Bad loans on the rise

THE situation with the state-owned banks is dire. As per the Financial Stability Report (FSR)-2012 brought out by Bangladesh Bank, "the classified loans in the state-owned banks are higher due to the nature of their operations (lack of efficiency in fund management, extending obligatory financing towards social and economical priority sectors and politically motivated lending)." Hardly comforting words coming out of the central bank, and why should they be? According to a report published in The Financial Express, the threshold for non-performing loans (NPL) as of December 31, 2012 in the five state-owned banks had reached a staggering 63%.
This culture of allowing the sanctioning of loans on financially unviable projects has taken its toll on the financial sector. Indeed, it is not only the state-owned banks that are defaulting, but again as per central bank data, we have 2 domestic commercial banks, 3 specialised development banks, and here it gets interesting, two foreign banks joining the ranks of NPL. A series of high-level financial scams have rocked the very foundations on which the banking system sits over the last year. While the sector was still coming to terms with the Hall-Mark and Destiny Group fallout, we are confronted with the spectacle of large-scale swindling in Basic Bank, another state-owned institution. What all this points out is that the recommendations of the central bank, particularly on strict on-site supervision coupled with off-site surveillance of financial intermediaries and greater collaboration between or among the various regulatory bodies to prevent such scams from repeating themselves, have not been heeded to. Going by what has been made public by the central bank; bad loans in the state-owned banks have reached levels in excess of Tk.100 billion or approximately 12% of the total credit disbursements over the first quarter of 2012.
Indeed, going by media reports, the volume of classified loans (CL), which basically means loans gone bad, are on the rise. Going over central bank data, we find that CL has increased by an estimated Tk.26 billion over January – March, 2012 over the same period in 2011. Across the sector, total amount of CL stood at slightly over Tk.252 billion in '12 as opposed to an estimated Tk.226 billion in '11. CLs, as opposed to NPL, are dependent on a myriad other factors which include amongst others the slowing down of the global economy, lack of access to energy in terms of power and gas, and the overall adverse political climate prevailing in the country.
There has been no lack of directives coming out of the central bank on how banks need to manage their respective portfolios to stem this alarming tide. Yet, when Boards of banks, especially state-owned institutions, have onboard individuals who are either politically affiliated or are backed by the "powers that be," there is little that the central bank can do. The fact that the culture of impunity is now a well established norm in our financial sector, whereby rules and regulations may be flouted openly, only goes to show to what extent Bangladesh Bank exerts influence in these institutions.
Despite the string of scams that have been witnessed in the recent past, little headway has been made to recover the vast sums that have been siphoned off. Such inaction is inexplicable and unacceptable by any standards. The drama of the probe report in the aftermath of Hall-Mark, the blame game that ensued between the ministry of finance and the central banking authority about who did what, the charade of so-called recovery and apparent promises made by principal accused of returning funds and the subsequent denial of accused to having made any such claim — all points to one conclusion. That it is perfectly acceptable to siphon off public or private funds from banks.
It is pathetic that we choose to play games with the financial sector. The bulk of graft has come from state-owned banks and not private ones, and it is this area that needs the greatest of attention. Having said that, had there been little supervision by the central bank, then the level of default would have been much higher in the banking sector. Although the central bank bore the brunt of the accusations for the scams of groups like Destiny and the share market debacle, the problem essentially lies elsewhere.
Ideally, a bank's Board should have a sprinkling of sound businessmen and seasoned senior bankers in them. Time has surely arrived to take note that state-owned banks are not a place to give rewards for loyalty where party apparatchiks may be stationed. To put all this in perspective, in the developed world, when a bank hits 2% non-performing loans, it is deemed to be in trouble. At 2.5%, head of loan department gets axed. At 3% or above, the Chief Operating Officer is laid out to pasture. In Bangladesh, we have banks hitting over 60% non-performing loans and it is still, business as usual.

The writer is Assistant Editor, The Daily Star.