Banks and financial institutions are the most important organisations for financial intermediation and economic emancipation of a country. A well-organised banking system can accelerate development of any country. Commercial banks' prime motto is to maximise profit for its shareholders. Every year, owners want good dividend, employees want salary raise and bonus which motivate the banks to run for more businesses for generating more profits. Hence, a bank needs to extend loans to its customers, because interest income from loans and advances constitutes its major earning.
Almost 70 to 95 per cent of banks' earnings come from interest income. Thus banks need to take most critical decisions with regard to extending loans by calculating a series of risk factors. The banks which can measure and manage the risks effectively, their portfolio remains sound and those who do not, theirs worsen over time. Then the matter of non-performing loans comes to the front.
The quantum of non-performing loans (NPLs) has persistently shown a rising trend. The volume of NPLs accumulated in the banking sector has severely affected its financial health. At some point of time, the accumulated non-performing loans become non-recoverable and over the year it is carried along on the balance sheet of the banks. To avoid disclosure in the balance sheet of non-performing loans, it has been decided by the authorities that those loans, which have no possibility of recovery in a short time, need to be omitted from the balance sheet.
The Bangladesh Bank (BB) introduced the guidelines for writing off loans in 2002. The directive was issued in line with recommendations of the Bank Reform Committee, headed by Dr Wahiduddin Mahmood, a professor at the Dhaka University's economics department. At that time, the Bangladesh Bank also issued new guidelines for loan rescheduling which enabled the banks to write off NPLs.
Banks write off bad debts which are declared non-collectable (such as a loan on a defunct business, or a credit card due and which is in default), removing them from their balance sheets. According to the Bangladesh Bank's circular, bad loans of over five years and secured under 100 per cent provisioning, would primarily be written off from the banks' balance sheets. If the existing provisioning is not enough, the banks may deduct required funds from their current year's income to write them off. After being written off, the borrowers would still be identified as defaulters, and the banks would continue their efforts to recover the loans.
The BB has also directed the commercial banks to continue pursuing legal procedures against the defaulters. And, if cases did not exist against any bad loans, the banks concerned would file cases against the relevant parties before writing them off. The central bank has directed all banks to form a 'separate unit' for monitoring the recovery of written off loans.
According to Bangladesh Bank, since 2002 loans worth Tk 3,150 billion have so far been written off as of March 2014. However, Tk 1,566.70 billion was written off during the last five years. The annual average amount of written-off loans stood at Tk 306.60 billion in the last five years. Writing off bad loans has been attributed by critics to the relaxed policy the Bangladesh Bank introduced in 2013 to allow banks to get rid of bad loans having maturity of two years from the previous five years. The banks keep 100 per cent provision from profit as part of writing off bad loans from the balance sheet, through which they deprive the shareholders of due profits and push up operational costs. According to BB data, four state-owned banks have written off loans worth Tk 1,522.80 billion until March 2014 since 2002. Of the amount, the share of Sonali Bank stood at Tk 585 billion, Agrani Bank at Tk 501.10 billion, Janata Bank at Tk 334.80 billion and Ruplai Bank at Tk 101.90 billion. Twenty-seven out of 39 private banks waived bad loans worth Tk 1,251.70 billion and four state-owned specialised banks waived Tk 326.10 billion.
Written-off loans are piling up year to year, but the recovery progress of written-off loans is very slow. In this circumstance, Bangladesh Bank may take further initiatives to expedite the recovery of written-off loans. A separate department may be formed at the Bank to monitor the progress in the recovery of these loans.
Quarterly/half yearly reporting system may be introduced by the central bank and it may form a task force comprising central bankers, government officials, prominent former bankers, economists, business leaders and lawyers to find out a permanent solution regarding recovery of the written-off loans. A strong commitment on the part of the government could be the single-most powerful factor in the recovery of written-off loans. It would bid farewell to the loan default culture in Bangladesh once and for all.
The writer is a banker.
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