Another ominous sign for the banking sector

Defaulted loans soared to the highest ever in the country's history, totalling Tk 110,874 crore as of this March after another Tk 16,962 crore—also a new record—was added to the tally in the first quarter of this calendar year. Defaulted loans now account for 11.87 percent of total outstanding loans, up from 10.30 percent last December, which itself was alarming enough.

The unprecedented increase in defaulted loans occurred partly because of the government's decision to ease loan rescheduling facilities for defaulters which basic economic theory—the concept of moral hazard—and economists warned would happen from day one, exactly as it has materialised.

As per the government's new policy, defaulters would be allowed to reschedule their classified loans by providing only two percent down payment instead of the existing 10-50 percent. And interest rate levied on them would go down from 12-16 percent to nine percent with extended repayment time. With such favourable terms, why wouldn't borrowers increasingly default on loan repayments, especially when there already is a pervading culture of defaulting and of defaulters being let off scot-free nearly every single time?

That the government would grant such concessions in the first place is shocking, as every single concession it previously granted had similarly backfired. Thankfully, however, there is currently a stay order from the High Court preventing the implementation of the new policy, which we believe should be scrapped permanently.

The banking sector seems to be in serious trouble with banks suffering from liquidity crisis because of these loan problems. And what is even more concerning is that the situation is actually worse than what it seems on the surface because previous rescheduling policies—allowing accounting manipulations—have allowed a lot more bad loans to stay hidden.

All this is the result of repeated political interventions in the financial sector and of nepotism—as experts have also pointed out. But there is still time to rescue the banking sector. However, the government must act fast as time is quickly running out and things continue to only get worse.