Unhealthy competition among banks on loan takeover has resulted in vulnerability in the banking sector as most of the transferred loans became defaulted, according to a new research.
Under the loan transferring system, widely known as loan takeover, a loan is taken over by another lender by paying off the old lender in full, after which the borrower starts paying instalments to the new lender.
Due to the unhealthy competition among the banks on loan takeover, lenders provide money to borrowers beyond permissible limit, said Md Akhtaruzzaman, director general of the Bangladesh Institute of Bank Management (BIBM).
He spoke while presenting a keynote paper on “A Review of the Banking Activities” at the opening session of a two-day annual banking conference. The BIBM organised the event at its office in Dhaka.
Akhtaruzzaman said assessors lack accountability for assessing the value of a collateral.
“Though collateral is secondary, it gives comforts to banks. At the time of disposal of collateral, it was found that the assessed value was much higher than the actual value.”
He said financing large businesses by multiple banks leads to creation of excessive loans compared to requirements, giving scope to divert the excess funds to unspecified areas, mainly in speculative businesses.
Under the circumstances, borrowers fail to generate cash flow from its operation to service the debt, which compels them either to become defaulted or repay loans of one bank by the fund borrowed from another bank, he said.
Non-performing loans in the banking sector stood at Tk 116,288 crore as of September, up 24 percent from nine months ago, according to data from the central bank.
“Improved corporate governance in banks will help maintain quality of credit operation,” Akhtaruzzaman said.
Last year, only 20 percent banks disbursed loans to new sectors or industries, whereas 80 percent lenders were confined to old businesses, he said.
Bangladesh Bank Governor Fazle Kabir said there is a negative tendency among banks when it comes to disbursing loans.
He said Bangladesh is on course to becoming a middle-income country. “We are now an import-dominant economy. But we need to grow our export,” he said.
The governor said private sector credit growth has been maintaining a downward trend in recent years, which is below the central bank target.
Banks should explore new areas to disburse loans in the interest of the private sector, Kabir said.