Repeated loan defaults pose risks to banks

The inability of some large borrowers to pay their instalments regularly despite taking a restructuring facility is posing a threat to the banking sector, a top banker said.

These large corporate firms could not recover their businesses, Mamun-Ur-Rashid, managing director and chief executive of Standard Bank, said in an interview with The Daily Star.

“Some clients approached us for further loan rescheduling and we forwarded them to Bangladesh Bank. But the central bank was very strict in this regard and declined to do so.”

The failure of large corporate clients to pay off loans even after taking policy advantage is not a good sign for the banking sector, he said.

Some 11 large business groups restructured loans of Tk 15,000 crore, taking advantage of the relaxed policy in 2015. But within a year, three of them returned to restructure their loans again.

Rashid said the banking sector realised benefits from the relaxed rescheduling policy offered by the central bank, as many non performing loans were regularised later.

Bangladesh Bank's move also helped in reducing the industry average in default loans to a tolerable level at 10 percent, he added.

The banking sector has regularised a total of Tk 113,775 crore from July 2013 to December 2015, according to central bank data. Of the total amount, banks rescheduled Tk 82,392 crore and restructured Tk 31,383 crore.

Of the rescheduled amount, loans of Tk 30,000 crore were regularised by taking advantage of the relaxed policy, and Tk 52,244 crore in compliance with the rescheduling policy.

Bangladesh Bank observed that the recovery of rescheduled loans under the relaxed policy was unsatisfactory.

He said banks are now focusing on the medium enterprises, as this segment is flourishing fast compared to the small and large enterprises.

Standard Bank is targeting the medium enterprises, mainly in agriculture, as the sector has potential and is growing in Bangladesh.

Previously, the agriculture sector was considered special, and banks were incentivised to disburse loans here. But, the scenario has changed as many big companies, including Pran and ACI, are now running their business in Bangladesh.

Many other corporate groups are diverting their businesses into agriculture as well, he said.

“We have targeted the agriculture sector to disburse loans as the default culture is weak and loans are given at a low cost of 10 percent here. Moreover, it is an employment generating sector. Women are more engaged here as they can manage both their businesses and their homes.”

Standard Bank gives priority to women entrepreneurs, providing loans of up to Tk 25 lakh without collateral, Rashid said.

He said the banking sector is not likely to see a further fall in the lending rate, as the banks are already suffering a fund crisis.

Depositors are taking away their money to other sectors as banks now offer a low rate of interest, he added.

However, the rate is high for banks as they lend at 9-10 percent and pay depositors at 6-7 percent.

Banks are taking steps for cost cutting and increasing other businesses to maintain their incomes, following the instruction of Bangladesh Bank, he said.

The weighted average lending rate was 9.85 percent in January, while the deposit rate was 5.13 percent, according to Bangladesh Bank data.

Standard Bank lends at 10.14 percent against 5.76 percent for deposits as of January, central bank data shows.

The government banks are mainly responsible for the high default loan rate in the sector; it is below 5 percent for most private banks, which is acceptable by central bank standards.

Banks' default loans dropped to 9.23 percent at the end of December last year from 10.34 percent in September same year.

Total default loans stood at about Tk 62,000 crore against outstanding loans of Tk 673,000 crore.

Standard Bank has launched aggressive drives to recover loans and reduce the default loan rate, the chief executive said.

The default loan rate of Standard Bank surged to 3.71 percent at the end of December last year, compared to 3.23 percent in the same period of previous year, according to central bank data.

As of December, total default loan of the bank stood at Tk 378.35 crore, against outstanding loans of Tk 10,208 crore. 

He said Standard Bank is growing steadily; it included around 54,000 new customers since October last year when Rashid joined the bank.

The bank has also taken measures to ensure cyber security, like installation of anti skimming devices at all ATM booths.

He also emphasised the importance of clients' awareness in combating cyber fraud.

The bank is also expanding its agent banking to extend financial services to the remotest parts of the country.

The bank has nine agents and it will add 50 more by this year, he said.