IMF voices concern over high stressed loans

The executive board of the International Monetary Fund has expressed concern about the continued weak financial situation in the banking sector in Bangladesh, including high default loans and the rising amount of restructured and rescheduled loans.

“They [directors] called for resolute steps to enhance banking regulation and supervision, reform state‑owned commercial banks, tighten the criteria for loan rescheduling and restructuring, strengthen banks’ corporate governance and enhance legal systems to accelerate loan recovery,” the lender said in a statement.

On September 9, the board concluded the Article IV consultation with Bangladesh.

During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.

The discussions took place in Dhaka during June 16–27. The report of the staff team, which was led by Daisaku Kihara, was completed on August 5.

The staff report said the ratio of default loans has increased from 9.3 percent at the end of 2017 to 10.3 percent at the end of 2018. Most of the default loans are in state-owned commercial banks (SoCBs).

The published default loan ratio likely underestimates potential problems in the banking sector, it said.

There has been a growing trend of loan rescheduling and restructuring, including those granted by the Bangladesh Bank on individual basis, though the central bank requires banks to keep provisioning for these loans.

Total stressed loans, which include default, restructured and rescheduled loans, now exceed 20 percent of total loans.

This reflects mainly the very high stressed assets in SoCBs, though in recent years the stressed asset ratio has also been increasing in private banks.

“Comprehensive reform is required to address banking sector weaknesses,” the report said.

In a press release, the executive directors commended the authorities for Bangladesh’s strong and stable economic performance, which has resulted in reduced income poverty and improving social indicators.

Growth is projected to be strong at above mid-7 percent in fiscal 2019-20.

After a slowdown in private investment before the election in last December, robust growth is expected, led by private consumption with strong remittance inflows and smaller negative contributions from net exports.

In order to realise the country’s growth potential and reach upper middle‑income status, the authorities will need to promote productive investments and upgrade the economic policy framework, the statement said.

The board said slow progress in resolving the Rohingya refugee crisis could add to social tensions as well as spending pressures and donor support will remain essential.

“With most humanitarian needs met by donor support, the fiscal impact appears limited so far, but donor fatigue is a risk in the future.”

The directors commended the BB for keeping inflation broadly stable. However, with inflation expectations remaining elevated, they urged the BB to monitor inflation developments closely and stand ready to adjust its policy promptly if warranted.

They encouraged the authorities to continue efforts to gradually increase exchange rate flexibility to help buffer the economy against external shocks, preserve foreign reserves and support the modernisation of the monetary policy framework.

The directors lauded the authorities for fiscal discipline and encouraged them to keep the public debt ratio broadly stable. In this context, they stressed the need to step up the effort to increase revenues to finance the upgrade of infrastructure, support the vulnerable and meet the potential costs of climate change.

The executive board highlighted the need to expand the tax base by reducing exemptions and to modernise tax administration.

While the launch of the new value-added tax is welcome, the directors noted that simplifying the multiple rates would facilitate administration and improve revenue intake.

The directors encouraged the authorities to continue to develop a well‑functioning capital market to reduce the economy’s dependence on bank financing.

In this context, they welcomed the ongoing reform of the national savings certificates system and called for further steps, including reform of the pricing mechanism.

The board underscored that further improvements in public financial management and strengthening governance will be crucial for continued growth.

They highlighted the importance of better public investment management and tax administration, and welcomed the work to revise the authorities’ medium‑term debt management strategy.

They urged continued progress in strengthening measure to combat money laundering and terrorist financing. The directors emphasised the importance of greater export diversification for stronger and more sustainable economic growth.

“They noted that improving the business environment and boosting human capital would help increase Bangladesh’s integration into global value chains and make exports more resistant to changes in global demand patterns,” the IMF statement said.

The directors welcomed the authorities’ effort to address the country’s vulnerability to climate change and natural disasters and recommended continued efforts to create fiscal space for adaptation and mitigation, managing the impact of natural disasters and promoting climate‑friendly investments.