About Tk. 250 billion are stuck up with the top loan defaulters. Of this amount, Tk.105 billion are with the four state-owned banks, Sonali, Janata, Agrani and Rupali. Filing cases against the defaulters does not produce any result. Loan default came down by Tk 160 billion in last December due to rescheduling opportunity allowed by the central bank. Investment capacity of the banks has gone down because of the huge amount held up with the top defaulters.
The defaulted loans lying for a long time have turned into bad ones. These loans were separated and written off after 100 per cent provisioning. Despite write-off, administrative measures were taken against them including filing cases. In most cases, the defaulters went for writs in the higher courts. The state-owned banks could not realise payments through litigation. The Bangladesh Bank governor met the top executives of the state-owned banks and reminded them about repayment of bank loans. Targets of repayment were fixed but the banks could not fulfil the targets.
Default bank loans of the four banks are: Sonali Tk 47 billion, Agrani Tk 27 billion, Janata Tk 21.50 billion and Rupali Tk 9.0 billion. In last December, Tk 150 billioin were rescheduled. Out of this, Tk 100 billion belonged to the state-owned banks. The Bangladesh Bank gave concessions to defaulters considering their difficulties during the political turmoil.
The Bangladesh Bank Governor said that two-thirds of defaulted loans belonged to the big borrowers. In three months loan default has increased by Tk 76 billion. Up to last March, loan default stood at Tk 481.72 billion. This is about 10 per cent of all loans. The individuals or institutions whose loans were rescheduled in last December could not pay their instalments. Therefore, these loans have defaulted.
In government sector, 22 per cent of loans were in default. In private sector banks, default loans were 5.77 per cent. It is 5 per cent in case of foreign banks. In specialised banks, it is 31 per cent. Defaults at Sonali, Janata, Agrani and Rupali increased in March compared to last December. Among the 39 private sector banks, defaults increased in 25, decreased in five; and it remained unchanged in the case of nine.
Among the nine foreign banks, there was an increase of default in the case of five banks and decreased in four banks. Provision is to be made against regular and defaulted loans. One hundred per cent provision is to be made against unrecoverable loans. Fifty per cent provision is needed against doubtful loans. Twenty per cent is needed for low level default. One per cent is required against regular loans.
In last December, provisioning shortfall stood at Tk 2.58 billion. This amount went up to Tk 24.33 billion by March this year. The amount of default loans was Tk 186.88 billion for four state owned banks. This is 22 per cent of total loans. Private banks had a default loan of Tk 185.28 billion which is 5.77 per cent of total loans. In the case of specialised banks, default loan was 23.93 per cent.
The central bank was perhaps aware of the end result at the time of issuing its directive relaxing the default loan rescheduling policy on December 23, 2013. It did not take too long a time to prove yet another time that loan default culture has gone deep into the country's banking system and any lenient attitude towards the habitual defaulters would only put the banks into deeper troubles.
The banks found a short-term benefit, in terms of their profitability, in the Bangladesh Bank's directive on loan rescheduling. It is suspected that some banks would have been in the red had there been no relaxation of the loan rescheduling rules. In the first quarter of the current calendar year, the size of the non-performing loans (NPL) increased substantially. The reason for a surge in NPL after a decline at the end of 2013 reportedly was due to the failure of a section of borrowers to service their debts on time. But rescheduling of loans had made them clean borrowers for a brief period and eligible for borrowing more from the same bank or other banks.
Four state-owned banks, Sonali, Janata, Agrani and Rupali, are in grip of bad loans. Eighty-five per cent of their loans are bad loans. At the end of March, bad loans stood at Tk 159.25 billion out of the default loans of Tk 186.88 billion Rupali bank is in most difficult situation. Ninety three per cent of its default loan is bad loan. The bank could not make necessary provisioning. At the end of March, the bank's provisioning shortfall was Tk 3.20 billion.
Interest earned against bad loans can not be transferred to income stream of the bank whereas provisioning has to be made from the income of the bank. As a result, net loss of the bank increases.
Seven banks have a provisioning shortfall of Tk 31 billion. One of them is government-owned, three are private and three specialised banks. If provisioning shortfall can not be adjusted on time, banks may face capital shortage at the end of the year. It will also decrease their income. Banks distribute loans which mostly come from depositors. The central bank has a lot of restrictions for avoiding risk of depositors' money. One of them is provisioning.
If the amount of default loan goes up and the bank's income does not increase, then there will be a provisioning shortfall and the retained earnings of the bank will go down. Finally, there will be capital shortage and return on shares of banks will also decline. As a result, ordinary share holders will be affected.
Total loan default stood at Tk 405.83 billion at the end of December 2013 but it has increased to Tk 481.72 billion by the end of March 2014.This is not a positive development. The central bank has to pay more attention against further increase in default.
The writer is an economist and columnist.
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