The country's banking sector is currently undergoing a number of challenges such as lowering lending rate to a single digit, bringing down advance-deposit ratio, tackling corruption, ensuring good governance, maintaining adequate liquidity, reviving and retaining depositors' confidence weakened by scams, frustrating deposit interest rate and rumours of bankruptcy, and recovering gigantic default loans. The biggest challenge, however, is the recovery of default loans.
The sector has been burdened with sky-high default loans for long. As of December last year, the total amount of outstanding loans was Tk 10.18 trillion (Tk 10,11,828 crore) out of which an amount of Tk 943.31 billion (Tk 94,331 crore) was classified (nonperforming) loans, according to the Bangladesh Bank report. The ratio of gross nonperforming loans (NPL) to the total outstanding loans of the banking sector stood at 9.32 per cent at the end of December, 2019. Such ratio has been swelling every year from 2011 to 2019 except 2013.
The country tops the list of loan default index in South Asia. Bangladesh's default loan ratio was estimated at 11.4 per cent for 2019 in the World Bank's latest 'Global Economic Prospects' report. It portrays the squandering culture of public money in the name of borrowing from the banking sector.
Banking regulators and analysts are prescribing remedies one after another. Formation of 'Banking Commission' and 'Asset Management Company' are the latest initiatives. But none seems to work. Default loan problem remains the most daunting challenge of the banking sector. Bankers are in search of remedies to default loans. No magic solution has emerged yet and there is no hope of finding a panacea overnight. The problem of default loans has turned into the cancer of the banking system.
Once banking was a top-ranking profession and bankers were acknowledged as symbol of trust and honesty. But in the current context, it has lost glory and unfortunately a few bankers had complicity with loan defaulters and plunderers of public money.
COST OF NPL: Bankers took many strategic and legal recovery actions. Yet a big portion of loan is not coming back to banks, prolonging their agony and rendering multifarious impacts on the banks and the overall economy. They include:
(i) A study shows that over three years, a 1.0 percentage point increase in the NPL ratio leads to a cumulative effect of about a 0.1 percentage point contraction of GDP (gross domestic product) growth, about a 1.5 percentage point decline in loans growth, and a 0.1 percentage point pickup in unemployment (Source: ADB Economics Working Paper Series No. 574 titled 'Nonperforming Loans in Asia: Determinants and Macrofinancial Linkages' authored by Junkyu Lee, Principal Economist and Peter Rosenkranz, Economist at the Economic Research and Regional Cooperation Department of the Asian Development Bank (ADB), March 2019).
(ii) Bank's liquidity and profitability depend to a great extent on the recovery of its advance. Banks derive most of their income from the interest they charge on loans they disburse. Interest income is usually generated from performing loans. In view of this, when such loans end up as nonperforming, the financial strength of these banks get affected. Besides, there is a twin-effect of classified loans on the banking system: NPL stops bank's earnings not only from NPL itself but also curtails earnings from regular loans; because, banks have to keep the interest earned from NPLs to their interest-suspense account, instead of taking it into profit account and a good amount of interest from regular loans (performing loans) has to be kept in provision as a cushion against both performing loans and nonperforming loans (NPL).
(iii) If the income of a bank is not adequate enough to cover the provisioning requirement as per Bangladesh Bank guidelines, it has to be set off from bank's capital, which might result in capital erosion as well as shortfall of regulatory capital of the bank. Twelve scheduled banks suffered Tk 108 billion (Tk 10,797.87 crore) in provision shortfall at the end of December, 2019. At the same time, 12 banks also failed to maintain the minimum capital requirement, and faced a shortfall of over Tk 236.12 billion (Tk 23,612 crore).
(iv) In case of writing off of 'bad and loss' accounts, outstanding amount of the loan is adjusted by the profit of the bank to erase the account from bank's balance sheet.
(v) NPLs shrink the investment/lending scope as they ultimately hamper ability of the banks in granting further loans to respective applicants as well as to fresh applicants.
(vi) Delinquent loans adversely affect the ability of banks to cover all expenses - servicing interest to depositors, payment of employee salaries, government taxation etc., especially banks which tend to have large NPLs.
(vii) Banks usually declare dividend only after making the required provision at the rate up to 100 per cent for classified loans. Consequently, classified loans could have an adverse effect on shareholders' earnings; because, provision for classified loans reduces the net profit of banks and consequently reduces the amount of dividends paid to shareholders.
(viii) Default scams erode the image and positioning of the bank. For instance, the Hall-Mark scam has become a defamatory hallmark for Sonali Bank Limited.
(ix) Overburdened NPL threatens the survival of the bank because of continued loss and lack of public confidence and customers' patronage.
(x) Rise in NPL indicates lack of corporate governance in the banks, which may attract regulatory interference from Bangladesh Bank or the government in the form of dismissal of managing director, reconstitution or abolishment of board, appointment of observer or administrator, renaming of bank, ban on fresh lending, non-permission for expansion/opening of new branches etc.
(xi) NPL policy tends to reduce total loan portfolio of the banks, thus affecting the interest earnings on loans.
(xii) Credit and CAMELS (Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity) rating of the bank worsen.
(xiii) If loans become bad, banks fail to make profit and cannot pay interest to depositors and meet their expenses. Ultimately they will incur loss and there will be bank failures.
(xiv) Most banks are unable to remain competitive in the turbulent financial sector/industry due to high default rate.
(xv) NPL scams demolish the reputation and goodwill, and thus negatively affect the share price of the bank.
(xvi) Large NPLs could lead to dwindling confidence of both depositors and foreign investors who may adopt strange position against the banks which might result in a negative signal and liquidity problem.
(xvii) The cost of doing business is high in our country in comparison with many other countries in the region due to high lending rate. Banks do not earn interest income from nonperforming loans. And to recuperate this loss they charge high interest on fresh lending. According to an analysis, halving loan loss provisions, to counter the widespread malaise, banks can bring down lending rates by 0.4 percentage points.
(xviii) The loan default malaise in Bangladesh has been so acute that the banking system needs injection of billions of taka as capital from taxpayers' money every year when it needs billions of dollars of investment for basic infrastructure development for achieving high economic status.
(xix) Apprehending bankruptcy and deposit loss, customers may try to withdraw their entire deposits from banks and there may be a run on banks. If similar situation happens in all banks, the entire economy will be affected.
(xx) At the end of last FY 2018-19,the size of GDP stood at Tk 25.42 trillion (Tk 25,42,482 crore). NPL of the banking sector is eating into 3.71 per cent of this GDP. Three Padma Bridges can be constructed with this NPL amount. It is estimated that GDP will go up by as much as 1.20 per cent (Source: Wikipedia) and GDP growth by 2.20 per cent (Source: BBS) once Padma Bridge is completed. So if the NPL amount could be realised it could have boosted the country's GDP growth by more than 6.50 per cent!
(xxi) Default loan malaise gives an alert to the international business communities that Bangladeshi businessmen are not creditworthy and lack in business integrity; and this may affect business relations with international traders.
(xxii) Default of the largest borrowers is likely to have the highest impact on the banks' soundness. As per the Financial Stability Report 2018 of Bangladesh Bank, at the individual bank level, 22 out of 48 banks are likely to become undercapitalised (fail to maintain Capital to Risk-weighted Assets Ratio--CRAR) if the largest three borrowers default.
(xxiii) A bank may face its ultimate fate. When NPL reaches at an alarming point accompanied by corruption and bad governance, it may even face the fate of merger with other strong banks or financial institutions. Even the government may takeover the bank. And, if everything fails the bank may ultimately be liquidated.
BANKS HAVE BECOME HOSTAGE OF WILLFUL DEFAULTERS: The finance minister has recently announced that the government has decided to lower lending rate as it can't bear the burden of default loans any more. But both 'default loan control' and 'running of banks with profit' are essential. Interest and survival of banks should be given priority or equal consideration at least.
Besides, lowering lending rate may reduce volume of default loans but not the number of defaulters; because, a good number of borrowers are wilful defaulters and another faction of borrowers remain regular by using the rescheduling and restructuring tools. Section 5(GaGa) of the Banking Companies Act, 1991 and Banking Regulations and Policy Department (BRPD) Circular number 11 dated July 19, 2012 and several subsequent circulars of Bangladesh Bank (BB) defined 'defaulter'; but neither any law nor BB has yet formally defined 'wilful or habitual defaulter'.
As a result, banks have actually become hostage to these disguised wilful loan defaulters. With the present default loans amount, as many as 235 more banks can be set up with initial paid-up capital of Tk4.0 billion (Tk400 crore) each. This indicates how much and how deep the haemorrhage is sustained by our banking sector and the economy as a whole.
So a clear clause in law or a BB circular defining and categorising wilful or habitual defaulters should be in place so that banks can easily detect them. In addition to arresting fresh default on loans, there must be some quick healing strategies for existing default loans, like tackling loan default as a national and priority problem, showing zero tolerance to wilful defaulters and scamsters, setting up special tribunal or separate bench for settling all pending money recovery suits within next 3 (three) years, issuing non-bailable arrest warrants to wilful defaulters, declaring notorious defaulters as bankrupt and confiscate their business and assets by the government for the settlement of bank dues.
Default loans have curtailed money flow in the economy and growth in the private sector. Thus it is diminishing employment opportunity and pulling back GDP and development growth of the country. So tackling the defaulters with an iron hand is a must to give the banking sector and the economy a better shape and a sustainable pathway to make the country a developed one by 2041.
Mosharaf Hossain is a principal officer at National Bank Limited.