The costly act of writing-off

The volume of both non-performing and written-off loans has been rising unabatedly in the country's banking sector with the state-owned banks leading the way.
There exists a direct relationship between the rise in the volume of non-performing loans (NPLs) and that of written-off loans. The banks, under the existing provisions, are allowed to write-off loans that could not be recovered within five years after turning bad. However, prior to writing off any bad loan, the bank concerned is required to ensure 100 per cent provisioning of the same. In the case of banks, such provisioning deprives their shareholder/s of a sizeable amount of profit.
Yet banks do very often take recourse to this costly way of ridding their annual balance sheets of soured loans, at least, partially. That is why the volume of written-off loans in the country's banking sector soared to Tk. 414.37 billion until March last. The amount was only Tk.180 billion less than the total volume of banks' NPL as of March last.
Had not the banks written off the bad loans, the total volume of NPL would have stood more than Tk.1.0 trillion as on March 31 last. Suspicion is strong that the volume of NPL is bigger than what is shown in the banks' financials. Many banks, allegedly, resort to window-dressing of different types to hide the actual size of their respective NPL.
Over a period of one year, ending on March last, the volume of written-off loans in the banking sector increased by nearly Tk.62 billion to Tk414.37 billion.  Though fewer in numbers compared to their counterparts in the private sector, the state-owned commercial banks (SoCBs) and the development financing institutions (DFIs) had the major share in the written-off loans. The six SoCBs and two DFIs together had written off more than Tk. 226 billion until March last while the volume of written-off amounts in the case of 39 private commercial banks and nine foreign banks stood at Tk.188 billion during the same period.  According to an unofficial estimate, the money that the banks have written off until now is more than their aggregate paid-up capital.
The act of writing off a loan by a bank does not anyway free the borrower concerned from his/her repayment obligation. Besides, the banks that provisions against the bad loans from their own coffer are supposed to continue efforts to recover the same.
But the reality is that banks have been hardly successful in their attempts to get back the written-off amounts from the borrowers. What the banks usually do is that they file cases with Money Loan Courts against the borrowers concerned. Often they get verdicts in their favour, but execution of the verdicts remains a serious problem.
Besides, there exist problems with the banks themselves. An unscrupulous section of their officials do, at times, join hands with dishonest borrowers in the matters of furnishing collaterals of questionable quality against loans. In the event of loans turning bad, when banks go for foreclosures of mortgaged property they detect lots of anomalies such as over-valuation and fake documentation. Despite all the good intention on the part of the boards of directors of banks, such irregularities do happen frequently.
There were talks about the recovery of a part of the written-off loans by selling off the same at attractive discount to asset management companies or by appointing recovery agents. In some countries, services of recovery agents are used to get back soured loans. One or two local banks, reportedly, tried the same method but failed in their bid.  In neighbouring India recovery agents often resort to coercive measures to get back bank loans. But such measures turn out to be successful only in the case of any weaker section of borrowers.
There is no denying that the large size of the NPL, a part of which is written-off later under compulsion, does depict not-so-rosy a picture of the country's banking sector. The incumbent chairman of the Anti-corruption Commission (ACC) recently did mention about irregularities in the banking sector.  He said the Commission is keeping a close watch on banks, both private and public. Such vigilance is necessary, no doubt. But what is necessary is due diligence on the part of banks while sanctioning loans of all types. That can be ensured only by bankers concerned and an alert central bank.
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