Written-off or ‘forgotten’ loans

Shamsul Huq Zahid | Published: February 17, 2016 00:37:10 | Updated: October 24, 2017 12:21:31

The size of the toxic assets of the country's banks, according to the latest statistics of the Bangladesh Bank (BB), stood at Tk.513.71 billion at the end of the final quarter of 2015, representing a 6.0 per cent decline over that of the previous quarter.
It does not require any elaboration that the shrinking of the non-performing loan (NPL) size in the last quarter was largely outcome of lots of window-dressing that are usually done in the last quarter of the calendar year. The banks find it to be a convenient way of giving their annual financials a respectable look.
The loan-restructuring introduced for the first time in 2015 had also come as a useful tool to help clean the balance sheets, to some extent, by a number of banks.
So, the latest central bank statistics put the size of the toxic assets in the country's banking system at Tk.513 billion. But the actual size is otherwise considered by many analysts to be much higher than that.
The amount of bad loans that different banks had written off until September 30, 2015 was Tk. 382.19 billion. This amount, obviously, is not shown as classified. Moreover, the banks last year restructured loans to the tune of Tk 150 billion. These are large loans belonging to few corporate clients, allegedly having links to powerful quarters.  
That provides reasons for considering the aggregate size of real toxic assets of the banks to be at a considerably higher level than what the available figures indicate. Such assets represent a very hefty amount of the total credit made available by them to their clients until December 30, 2015. That amount is again on account of a countable number of very large borrowers.  
There is no denying that state-owned banks do carry a large burden of NPLs because of a number of factors, including mismanagement and unnecessary exogenous interference.  
But the problem does also exist in the case of private banks. Some of them are affected more and some, less.
It is not that banks, particularly the privately-owned ones, would deliberately lend money to clients with dubious past records. But persuasion by powerful quarters from within or outside do at times facilitate extension of loans to clients not having sound track records.
Whatever may be the reasons, the default culture in lending operations is very much there. Despite some regulatory steps by the central bank to enforce discipline in the financial sector, there is still the pressing need to improve, the situation that has been under strains over the years.
It is, however, universally known that when there is a bank there will be loan defaults. No commercial bank can claim 100 per cent success in loan recovery at any given point of time.
But the most disturbing fact about the whole gamut of classified loans relates to that of written-off loans. Tk. 382 billion is a big sum. Nobody seems to bother much about the fate of this large amount of depositors' money. Even the banks that have to provision against the stressed loan amount, are not apparently interested to get back at least a part of it. Some banks file cases with Money Loan Courts to recoup the money. After years of efforts some get verdicts in their favour, but ultimately fail to get the same executed on the ground.
The banks are yet to find a better way for getting back, at least, a part of their stuck-up loans with errant borrowers through a well-functioning institutional arrangement that is backed by law. One such an option was discussed in the banking circles some years back. But none had taken it seriously.
Banks in neighbouring India during the past few years have been taking the services of organisations, known as Asset Reconstruction Companies (ARCs), to get back some part of their default loans. In fact, the Indian banks do not wait for long for a loan going deeply stressed. They employ an early recognition mechanism to detect the quality of a loan and try to sell the same to the ARCs before deterioration of its economic value.
Initially, the ARCs used to buy toxic assets from banks against security receipts. But in view of the problem with the realisation of the receipts, the Indian banks are now selling stressed assets to 14 Reserve Bank of India (RBI)- recognised ARCs at a mutually agreed price. Toxic assets worth $2.8 billion were sold in 2014.  
However, a mechanism for offloading toxic assets, maybe on a very limited scale, has not come automatically in India or any other country. The banks concerned and the regulator have played a very proactive role in this connection. The Indian parliament passed a relevant law in 2002 that paved the way for floatation of ARCs and the RBI granted certificates of registration to 14 ARCs  to put in place a system for unlocking value of the toxic loans which are seen here as 'forgotten' loans.

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