Default loans in the banking sector surged 19.3 per cent year-on-year in the first quarter of 2022 to reach one of the highest levels in Bangladesh’s history, driven by the withdrawal of the relaxed loan classification policy.
Non-performing loans (NPLs) totalled Tk 113,441 crore in March, only behind Tk 116,288 crore of default loans, the highest-ever, hit in September 2019.
Analysts, however, blamed the deterioration of corporate governance amid lax monitoring by the Bangladesh Bank for the higher NPLs.
Earlier, the central bank took several measures, including easing of the loan rescheduling and classification rules, in order to get rid of NPLs. But the moves have largely failed to produce expected results and restore the financial discipline in the banking sector, which was reflected in the higher default loans in the January to March quarter.
Default loans increased 9.84 per cent in March from three months ago when it stood at Tk 103,274 crore.
The ratio of default loans accounted for 8.53 per cent of outstanding loans in March, up from 8.07 per cent a year earlier.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said that the withdrawal of the relaxed loan classification, which the BB had introduced to help borrowers stay afloat amid the business slowdown caused by the pandemic, was one of the main drivers for the spike in NPLs.
The central bank maintained a moratorium facility for borrowers throughout 2020.
As a result, banks did not reclassify the credit status of borrowers, bringing NPLs down to Tk 88,734 crore, a decrease of 6 per cent on 2019.
Under the policy, borrowers were allowed to avoid slipping into the default zone in exchange for giving only 15 per cent of the total instalments payable last year.
The relaxed policy continued last year, as well as the coronavirus pandemic, kept hurting the economy and the businesses.
Rahman says small and medium enterprises (SMEs) have been hit hard by the pandemic as demand plummeted, and many of them are still facing difficulties.
“Many SMEs have become defaulters.”
The banker, however, notes that default loans usually climb up in the first quarter of a year as banks opt for the period to classify loans so that the borrowers repay during the rest of the year.
Emranul Huq, managing director of Dhaka Bank, said some clients might have failed to pay back their loans obtained under the stimulus packages declared by the BB to offset the slowdown.
Central bankers say many banks have their writ petitions, filed by the defaulters, vacated in courts in the first quarter, sending NPLs high.
Salehuddin Ahmed, a former governor of the central bank, thinks a group of delinquent borrowers are not repaying loans on the excuse of the pandemic.
The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), the apex trade body of the country, has recently demanded the central bank extend the relaxed loan classification policy until December.
“The central bank should not entertain the FBCCI proposal since previous experiences of relaxed policies did not bring any positive for the economy,” Ahmed said.
The central bank has loosened its monitoring of the banking sector due to the ongoing foreign exchange crisis. The laxity in monitoring is not a positive sign for the financial sector, he said.
“Instead, the health of the banking sector should have strengthened at this moment as the economy is now fighting against the global crisis stemming from the Russian-Ukraine war.”
Monzur Hossain, research director of the Bangladesh Institute of Development Studies, also echoed Ahmed on the central bank’s monitoring.
“The ongoing global business crisis has had an adverse impact on the local businesses, so NPLs are on the rise,” Hossain said.
He says the number of habitual defaulters is going up, contributing to the increase in NPLs.
Bangladesh Bank data showed that 46.5 per cent of the defaulted loans were with nine state-run banks.
NPLs in the state-run banks rose 11 per cent year-on-year to Tk 52,753 crore in March.
Forty-one private commercial banks held defaulted loans of Tk 57,804 crore, up 28 per cent from a year ago, while the NPLs in nine foreign banks increased to Tk 2,885 crore in contrast to Tk 2,458 crore.
In a paper yesterday, the Centre for Policy Dialogue said due to the longstanding moratorium on loan classification, the current level of NPLs is hardly indicative of the reality.
“It is apprehended that the actual volume of NPLs is far greater than shown by the official numbers.”
It is anticipated that NPL will rise further in the coming days, as loans under Covid-19 liquidity support packages were not provided in a transparent or accountable manner, said the CPD.