State banks breed default loans in all sectors | The Daily Star
12:00 AM, May 29, 2019 / LAST MODIFIED: 12:00 AM, May 29, 2019

State banks breed default loans in all sectors

BB blames it on poor governance

Dull business in any particular sector is not to be blamed for the rise in default loans in state-run banks; rather, bad debt can be found in every sector that they financed because of their poor governance, said a Bangladesh Bank report.

Banks usually give loans to 11 major sectors in bulk, and the state banks’ default loans are much higher than the private and foreign ones in all the sectors, as per the report unveiled yesterday.

But Sonali, Janata, Agrani, Rupali, Bangladesh Development Bank Ltd and BASIC Bank faced the highest default loans in shipbuilding and breaking, transport and communication, SME, and garment and textile sectors.

At the end of December last year, the state banks accounted for 52 percent of the banking sector’s total default loans at Tk 93,370 crore.

Fazle Kabir, the governor of the central bank, unveiled the Financial Stability Report 2018 at the BB headquarters in the capital.

Default loans in consumer credit would also be high if the state banks focused on the segment, said a Bangladesh Bank official.

The central bank report indicates that the state banks have become weak financial institutions in the absence of corporate governance and poor efficiency in running their business, said Ahsan H Mansur, executive director of the Policy Research Institute.

And it is not just the state-owned banks that were in trouble last year; the entire banking industry is distressed, with the sector’s net profits shrinking by half in the wake of spiralling default loans, according to the report.

Besides, about 30 percent of the rescheduled loans defaulted again last year. And yet, banks rescheduled a record amount of default loans last year at Tk 23,210 crore, up 22 percent from a year earlier.

A major portion of the loans was rescheduled without verifying the borrowers’ cash flow and financial strength and without securing the requisite down payment, Mansur said.

“These have cast a pall over the entire financial sector.”

The sector enjoyed good operating profit last year but banks’ net profit ended up being 57.5 percent lower than a year earlier because of the upward trend in default loans, the report said.

In 2018, the banking sector’s operating profit stood at Tk 26,600 crore, up 7.91 percent year-on-year.

But its net profit was Tk 4,040 crore, down from Tk 9,510 crore in 2017, thanks to doubling of provisioning requirements at Tk 14,620 crore.

Default loans were up 25.66 percent in 2018 from a year earlier.

“This is contrary to the picture of the financial sector depicted by the government,” said Mansur, also a former economist of the International Monetary Fund. 

He said the declining trend of net profits would have serious implications on the government’s initiative to mobilise revenue.

“The picture has hinted that the financial health of the banking sector is on the decline, which will subsequently hit the operating profits in the days ahead.”

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