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The Financial Express

Banks: Time to reassess situation


Banks: Time to reassess situation

The financials to be prepared at the end of the current quarter (January-March) might give banks a taste of what the pandemic has done to them.

Why is it at the end of March next when the Covid-19 pandemic has been wreaking havoc on the economy for almost a year?

It is because the banks have gone back to the old procedure of loan classification. The central bank has already withdrawn its order relating to the suspension of loans classification.

Asked by the central bank, all commercial banks suspended the usual practice of loan classification for a quarter ending on March 31, 2020. But as the pandemic persisted the banks extended the suspension during the next three quarters.

Reportedly, there was hard lobbying by certain quarters to get yet another extension, but it was not forthcoming, fortunately.

Bank borrowers, if not others in their thousands, have been lucky, at least, on a couple of counts. First, their loans despite non-payment as per schedule were not classified and, secondly, they got fresh loans at throwaway interest rates.

However, the biggies have been favourites with the banks, as always. They got most part of the stimulus packages meant for them. The small and marginal operators in the economy have not been as lucky as the large industries and enterprises. A sizeable part of the relief package for micro and small enterprises has remained unspent until now since their owners do neither have clout nor connections.

Like the loan defaulters the banks have also been in the comfort zone in the year 2020 since they did not have to show the actual size of the classified loans. That is why at the end of September last, the volume of classified loans of banks instead of rising had declined.

Despite the lax attitude of banks, good borrowers even during the Covid time did service their debts and took fresh loans at reduced interest rate. They have been aware of the fact when the banks would go back to normal loan operations, paying instalments of both old and new loans would be difficult for them.

But banks are likely to face most problems from the delinquent and habitual borrowers.  This particular class of borrowers has exhausted all the options available to delay repayment of loans to banks. They have availed of loan rescheduling facility time and again in the name of so-called bank-client relationship. The banks concerned and the central banks, to some extent, have been lenient in granting the facility.

But some big borrowers -- a few of them are habitual defaulters also -- using their connections did avail of yet another facility called 'loan restructuring'. The facility carried certain conditions. But the relevant borrowers, as feared, have failed to meet those.

The default culture in the banking sector has led to the accumulation of a huge volume of 'deferral loans'.  According to a news report, more than Tk 2.55 trillion out of the total outstanding loan of Tk 11.0 trillion is now categorised as 'deferral loans'. During the last one year, the borrowers concerned have repaid only a small part of those loans. The concessions granted due to the pandemic have created yet another opportunity for this particular section of borrowers.

The pandemic has made the situation for both businesses and financial institutions really difficult. A rising volume of non-performing loans had been a serious problem for the banking industry even before the pandemic. The concessions granted due to the Covid are set to aggravate the problem further.

Since the economy is now showing signs of recovery, the central bank has, rightly, decided to roll back most of the concessions in the greater interest of banks. Yet it has kept a few of those in place.

Between March and December of 2020, businesses were relieved of mandatory payment of loan instalments. When the central bank decided to discontinue that facility from January 01 last, businesses pressed for keeping the facility intact for another six months. But the BB decided not to budge to such a pressure. Instead it has extended the repayment period of term loans.

Interestingly, the Bangladesh Association of Banks (BAB) that represents the owners of banks has reportedly written to the central bank to extend the repayment period of loans disbursed as working capital. The maximum time limit of working capital loan repayment is one year. The BAB has asked for converting the working capital loan as term loans and rescheduling the same for three years.

If the proposal is accepted, banks might face liquidity problem as 65 per cent of the loans are working capital loans.

The central bank is expected to make the right decision taking into cognizance the interests of both banks and businesses. Already the banking sector is in trouble. The banking-sector regulator should not take any decision with the potential of aggravating the situation further.

 

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