Bleeding from bad loans

Ballooning bad loans are crippling not only the banking sector but also the national economy as a whole as the authorities fail to recoup the loan money from big businesses, many of whom are willful defaulters, analysts say.

The ripple effects reach far and wide. To start with, banks cannot convert savings into loanable funds as they have to keep aside the amount equivalent to the bad loans as provision, which they cannot invest to maintain stability. As a result, banks' cost of funds shoots up and lending rates get higher.

All of this affects the banks' profit margin, scope of business expansion and the plan for job creation, according to experts.

Things are getting worse by the day as borrowers from some leading corporate groups to little-known businesses have been taking away depositors' money, never to return it.

Eight state-run banks are the worst victims as a fourth of their loans have gone bad.

As of April, the accumulated default loans in the economy is Tk 111,347 crore, which is higher than the development spending last fiscal year, as disclosed by Finance Minister AMA Muhith in parliament on Monday. The figure includes the written off loans totaling nearly Tk 40,000 crore.

Bangladesh Bank data show nonperforming loans account for 10.53 percent of the total outstanding loans. But analysts say the figure would have been much higher if loans had not been rescheduled and restructured.

In 2015, for example, the BB allowed large borrowers, with at least Tk 500 crore loans, to restructure their loans. Around Tk 15,000 crore were restructured that year alone.

Analysts say there is no record of anyone being punished for willful defaults. Such inaction is encouraging unscrupulous businesses and individuals to become defaulters willingly.

Experts think there is a lack of political will to deal with loan defaults, on which India has been cracking down for the last two years.

Prof Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said growing bad loans were impeding further economic growth as banks' lending capacity gets tightened and good clients could not get loans at lower rates.

Taking mortgage or collateral against loans at inflated price has become another big problem for banks that fail to sell mortgaged assets whose market prices are much lower than the loans, he added.

State-owned BASIC Bank is the victim of this practice as many little-known businesses took loans giving mortgages at inflated prices between 2009 and 2013 when Sheikh Abdul Hye Bacchu was chairman.

“We have been pursuing the government for the past three years to set up a commission for banks. But it did not pay any heed to the proposal,” said Prof Mustafizur.

If the commission was mandated to reform the sector, accountability, transparency and governance would have improved in the crippled banking industry, he added.

Zaid Bakht, an economist and current chairman of state-owned Agrani Bank, said use of loan money in unproductive sector, such as to buy land or to launder it, is detrimental to economic growth.

“Had the borrowers utilised the money in productive activities, they could have paid their loans back,” he said.

Willful defaulters take the advantage of legal loopholes, said a senior official of a state-owned Bank.

The official added they were pressing a borrower to pay back around Tk 500 crore. In response, the borrower went to the court that gave him 12 years' time with three years' moratorium.

Four state banks -- Sonali, Janata, Agrani and Rupali -- are feeling the pinch of these legal loopholes. The recovery of some Tk 27,700 crore loans remains uncertain because of court orders. Of the sum, over Tk 14,000 crore was taken from Sonali Bank. 

The managing director of a private bank voiced the same concern.

Helal Ahmed Chowdhury, former managing director of Pubali Bank, said a taskforce could be formed to heal the ailing banking sector.

“But political will is a must for that,” said Helal, also a supernumerary professor at the Bangladesh Institute of Bank Management.

About the court orders, the veteran banker said banks had to overcome the problem with the help of the court.

Analysts also cited the example of India, which has been dealing with bad loans effectively in recent years.

Last year, India's central bank decided to clean up the balance sheets of Indian banks, which are collectively saddled with Rs 6 lakh crore bad loans, equivalent to 9 percent of the total outstanding loans in the economy.

After the Reserve Bank of India's order, banks have started cracking the whip on Indian companies for repayment of loans. Leading corporate houses, including Reliance, Tata, Birla and Essar, were forced to sell their prized assets to repay their bank loans.

Analysts also point out that enforcement of laws in India is much stronger than in Bangladesh.

For example, liquor baron Vijay Mallya, who is accused of defaulting Rs 9,000 crores in loans, was arrested from London in April.

Subrata Roy, chief of Sahara Group, which was the sponsor of India's national cricket team for years, is in jail for over two years now, for allegedly embezzling Rs 24,000, which he did not pay back to investors.