1.20 trillion, the outstanding rescheduled loans of about Tk2.127 trillion and the outstanding restructured written-off loans amounting Tk444.93 billion at the end of 2022. Together the loan figures come close to a whopping Tk3.78 trillion, which is nearly half of the country's current (FY24) budget amount at around Tk7.61 trillion! Though the banking sector regulator termed the increase in the size of the soured loans as marginal, it, however, admitted that the asset quality of banks has deteriorated slightly in 2022.

The volume of loans rescheduled in 2022 was over Tk637 billion, twice the amount rescheduled (around Tk268 billion) in the year before (2021). In this connection, the central bank also admits in its report that across the different sectors of the industry, the proportion of the classified outstanding rescheduled loans has seen a general rise. This is quite disconcerting, because rescheduling is essentially regularisation of a loan by relaxing the repayment conditions when the borrower is at risk of defaulting on the debt obligations. Unfortunately, rescheduling of defaulting loans in the country's banking sector has become an unhealthy culture, which some experts in the sector terms a 'perverse incentive' to the wilful defaulters. The frequent rescheduling of the risky loans is also a factor behind ballooning of the stressed assets in the banking sector, experts believe.

The central bank's introduction of the relaxed policy of loan scheduling in 2019, which allowed clients to regularise their loans by paying a lower than required amount as down payment against their non-performing loans (NPLs) is to many observers the villain of the piece. As the central bank data show, in 2020, 18 per cent of the rescheduled NPLs amounting to Tk134.70 billion were in the red. Next year (2021), the banks regularised defaulted loans amounting to Tk123.80 billion through rescheduling and 19.8 per cent of it turned into bad loans. Despite the progressive rise in the rate of defaulted rescheduled NPLs, the central bank in July last year, further relaxed the rules of rescheduling so much so that defaulters could then deposit 2.5 to 6.5 per cent of their NPLs as down payment instead of the previous requirement of 10 to 30 per cent. Worse yet, the payback time for the defaulted loans was extended to six to eight years instead of the previous two years. Allowed to regularise their NPLs so cheaply, the habitual bank defaulters did not wait to take unfair advantage of receiving new loans from different banks and thereby inflate the banks' distressed assets to a disproportionately high level.

For the sake of good governance in the banking sector, the central bank should review its policy of treating bank defaulters with kid gloves. The sooner delinquency in the banking sector is dealt with an iron fist the better for the economy.