BB to sign MoU with banks to cut default loans

Bangladesh Bank plans to sign a memorandum of understanding (MoU) with 10 commercial banks for taking various steps on a pilot basis, including periodically publishing their lists of defaulters, in a bid to reduce their default loans. 

The central bank recently shared this plan with a visiting mission of International Monetary Fund (IMF).

The IMF mission submitted a statement to government high-ups on Thursday wrapping up its nine-day tour.

A finance ministry official said the IMF mission provided its preliminary findings in the statement and a detailed report would come later.

In the statement, the international lender mentioned four major reform priorities to boost medium-term growth prospects.

These include strengthening corporate governance of banks, adopting risk-based supervision and strictly enforcing the current prudential framework and withdrawing waivers and phase-in periods for required provisions.

It also spoke of reforming the legal system to support a stronger enforcement of creditor rights and incentives for debtors to make repayments.

The IMF said the government informed them that they would amend the bank related acts by the end of this year.

According to the IMF statement, tackling the high amount of non-performing loans (NPLs), especially in state-owned commercial banks, remains a major challenge.

"Bangladesh Bank plans to sign memorandums of understanding on a pilot basis with 10 commercial banks to devise a credible plan to reduce NPLs," it stated.

"In the interim, BB (Bangladesh Bank) should resume publishing data on 'stressed advances' as done until 2018," it read.

"Ensuring that the classification and provisioning requirements are in line with Basel standards and conducting an asset quality review of SOCBs (state-owned commercial banks) is an important first step," it added.

Non-performing loans totalled Tk 113,441 crore in March, seeing a 19.3 per cent year-on-year surge.

An official of Bangladesh Bank said another technical mission from the IMF would come later to provide assistance to the central bank for reducing default loans.

In the IMF statement, it was mentioned that greater supervisory oversight, including developing internal NPL management skills and setting operational targets to reduce NPLs, can help initiate active NPL resolution in banks.

In the absence of reforms to stem the flow of NPLs, the authorities' plan to establish a public asset management corporation poses significant fiscal risks, it opined.

According to the statement, the government is considering raising prices of petrol, octane, liquefied natural gas (LNG) and electricity in the coming months.

It observed that subsidies for energy, fertilisers and food as well as support for the vulnerable and farmers have increased.

But a reprioritisation of current and capital expenditures is expected to contain the fiscal deficit for FY22 as budgeted at 5.1 per cent of the GDP, it said. 

The IMF projected the fiscal deficit to reach 5.5 per cent of the GDP in FY23, partly driven by higher subsidies and weak revenue collections.

In the absence of adequate revenue mobilisation, budget financing is increasingly relying on costly domestic debt, eroding fiscal space, it opined in the statement.

The government has set aside an allocation of Tk 82,745 crore to run its subsidy programme for fiscal year 2022-23.

A finance ministry official said the amount of subsidy may need to be raised if the prices of fuel, fertiliser and LNG rises in the global market.

Of the total allocation, subsidies worth Tk 18,000 crore have been set aside for power, Tk 15,000 crore for fertiliser and Tk 6,000 crore for LNG.

The IMF mission opined that the Russia-Ukraine war has interrupted the robust recovery from the pandemic and was posing serious macroeconomic challenges for the country.

In line with global developments, rising commodity prices, supply disruptions, and a slowdown in external demand have led inflation rising to its highest 7.6 per cent in June since 2014, it said.

Current account deficit has widened to 3.5 per cent of the GDP between July and May and the taka depreciated by 9 per cent since March, it said.

Moreover, foreign exchange reserves declined to 5 months of prospective imports from their peak of 7 months at the end of FY21, it added.

Near-term growth is expected to be weighed down by a slowdown in Europe and the US which account for over 80 per cent of total export demand, forecasted the IMF.

Inflation, driven by commodity prices, is expected to peak in the third quarter of FY22 and remain elevated, it said.

Persistent inflationary pressures, faster tightening of financing conditions and larger than expected slowdowns in major advanced trading partners and China could further put pressure on reserves and the taka, it pointed out.