No end in sight to the loan default crisis

There is little to cheer for the banking sector after a review of non-performing loans (NPLs), or defaulted loans, from the July-September period has once again painted a very worrying picture. According to latest figures from Bangladesh Bank, the third quarter of 2023 saw fluctuations in such loans, with an increase in the NPLs of private banks but a decrease in that of state-run banks. Overall, while NPLs had reached Tk 156,039 crore by June, it stood at Tk 155,397 crore by September. The relative decline is anything but reassuring, for two reasons.

Firstly, it was due mainly to the regularisation of some loans in a state-run bank through rescheduling. In fact, the total would be much higher if all such written-off loans and credit stuck in legal disputes were factored in. Secondly, the NPL figure from the third quarter marks only a marginal decrease from that of the second quarter, but it is significantly higher than that of the first quarter: Tk 131,620. When compared year-on-year, bad loans have actually gone up by a staggering Tk 21,001 crore. What this means is that the banking sector remains every bit as miserable as it was before.

The question is, why are the authorities failing to do anything about it despite widespread criticism and even stern warnings from the apex court? The NPL crisis already has had a massive repercussion across the sector, not to mention a dent in investors' confidence as well as Bangladesh's credit ratings. A number of factors have been responsible for this—first, the corrupting influence of politics on business, with politically connected individuals mainly defaulting on large loans, sometimes even establishing private banks with swindled funds and then continuing the cycle; second, the shambolic state of governance, frequently allowing financial bad practices; and third, the inadequacy of the legal infrastructure in handling loan disputes.

The effects of all this go beyond loan defaults. Over the years, we have had reports of many scams and irregularities of various kinds by exploiting poor regulations in financial institutions, both public and private. The woeful state of governance can be understood from the fact that bad loans surged by approximately 55 percent in six private banks within the first nine months of this year. Or think of how liberties were taken with rules to allow a little-known real estate company to raise Tk 1,000 crore by issuing bonds using the name of the IFIC Bank, because a powerful businessman-politician sits on its board. These incidents are by no means isolated. This is what happens in a climate of poor governance with little accountability.

We urge the authorities to take a critical look at this state of affairs and take firm action to prevent habitual loan defaulters and improve financial governance in the banking sector. The central bank must play a more active role in this regard.