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It's no secret that wilful loan defaulters are bleeding Bangladeshi banks dry. Loan defaults are not unusual in banking systems worldwide. They occur often, sometimes due to procedural weaknesses or poor choices. Lehman Brothers defaulted due to reckless investments in subprime mortgages. China's Evergrande Group fell under the weight of a falling real estate market. These were failures within regulatory limits, not outright wrongdoing. Mistakes, not malice. However, in Bangladesh, the magnitude of defaults and the way loans are secured transcend mere incompetence. Loan defaults here resemble daylight robbery, executed with brazen disregard for rules and regulations.
The Bangladesh Bank in a circular, issued on 16th January 2022, had set single-borrower exposure limit. Banks are not allowed to make funded and non-funded exposure to a single borrower exceeding 25 per cent of their respective capital. This is a safeguard to protect against risks with bad consequences. However, this rule is routinely flouted. State-owned Janata Bank's loan to the Beximco Group, for example, reportedly reached a staggering 410 per cent of the bank's capital, making a mockery of the 25 per cent limit. This single loan also likely breached the regulation that total large loan exposure shouldn't exceed 400 per cent of a bank's capital.
Rules exist for a reason. Borrowers, who knowingly violate these regulations, with complicity of bank authorities, are unlikely to repay their debts. Why would they feel obliged to return money that was obtained through coercion or collusion? This is one way for banks to fall into debt trap.
Much of the borrowed money never circulates within local economy. It ends up abroad, in Swiss bank accounts, Dubai and UK properties, or offshore tax havens. So when the borrowers inevitably default, what can the banks do? It is not easy for them to classify the loans as bad or doubtful because doing so would keep them from recording interest income. Worse, they would be required to set aside provisions from their operating profits to cover for these loans. The only viable option left to them is grovelling at the feet of loan defaulters to implore them to make payments. Hence the saying: borrow small, you chase the bank; borrow big, the bank will chase you.
The BRPD Circular tasks the Board of Directors of local banks with sanctioning, renewing, or rescheduling large loans. But the question is who watches the watchers? Just look at Islami Bank's case where the board facilitated Tk 750 billion in loans, much of which was funnelled abroad. Clearly, the boards cannot be trusted to do their job.
Furthermore, while the Circular establishes loan limits, it fails to outline consequences for violators. When there is a loophole, chances are it will be exploited and solution lies in engineering systems that make wrongdoing impossible. Just as the Securities and Exchange Commission (SEC) employs circuit breakers to protect stock markets and halt freefalls, the central bank must implement automated safeguards to block loans that breach exposure limits.
The time for half-measures is over. Reforms are sweeping through many sectors in the country, but the banking industry remains overlooked. This must change. Policies must be revised to address shortcomings and ensure that loans remain within acceptable thresholds at all times. A healthy banking system is the backbone of a nation's economy. If the country's banks are unsafe, so too will be its economy.