Defaulted loans soared to Tk 110,874 crore as of March this year, the highest ever in the country. 

The record was broken as the first quarter figures for this calendar year, released by the Bangladesh Bank yesterday, revealed that Tk 16,962 crore of classified loans were added to the tally, which was another record.

Now defaulted loans account for 11.87 percent of total outstanding loans, up from 10.30 percent in December 2018. In March 2018, the percentage was 10.78, according to the central bank.

“The government and the central bank must take full responsibility for this desperate situation,” said Ahsan H Mansur, executive director of the Policy Research Institute.

At the turn of the year, defaulted loans totalled Tk 93,911 crore. But as rumours started spreading that the central bank plans to extend a host of facilities to loan defaulters, many stopped paying instalments hoping to avail the benefits.

The rumours were confirmed on May 16 when Bangladesh Bank unveiled a set of extraordinary facilities for the defaulters.

As per the new policy, defaulters would be allowed to reschedule their classified loans by providing only 2 percent down payment, instead of the existing 10-50 percent.

A maximum of 9 percent interest rate would be levied on the rescheduled loans, lower than the existing 12-16 percent. The time for repayment was also generously set to 10 years with a grace period of another year.

The policy said the accrued interest on the defaulted loan could be waived, based on the bank’s relationship with the client, and the defaulter could only pay the principle amount and the new 9 percent interest rate. 

The move came hot on the heels of Bangladesh Bank’s attempt to ease the loan classification rules, including giving borrowers more time to pay off their instalments and relaxing the loan write-off policy.

These were allegedly done to have a lower default-loan figure but the latest data suggests it backfired.

Even though the High Court stayed until June 23 the implementation of the new loan rescheduling policy, defaulters still believe that they would be able to enjoy the benefits, Mansur of PRI said.

“There is no ray of hope of arresting this upward trend of defaulted loans.”

This means the government would have its hands tied while financing the budget for 2019-20, due to be unveiled on Thursday.

“It will be unable to borrow much from banks to manage the deficit financing,” said Mansur, also a former economist of the International Monetary Fund.

Of late, the government has been borrowing heavily through high-cost savings instruments instead of low-cost bank loans.

In the first 10 months of the current fiscal year, the government did not borrow from banks and repaid them. But from May 1, it started borrowing, sending the cash-strapped banks into a state of panic, sources said.

Due to the high amount of defaulted loans, the liquidity crisis at banks continues to worsen. This has also limited their capacity to extend funds to the government, they said.

“In the banking sector, political influence should be immediately stopped,” Mansur said urging the central bank to crack down on large corporate groups who have piled up defaulted loans.

He said the actions taken by the government should be revised at the earliest to recover the loans.

The Bangladesh Bank data shows that more than 52 percent of the defaulted loans were with eight state-run banks. As of this March, the eight banks had Tk 58,667 crore defaulted loans, up by 9.69 percent from the previous three months. Forty private banks had defaulted loans of Tk 49,950 crore, up by 31 percent from the previous quarter.

Banks are now forced to disburse loans to some quarters due to political influence, said AB Mirza Azizul Islam, a former adviser to a caretaker government.

“This has played a major role in escalating the loan-default situation.”

Besides, private bank directors often sanction loans due to nepotism or personal relationships with clients.

“The central bank must put an end to such culture,” Azizul added.

Arfan Ali, managing director of Bank Asia, said many businesspeople were unwilling to repay loans believing that they would not get fresh credit in the near future as banks were in liquidity crisis.

Salehuddin Ahmed, former governor of Bangladesh Bank, said the latest figure of defaulted loans would create chaos for the government’s plans to be unveiled on Thursday.

The escalating defaulted loans would choke private investment, an important component for economic growth, and limit the government’s capacity to subsidise various sectors, he said.

Bangladesh Bank should move away from giving special facilities to defaulters on an ad-hoc basis as the practice encouraged them to perpetrate financial crimes, he added.

Md Serajul Islam, spokesperson and an executive director of Bangladesh Bank, said some banks have failed to recover loans after rescheduling defaulted loans in recent months. This had an adverse effect.

Lenders have also adopted a cautious policy in disbursing fresh loans, due to which the percentage of defaulted loans look bigger, he claimed.