Poor recovery from default loans new headache for banks

The recovery from default loans has failed to keep pace with escalating delinquent assets in Bangladesh, hitting banks' income and cash flow.

Between January and September, banks retrieved Tk 4,195 crore from their non-performing loans, which was Tk 3,751 crore during the same period a year ago, data from the central bank showed.

The recovery is, however, much lower than pre-pandemic levels, hampering banks' smooth operation as their capacity to lend has squeezed.

Banks recouped Tk 5,802 crore from their combined NPLs in 2020 in contrast to Tk 15,466 crore the year before.

Although the central bank has been following relaxed loan classification policies since the inception of the coronavirus pandemic in March last year, the move has failed to bring down NPLs.

Up until September this year, the NPLs stood at Tk 101,150 crore, an increase of 14 per cent from nine months earlier and 7.1 per cent year-on-year.

Emranul Huq, managing director of Dhaka Bank, blamed business slowdown deriving from the pandemic for the adverse impact on the cash recovery.

A good number of businesses are showing reluctance to pay back loans despite a comfortable cash flow thanks to the business revival, he said.

Failing to recover sufficient cash from default loans chiefly hits the banks' income, forcing them to keep more provisions.

"Against the backdrop, we have decided to take strict actions from January against the defaulters who will not pay back their loans by December."

Dhaka Bank will do everything, including filing of criminal cases, to recover the default loans as part of its efforts to improve the financial health, Huq said.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said that the lower recovery had forced banks to raise lending rates and squeezed their capacity to reinvest.

In such a situation, the cost of funds usually rises to a large extent, which ultimately puts pressure on good borrowers.

"We have to keep a higher provision against the NPLs. That's why banks have to set a higher lending rate in order to ensure profits," said Rahman.

Besides, depositors' money are getting stuck because of the banks' failure to recover the NPLs.

"The banking sector is now in a vicious cycle because of the lower recovery of funds compared to pre-pandemic periods. It will eventually hit our incomes," said Rahman.

Regular operations of courts were affected during the peak of the pandemic, creating difficulties to settle cases at the Money Loan Courts in a quick manner, he said.

Banks are also facing tough jobs in getting back regular loans due to the business slowdown.

Abul Kashem Md Shirin, managing director of Dutch-Bangla Bank Ltd, said that banks were now giving more attention to recover the unclassified loans than that of classified ones.

"Lenders were unable to send staff members at the height of the pandemic to push the defaulters to repay. This has sent the recovery of funds from the NPLs to a lower level," he said.

Six state-run banks – Sonali, Janata, Agrani, Rupali, BASIC, and Bangladesh Development Bank – recovered Tk 584 crore from the NPLs in the first nine months this year, up 1.6 per cent year-on-year.

Default loans at the banks stood at Tk 44,016 crore as of September.

Private banks got back Tk 2,093 crore, a decrease of 11 per cent, from a combined default loans of Tk 50,743 crore.

Nine foreign banks realised Tk 88 crore in contrast to Tk 21 crore during the period. NPLs at the banks stood at Tk 2,692 crore.

Three specialised banks managed to get back Tk 1,429 crore from the defaulters compared to Tk 792 crore in September last year, when they collectively faced NPLs to the tune of Tk 3,699 crore.

A BB official said that some defaulters had frequently secured stay orders from courts in order to show their default loans as unclassified assets.

In addition, many delinquent borrowers also have their NPLs rescheduled by making down payment, albeit at insignificant amount, with approval from the central bank, he said.

These have made the issue more complex for banks to realise bad loans, he added.