State-run banks and default loans  

How does one react to the finding that one third of the country's state owned banks' bad loans is in the grip of only 20 defaulted borrowers?  This, no doubt, speaks volumes about the nature and trend of loan disbursement by the state owned banks, during the first half of 2017.

Curiously, this is not the finding of a private agency, but it is the ministry of finance itself that made it public in a workshop held in the capital recently.  According to a paper prepared in this connection, these loan defaulters owed Tk 115.79 billion to Sonali, Janata, Agrani, Rupali, BASIC banks and Bangladesh Development Bank Ltd. (BDBL). The amount is more than 33 per cent of the total default loans of these banks. This, beside seriously affecting the financial health of the banks, brings home the pressure on the government to inject funds into them for their very survival. 

Over the last four years the government dished out Tk 96.39 billion to the state-owned banks. In the current fiscal year (2017-18), Tk 20.0 billion has been set aside for the purpose, which most observers consider too burdensome, even unaffordable for the country at a time when development expenditure demands the utmost priority.

The capital adequacy ratio of the state-run commercial banks is reportedly 6.99 per cent, which is far below the required 10 per cent. Experts hold that unless the banks' disbursement and provisioning mechanisms are corrected, injection of funds would continue to be no more than a botched-up arrangement, as has been the case in the past.

There are, however, counter arguments --feeble for the most part --raised by some members of the top management of the state-owned banks. In the aforesaid workshop, it was mentioned that the financial performance of state-owned banks becomes poorer as they are to participate in many development activities of the government. For example, these banks participate in the social safety net programme of the government for channelling money all over the country free of service charge, which costs them a considerable amount annually. This, no doubt, is a poor proxy to reason out non-performance of the banks.

Many will agree, it is the lack of stake of the board of directors of the state-owned banks - themselves not being the owners like those in the private banks -- that largely accounts for the way in which loan disbursements and rescheduling are dealt with, ostensibly due to pressure and clout of 'big' clients thick with the government in power. So, it is in most cases a combination of wilful loan default and a lack of political will to bring things in order that accounts for the sorry state of these banks.

A daily newspaper quoting the Bangladesh bank sources reports that defaulted loans in the banking sector including the state-run ones increased significantly in the first half of 2017. The amount, according to the source, increased by Tk 119.76 billion to Tk 741.48 billion from Tk 621.72 billion. The state-run banks accounted for more than 54 per cent or Tk 400.99 billion of the total default loans of the country's banking sector in the last fiscal.

No doubt, the most talked about issue in the country's banking sector is loan default, especially of the state-run banks. Highly placed persons including the finance minister himself has time and again referred to the issue as potentially threatening for the banking sector, but as of now, there hasn't been any noticeable attempt to rein in the anarchic situation. What on the other hand is ironic is the way in which big defaulters are provided with a sense of reprieve, by way of long-term rescheduling of default loans-- as was done in 2015. It may be recalled that borrowers with default loans between Tk 5.0 billion to 10.0 billion were allowed to reschedule their loans on easy terms for six to fifteen years.

The obvious question one cannot skirt around is, who do these banks serve at such a high cost? It seems as though the culture of impunity has been carefully nurtured for long to allow things to go haywire, and what most observers think, the government is taking too lenient a view that apparently looks like a cover-up of gross financial misdeeds.

There isn't much one can tell the authorities by way of advice to rein in the appalling loan default culture. Economists and eminent bankers have for long been clamouring a lot for this as if the regulators are little aware of the adverse fallout not just on the banking sector but also on the economy as a whole. What now is left to the government is to think hard whether to let the culture of criminality and impunity to thrive for the sake of the handful few.

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