Classified loans: there is no shortage of concerns

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The situation of nonperforming loans (NPLs) in the country’s banking sector is quite confusing.

The size of the NPL, huge as it is, according to the Prime Minister’s economic adviser, Dr Mashiur Rahman, is now out of control.

Dr Mashiur Rahman, speaking at an event in Dhaka last week, claimed that many large borrowers were not repaying loans to banks, leading to a reduction in banks’ lending capacity.

Some former leaders of the country’s central bank also spoke at the same event. They, too, have expressed concern over the ever-increasing size of defaulting bank loans.

The volume of NPL grew from Tk925 billion to over Tk1 trillion by the end of the third quarter of 2021. The NPL has grown steadily when almost everyone has pointed out the need for it to be under control. The volume of NPLs will be much larger if the money written off by the banks is taken into account.

Defaulting on loans is a normal occurrence in any banking system, as some borrowers, whether deliberately or not, would not repay on schedule. But the problem arises when many large borrowers become habitual defaulters and try to use their connections with powerful neighborhoods to evade payments to banks.

Undeniably, the country’s banking system is plagued by a strong culture of default. Although this unsavory culture has eaten away at most of the system, banks, for reasons they are more familiar with, are unwilling to collect their delinquent loans, especially from some of the large borrowers, using measures effective.

The current Covid-19 pandemic has worsened the situation for NPLs. Economic activities came to a halt when the government imposed restrictions to contain infections and deaths from the third quarter of 2020. The government, to help businesses, announced stimulus packages for various categories of industries and businesses. ‘companies. The central bank, to give respite to businesses affected by the pandemic, also put into effect in March 2020 a moratorium on loans until June of the same year. The moratorium has been extended several times until December of last year.

The central bank, in a meeting with major bankers held in the last week of the just ended calendar year, announced that there would be no further extension of the moratorium. He did, however, offer some concessions to borrowers. He said the loans would not be classified as classified if the affected borrowers paid 25% of their outstanding amounts to banks by December 31, 2021. The central bank, however, had kept the percentage at 15 in the chalet’s case, micro, small and medium-sized enterprises (MSME).

Large borrowers also asked the central bank for a facility identical to that of MSMEs. The heads of the country’s main trade bodies met with senior officials of the Bangladesh Bank last Thursday and got what they wanted.

It’s not that the central bank doesn’t want to improve the lending situation. But not everything is under his control, it seems. The pressure groups, in some cases, are quite strong. Not all banks are so sincere in keeping their loan portfolios tidy.

Allegations claim that some large borrowers are too powerful to influence the loan classification system. Even a few of them have remained afloat bending rules regarding so-called structured loans. Occasionally, the “bank-customer” relationship has come to the rescue of many credit arrears.

The actual amount of classified loans would be much larger than what is found on the books of account. The usual wrapping up and forgiveness of loans helps banks show that their classified loans are inferior to reality. The moratorium put in place during the pandemic also helped prevent many loans from being filed.

Thus, the concerns expressed by the Prime Minister’s adviser for economic affairs and the former main central bankers in the face of an ever-increasing volume of NPL are fully justified. Some men in power might deny it, but the fact remains that the country’s banking sector is in big trouble due to the huge NPL which has eroded bank profitability.

If they had been on a solid, financially sound basis, banks would not have to issue bonds to meet their Tier 1 or Tier 2 capital requirements, in accordance with the Basel accords. There is a cost to issuing bonds and banks could avoid that.

The central bank has the legal power to discipline lending operations by banks. But, in the conditions of Bangladesh, it is not always easy to exercise them. However, a strong propensity to give in to external pressures can lead to disasters. Central bank officials must be on the lookout for such an outcome. When it comes to the management of NPLs, it is high time for the central bank to take a firm stance to avoid a period of great concern.

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