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Surge in default loans 'alarming'

Study says at banking conference, banker says tycoons take loan from one bank to repay another

FE Report | November 27, 2017 00:00:00

The rise in default loans is "alarming", says a study that favours effective use of audit committees by the private commercial banks and enlargement of their boards with experienced members as a remedy.

Doing this, it says, could guarantee sound risk management and help administer the managers in a better way.

On the other hand, in a the keynote paper of the annual banking conference 2017, Bangladesh Institute of Bank Management (BIBM) director-general Toufic Ahmad Chowdhury said NPL rate is a problem not only with large loans but also small-and medium-enterprise loans.

He held financing large corporate business by multiple banks mostly responsible for the poor credit quality along with other reasons like poor internal governance, inefficiencies in fund management, directed lending and the like.

Experts at the meet, however, said the banks are showing less NPL than the actual. At present it is shown as 12 per cent of the GDP, which is actually 20 per cent.

The observations were made at the two-day banking conference that started Sunday at BIBM in Dhaka. Bangladesh Bank (BB) governor Fazle Kabir was present as the chief guest at the inaugural session.

Mr Fazle Kabir said improving banking environment and resolving operational banking problems are priority issues to the Bangladesh Bank. With this aim in view, the central bank has introduced several guidelines on roles and responsibilities of board and senior management, guidelines on Basel III, prudential relations and so.

"We have also intensified on-site and off-site supervision," the governor told his audience from the country's banking sector, where some major problems surfaced in recent times.

In his paper titled 'A Review of the Banking Activities 2016', Toufic Ahmad said NPL is a cause of deep concern for the banking sector of Bangladesh. During 2016, the NPL ratio crossed 10 per cent, which was below 9.0 per cent in 2015.

The review on credit operations of banks also observed that private- sector-credit growth was 16.8 per cent in 2016 against the target of 14.8 per cent while public-sector credit experienced only 1.3 per cent growth against a target of 10.3 per cent.

Though rural credits increased to 10.03 per cent in 2016 compared to 9.88 per cent in 2015, the industrial-term loans as well as SME loans experienced slower growth compared to the previous year.

Credit concentration in trade services, Dhaka and Chittagong divisions and large lending continued unabated, said Mr Toufic.

Around 36 per cent, 86 per cent, and 35 per cent of total outstanding loans in 2016 were in trade services, Dhaka and Chittagong divisions and in large loans (above Tk 200 million).

He also said large loan figured highest in 2016 and the share of large loans in total loans outstanding from state-owned commercial banks (SOCBs) was around 48 per cent in 2016.

The BIBM study found that still 12 per cent banks could not meet the Category-I status as stipulated in BB guidelines. Only 22 per cent of the banks have ITG framework, indicating severe weakness in respect of management's active involvement in IT system management in banks.

Security awareness of both bank customers and employees is a great concern for banking sector. The online-banking fraud has increased over the years for lack of proper knowledge regarding banking-information security.

In the study titled 'Do Corporate Governance and Credit Risk Management Have Implication on Bank Performance? An Empirical Study On The Private Commercial Banks of Bangladesh' presented in the first plenary session, it was found that large and independent risk committee has better monitoring capacity over credit risk, hence reflection of effective governance and greater profitability.

The study suggests bigger board can help reduce credit risk-a proposition which was opposed by some of the panelists.

In the panel discussion, additional managing director of Trust Bank Faruk Mainuddin said most of the banks hide the actual information of NPL. Governance and NPL are inter-related.

Criticizing the big corporate businesses, he said they are flooded with unwanted funds.

They get loans at the lowest interest rate and then apply for incentives as a good borrower. They borrow from one bank to repay the loan of another one, which is not a sign of a good borrower. It is a governance issue, the banker added.

Centre for Policy Dialogue research director Khondker Golam Moazzem said proper reason for default loan is not clear. It should be explored why the default loan is increasing. It needs to be investigated whether NPL is increasing for the fault of the board of directors of the bank or the management committee.

BIBM supernumerary professor Yasin Ali said the shariah banks are not following the rules properly. It is time a law was enacted for these banks. There is no job security in the private banks now, he added.

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