Default loans denting confidence: BIDS

The rise in default loans stemming from financial scams and weak supervision by the central bank are eroding the confidence of customers in the banking sector, according to a paper of the Bangladesh Institute of Development Studies.

In the recent past, corporate governance in the banking sector improved a lot, but the financial health of many banks has started to deteriorate alarmingly, analysts said yesterday at a Critical Conversation organised by BIDS at the Six Seasons Hotel in the capital.

Rising inequity and the declining trend of poverty reduction have raised question about the high GDP growth figure being recorded in recent years, they said.

The banking sector should be taken to global standards as the country heads towards the middle-income bracket, said Wahiduddin Mahmud, a noted economist and also a former adviser to a caretaker government.

The cost of foreign transactions for local banks will increase unless global standards are established in the banking sector, he said, while delivering a speech as the guest of honour at the inaugural session of the two-day conversation.

Reforms were made in the past to take the banking sector to global level, he said.

“But it appears that we are switching away from global standard,” he said, citing undue interference in bank operation, loan restructuring and recent changes in loan classification rules.

If research shows that policy changes for loan classification are necessary then it is warranted.

“And if the loan classification criteria are changed without research, it will appear to us that these are done amid pressure from businessmen. And it will not bring any good for the banking sector,” he added.

At the first session of the conversation, Monzur Hossain, senior research fellow of BIDS, presented a paper titled “Banking sector in Bangladesh: Where are we heading to”.

State-run banks have accounted for the highest share of non-performing loans (NPLs), while the private ones are struggling to keep it low by loan restructuring and rescheduling, the paper said.

Default loans in the banking sector stood at Tk 93,370 crore as of December last year, which is 10.33 percent of the total outstanding loans.

Bangladesh Association of Banks, a platform of the sponsors of private banks, declared 6 and 9 percent interest rate for deposit and lending respectively, but it did not work at all, Hossain said.

The large amount of NPLs, low operating efficiency of banks and a higher cut of yield on national savings tools are mainly responsible for the high interest rate on lending.

The central bank has recently allowed more lenders, taking the total number of banks to 59, but the new ones are not in a good position.

Merger and acquisition of banks can help perk up the sector and the government should enhance the central bank’s autonomy to address irregularities and reduce the role of banking division under the finance ministry, he added.

The number of banks is much too high and skilled workforce are not available for banking operations, said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh, a platform of the chief executive officers of private banks.

Employees of lenders do not have adequate loyalty to their organisations and they frequently move from one bank to another.

Some banks are involved in aggressive banking and they often engage in competition to lure in clients from other lenders.

Both banks and borrowers are liable for the high volume of NPLs, he said.

It will take 8 to 10 years to settle any case in the money loan court, which tempts wily defaulters to not repay loans, said Rahman, also the managing director of Dhaka Bank.

The government and the central bank are trying to bring down default loans by way of using rescheduling and restructuring.

“The initiative will decrease NPL for the short-term, but we have to think about the issue in the long-run,” he added.

Planning Minister MA Mannan said the government is also concerned about the weakness in the financial sector, and there are discussions about it at the higher level of the government.

The central bank should implement the floating exchange rate for the local currency taka in the interest of widening the export volume, said Zahid Hussian, lead economist of the World Bank’s Dhaka office.

A question has been created about the high GDP growth as it could not stop the rising inequality or bring down the poverty, said Sajjad Zohir, executive director of the Economic Research Group.

The garment sector is now enjoying all types of facilities to expand its business and export volume but the other sectors have not got their desired support, said Selim Raihan, executive director of the South Asian Network on Economic Modelling.

He went on to urge the government to provide incentives to other potential sectors to give a boost to exports.

Zaidi Sattar, chairman of the Policy Research Institute, moderated the first session, where Kazi Iqbal, senior research fellow of BIDS, also presented another paper styled “Issues of Economic Growth in Bangladesh”.