Right after he took office as the new Finance Minister of Bangladesh (FM), AHM Mustafa Kamal declared at a meeting in Dhaka on January 10, 2019, “From today no more money will be added to the defaulted loans and it will gradually decrease from now on.” It is too early to subject the FM’s laudable promise to “fact check” but he deserves credit for providing a list of 300 top loan defaulters to the parliament during the last budget session. The FM also provided a list of 14,617 individuals and institutions which have outstanding loans of over Tk 50 million since 2009. It is my sincerest hope that the FM and banking division are using other tools to recover bad debts since the effectiveness of “name and shame” to cure loan default is still unproven. More on that later.
These efforts by the government to address the problem of non-performing loans (NPL) are not new. Publishing a list of defaulters has been tried before and is part and parcel of the name and shame therapy. It is expected that individuals and institutions who have been named in the list will repay the outstanding loan to their lenders stung to the shame that they suffer. It can be hoped that the government would also seriously consider publishing the results of each “name and shame” campaign from the past and its effectiveness.
NPLs are proving to be a perennial problem for both the state-owned and private commercial banks. However, it is known that NPLs are not evenly distributed among banks with five banks accounting for almost half of the total NPLs. According to a report by the World Bank, NPLs are on the rise in Bangladesh. In a graphic entitled “NPL as percent of Outstanding Loan” in this report, total NPL was 20 percent in December 2013, and oscillated within a narrow band until December 2015, and has been on the upswing since then, reaching a level of 32 percent in September 2018. The practice of loan rescheduling and write-offs also increased, creating further stress on banks. Bangladesh Bank (BB) approved loan rescheduling of Tk 191 billion in 2017 and Tk 200 billion in 2018. NPLs are increasing despite these wholesale approvals of loan rescheduling.
Will this latest round of “name and shame” campaign bring about the desired results? If the past experience is any guide, this tactic does not work in Bangladesh. Fahmida Khatun, Executive Director of CPD, voiced her scepticism about this policy through her columns in The Daily Star. Many of the defaulters operate in society with impunity and even vaunt their ill-gotten money. “It has a lot to do with the value system and cultural practice that exist in our society.” Large borrowers are politically well-connected and manage to reschedule their loans on easy terms. Our neighbour, India, which has a similar problem, has added another approach and gone to court to rein in the “wilful defaulters”. These are the borrowers who have the capacity to repay but do not pay up on their loans.
So, if the “name and shame” campaign is of doubtful efficacy, what can the Bangladesh government do to ameliorate the situation and eventually eradicate the curse of NPLs? First of we must stop pointing the finger at the borrowers only. As they say in Bangla, “ek hathey tali bajey naa” or you cannot clap with only one hand. The current mess is the result of lapses and deficiencies in our banking and financial system, and I will outline some thoughts on reforming the three entities that are at the core of our NPL crisis: the borrower, the lender or banks, and the rules and regulations governing the system.
Experts have frequently raised the alarm about the poor risk management, weak corporate governance, and political interference that has led to the rise in NPLs.
Let us take the case of the borrowers. Obviously in some other societies or in some other context “name and shame” therapy might work. In the USA, tax evaders are targeted by Internal Revenue Service (IRS) after repeated attempts by IRS to work out a deal. However, loan defaulters regularly have their assets seized and businesses that declare bankruptcy (also known as Chapter 11) are shunned by banks and private lenders. Similarly, individuals who have been convicted of sex offences might have their photographs and names listed on the Internet, and they work to a degree as a deterrent.
Banks can use other tools to recover bad loans and use their power to seize and sell assets, take borrowers to court, sell loans to investors, and strengthen their “debt recovery teams”. In Bangladesh, legal reforms are also needed to move these cases through the courts.
One of the most powerful tools against loan defaults in the North American and European countries is the credit rating system which provides a risk assessment for each individual and business. Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit. A borrower’s FICO score, a three-digit number, is very sensitive to his/her past repayment history, bad debts, defaults, and even late monthly payments or delinquency. The lower your credit score, the less likely you will get a new loan for a car or mortgage, and higher the interest rate you pay. Unfortunately, it has been frequently reported that in Bangladesh, the defaulters of Bank A have managed to borrow from Bank B with no difficulty. According to a report by Deloitte, management of a bank’s credit portfolio requires a culture focused on credit risk, robust policies and procedures, well-trained staff, and constant management and oversight. On all four counts, there are severe deficiencies in our banking sector.If loans are rescheduled, it is important that banks and borrowers have a clear sense of the expected timeline and potential pay-offs in restructuring and potential liquidation. If restructuring leads to an injection of fresh capital it must be accompanied by improved management, which will help the defaulter to recover from the mismanagement which brought about the crisis.
In the US, federal regulated banks are required to use the five-tier non-performing loan classification system according to the Bank for International Settlements (BIS): Pass, Special Mention, Substandard, Doubtful, and Loss. However, Bangladesh Bank operates outside BIS guidelines.
In a notice sent out in April, BB loosened the regulations even more. Banks will now treat term loans as sub-standard if no instalments were made for nine straight months, up from three months at present. Non-payment of instalments for 12 months and 18 months will land the accounts in the doubtful and bad categories respectively, up from six and nine months currently.
Dr Abdullah Shibli is an economist and works in information technology. He is Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA.
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