The Global Financial Stability Report (GFSR), released last week by the International Monetary Fund (IMF), advised Bangladesh to give topmost importance to addressing the issue of non-performing loans (NPLs) in order to ensure financial stability in the country.
Many nations have tackled the problem by developing a secondary market for NPLs and by being aggressive in terms of writing off NPLs and provisioning for them.
On the country's rising NPL issue, the IMF hoped that the situation would improve following the change in the accounting standards.
The NPLs and excess liquidity have become major areas of concern for the country's banking sector. Besides, the number of large loans is also on the rise while the amount of credit received by small and medium enterprises has declined.
The volume of classified loans in the country's banking system jumped by over 26 per cent or Tk 196.08 billion to Tk 939.11 billion as of December 31 in the last calendar year from Tk 743.03 billion in 2017. The share of NPLs in the total outstanding loans came down to 10.30 per cent as of December 31 in 2018 from 11.45 per cent three months back.
In order to bring the loan default culture under control, the country's banking sector is expected to come under a kind of special auditing system. The main purpose of such auditing is to help the banks get rid of bad loans. The government needs to identify who are the genuine borrowers and who are the wilful defaulters. It needs to monitor how the bank loans are being used.
There is no denying the fact that necessary legal reforms should be brought about in order to address the issue of the rising non-performing loans. In Malaysia, for example, wilful defaulters get blacklisted by all the government agencies. They are not even allowed to leave the country.
Finance Minister AHM Mustafa Kamal termed loan default a 'crime against the whole nation.' He advised the bank officials to better understand their clients before issuing loans and said no long-term loan should be issued against short-term deposits. In this regard, he stressed the need for strengthening the corporate governance culture within the banks. The mid-level management can play a strong role in ensuring better corporate governance.
There are, however, many problems in recovering default loans from the defaulters, particularly wilful ones. In order to address the problem, the authorities concerned should gear up legal process for recovering such credit.
The introduction of arbitration is a process to solve the problem. It should be introduced to help settle loan disputes. The central bank may submit its recommendations for amending relevant laws and regulations to the Ministry of Finance to help reduce the volume of NPLs.
High level of NPLs is, in fact, threatening the growth and stability of the economy. Many say loans should not be concentrated among a number of large borrowers. The number of state-owned banks should also be reduced as NPLs and classified loans are increasing in these banks with the top 20 borrowers holding a third of the default loans.
The depositors are, in fact, being deprived of fair interests on their deposits owing to the high NPLs. Realisation of Tk 750 billion has been stuck for cases in courts. There is no competition in the banking sector regarding interest rate fixing. There is collusive oligopoly in the case of fixing interest rates.
Bangladesh Bank has, in the meantime, issued a circular that the banks can now write off increased amount of bad loans without filing lawsuits after the issuance of new policy. The banks are now empowered to write off loans up to Tk 0.20 million instead of the previous ceiling of Tk 50,000 without filing cases for recovery. The policy also allows the banks to write off such loans after three consecutive years instead of the previous five years.
Analysts say the banks stand to benefit from the policy as they will now write off small-sized loans without resorting to court. But they said the new policy may not be effective for large loans. Potential defaulters will benefit from the latest policy relaxation, but small and medium entrepreneurs may face trouble in securing fresh loans. Provisioning cost of the banks will be reduced after the relaxation of the policy, they argued,
The amount of NPLs in the banking system is, according to them, likely to go down if bad loans are written off after making 100 per cent cash provisioning against them. It might help reduce the NPLs in retail credits, particularly of credit cards.
However, many say the policy will not leave any significant impact on large loans. The amount of small bad loans has been re-defined for writing off to avoid additional expenses for legal purposes in the new policy.
Writing off loans is, in fact, a global practice. But it depends on the capability of the banks concerned to write off its bad loans. Before making any final decision in this regard, the bank management has to ensure 100 per cent provisioning against the amount to be written off.
Many experts opine that loan defaulters would become more aggressive if they are given such benefits and might come up with new demands. Bangladesh Bank will have to strictly supervise the sector. It will not be wise, according to them to write-off loans without filing cases. No one will take care of those debts if there is no lawsuit about those, they add.
However, too much dependence on court for recovering loans is one of the reasons behind the remarkable rise in NPL as court procedures are usually lengthy, expensive and cumbersome. Over 80 per cent cases related to NPL, according to banking experts, can be settled out of court. Since recovery of default loans is a time-consuming process, the option of alternative dispute resolution (ADR) can help address the problem.
The country needs to bring a number of legal reforms to mitigate the sufferings of the banks on account of swelling bad loans. The loans that are becoming classified are actually the hard-earned money of the ordinary people. The banks must be tough to punish such wilful defaulters.
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