Default loans drop on relaxed policies

Default loans went down in 2020 on the back of a general forbearance on loan payments, a development that does not cheer experts and bankers as the fall did not paint the actual scenario.

Non-performing loans (NPLs) stood at Tk 88,734 crore last year, down 5.93 per cent year-on-year, data from the Bangladesh Bank showed.

Experts and bankers call the decline in the NPLs meaningless as it occurred due to the central bank's instruction to lenders not to classify any loans throughout 2020 under the general forbearance or moratorium.

The moratorium on bank loan payments was introduced in the middle of March after the coronavirus pandemic arrived on the shores of the country, hammering economic activities.

The support was initially expected to last until the end of June. Later it was extended up to December as the crisis showed no signs of abating.

Banks rescheduled and wrote off a good amount of default loans last year, helping bring down the toxic assets as well. Banks removed Tk 12,140 crore of default loans from their books by using the tools of rescheduling and write-off in the nine months to September.

The central bank is yet to come up with the full data on the rescheduling and write-off loans for the final quarter of 2020. This lowered the amount of default loans artificially.

Default loans accounted for 7.66 per cent of the outstanding loans of Tk 11,58,775 crore as of December. The ratio was 9.32 per cent in December 2019.

The central bank prepared the statement of default loans for the first time by calculating the credits disbursed by the domestic and offshore banking units (OBUs) of banks operating in the country. Previously, the statement based only on the loans given by the local branches.

An OBU, a shell branch of banks located in another international financial centre, disburses loans and takes deposits in foreign currencies. It is not allowed to accept deposits or make loans in the local currency in the country it operates in.

If the previous calculation of default loans was considered, NPLs stood at Tk 88,282 crore, which is 8.06 per cent of the outstanding loans amounting to Tk 10,95,772 crore in the domestic banking units of lenders.

Salehuddin Ahmed, a former governor of the central bank, said default loans had declined last year riding on the moratorium, loans rescheduling, and an upward trend of loans write-off.

"This is not the genuine picture of the banking industry. The loan recovery is now highly feeble," he said.

The performance of the banking industry is declining, creating a worrisome situation for the entire financial sector, Ahmed said.

"The lower figure of NPLs is a sign of sweeping data under the carpet."

The banking industry has been facing a lack of corporate governance for years, escalating NPLs, he said, adding that the central bank should strongly monitor the financial health of banks.

Default loans plummeted heavily in the last two years due to the relaxed rescheduling facility, which was put in place in 2019 ignoring global best practices.

For instance, NPLs surged to Tk 116,288 crore in September 2019, prompting the central bank to relax the rescheduling policy as per a government instruction.

Under the policy, defaulters can reschedule classified loans by making a down payment of only 2 per cent instead of existing 10-50 per cent.

A maximum 9 per cent interest rate was charged in 2019 on the rescheduled loans instead of 12 to 16 per cent regular lending rate levied by banks at that time.

This had helped reschedule a record Tk 50,186 crore in 2019 and halted the rise in the default loans. Similarly, the moratorium reined in the upward trend of default loans last year.

"The decrease in the NPLs has not brought any meaningful change to the banking industry as toxic loans will escalate at a faster pace as the moratorium has already been lifted," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

"There is no scope to be complacent as the actual challenge awaits lenders," he said. 

The large borrowers are mainly the delinquent clients, who are responsible for the persisting default loans, said Mansur, also the chairman of Brac Bank. 

Banks should adopt a cautious stance while giving out new loans given the ongoing business slowdown such that they can protect themselves from the pressure of delinquent loans, he said.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said some clients had also paid instalments on loans despite the moratorium, helping the banking industry enjoy a lower amount of default loans.

"Rescheduling and written-off of loans also contributed to the decrease in the delinquent loans," he said.

Md Arfan Ali, managing director of Bank Asia, also echoed the same.

BB data showed more than 50 per cent of the defaulted loans were with the nine state-run banks.

Defaulted loans in the state-run banks, however, decreased 3.57 per cent year-on-year to Tk 46,333 crore last year.

Forty-one private commercial banks held defaulted loans of Tk 40,361 crore, down 8.63 per cent from a year ago. The NPLs in nine foreign banks fell to Tk 2,038 crore in contrast to Tk 2,103 crore.