Default loan rates highest in shipbreaking, SME

Shipbreaking and shipbuilding, small and medium enterprises, trading, agriculture and garment are the top five sectors that generated the highest level of bad loans in Bangladesh in 2020, official figures showed.

Fund diversion by borrowers, lack of farsightedness among businesses when it came to investment, and banks' failure to maintain due diligence were mainly responsible for the highest amount of default loans in the sectors.

As of December last year, banks gave out funds amounting to Tk 16,980 crore in the shipbuilding and breaking sector. Of the volume, 18 per cent turned into non-performing loans (NPLs), the highest ratio among all of the sectors, according to data from the central bank.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said a majority of shipbuilders lacked foresight when it came to expanding their business.

He said shipbuilders took a hefty amount of loans and expanded their capacity.

"But they did not assess the global market before producing ships. As a result, many businesses failed to sell their products on time."

Md Saiful Islam, chairman of Western Marine Shipyard, the leading shipbuilder in Bangladesh, said his company had operated business successfully between 2001 and 2010.

Then, the global and eurozone financial crises hit the shipbuilders in Bangladesh.

"The global demand for ships nosedived after the crises," he said.

But there is a ray of hope as demand had started to pick up, said the entrepreneur.

He requested the government to extend policy support to the sector so that it could regain its previous position in the global market.    

Enterprises in the shipbreaking sector chiefly diverted funds, said Rahman.

Emranul Huq, managing director of Dhaka Bank, said there were many wilful defaulters in the ship breaking sector.

Md Abu Taher, president of the Bangladesh Ship Breakers and Recyclers Association, said of the 160 member companies of the association, 50 were in operation.

The companies purchased old ships at higher prices, but they failed to sell scarps due to lower demand.

"As a result, they could not repay loans. And banks also showed reluctance in providing more loans to protect them from the debacle," Taher said. 

The CMSME sector had the second-highest level of NPLs, which accounted for 12 per cent of the total outstanding loans of Tk 44,790 crore as of December.

The elevated NPL ratio has been a common phenomenon in the sector for years as their financial condition is weak. As a result, CMSMEs become defaulters when their business faces any crisis.

The NPLs facing the commercial loans in the trading sector stood at Tk 24,700 crore, or 11 per cent of the outstanding loans.

A majority of commercial loans are usually provided in the form of working capital.

Huq says client selection by banks is important before disbursing commercial loans.

Many commercial loans are given out based on the aggregate products available at their depots. But a good number of borrowers did not repay the loans on time despite selling goods, which resulted in a large volume of NPLs in the sector, said Huq.

Default loans in the agriculture sector stood at Tk 4,465 crore, which is 10 per cent of the loans disbursed among the farmers.

Growers frequently face natural calamities that make it tough for them to pay instalments regularly. In addition, the supervision of farm loans is also weak, another major reason for the increase in bad loans in the segment.

"Many private banks don't have the capacity to disburse and recover farm loans efficiently," said Mutual Trust Bank's Rahman.

The garment industry is another sector where a considerable volume of loans has fallen into the defaulted category. The ratio of NPLs stood at 9 per cent against the outstanding loans of Tk 130,850 crore.

Huq said some borrowers in the industry defaulted as they failed to sell products abroad or receive timely payments from their buyers.

Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, says the number of good borrowers is higher than bad ones in every sector.

"Lenders can't avoid their responsibility for the higher ratio of NPLs in the five sectors."

According to him, the debt-equity ratio is the most important indicator before any loan disbursement.

"If a bank lends a higher amount of loans than the equity owned by a client, the fund will slip to the risky zone. Unfortunately, some banks are doing so, generating NPLs."

Ahmed also urged banks to verify the cash flow of a business before lending.

"If banks follow the method, defaults can be contained to a large degree."

Rahman said some banks did not monitor borrowers regularly, giving them a scope to misuse the fund.

However, the overall default loans in the banking industry went down in 2020 on the back of a general forbearance on loan payments extended because of the coronavirus pandemic.

NPLs stood at Tk 88,734 crore last year, down 5.93 per cent year-on-year, BB data showed.

However, bad loans went up heavily in June this year. It was Tk 99,205 crore, up 11.80 per cent from six months earlier and 3.21 per cent year-on-year.

This means NPLs may increase further in the five sectors, a central banker said.