In its Financial Stability Report 2016, released on July 31, 2017, the Bangladesh Bank (BB) revealed that "rescheduled loans [have] created extra stress on the banking sector in recent times," constituting "a significant part of the bank's total loan portfolio." When exposed to various credit shocks, 23 out of 49 banks would become undercapitalised mainly due to default by large borrowers, the report said. Having refused (for years) to admit the severity of trouble the banking sector is mired in, this is perhaps the clearest official admission till date as to the true gravity of the crisis at hand.
Yet, according to reports in the international media, there is a huge amount of defaulted loans "even outside of this" that is not being reported anywhere! The only reason why they have managed to remain hidden for so long, according to reports, is because of data manipulation and accounting frauds. Even the BB had, in fact, found several state-run and commercial banks under-reporting bad loans and inflating profits in its own inspections.
But putting that aside for a moment, a peek at the "officially" admitted figures alone should be enough to set alarm bells ringing. The amount of non-performing loans till April 2017, for example, stood at Tk 1,113.47 billion even after all the (questionable) loan rescheduling and more, as per official data. This figure becomes even more astounding when one takes into account the fact that, in 2009, defaulted loans stood at only (relatively speaking) Tk 381.48 billion of which, more than half was already written-off.
Given that outstanding loans had amounted to Tk 62.632 billion at the end of 2016, over the last one year, defaulted loans have increased by nearly Tk 11 billion—a record for Bangladesh. To put things more into perspective, according to a BB report published on March 23, 2017, a whopping 9.23 percent of total outstanding loans in the banking sector (then) were in default. If that wasn't bad enough, once restructured and rescheduled loans are factored in, that figure actually increases to somewhere close to 16 percent.
And it gets worse, still; despite the dangerous implications of all of this, banks have been allowed, somehow, to get away with having reduced levels of provisions against potential losses. At the end of March 2016, loan-loss provision totalled Tk 266 billion, with a shortfall of Tk 42.9 billion, according to the central bank's Regulation and Policy Department. Yet, provision shortfall went up again in the second quarter of 2017 by 18.33 percent in comparison to what it was a year before. During the April-June period of 2017, total shortfall went up from Tk 9.59 billion in the previous quarter to Tk 61.91 billion, showing that there has actually not been any improvement whatsoever; rather, performance of (most) banks have continually deteriorated.
Given the circumstances, the South Asian Monitor, in one of its report, concludes that, "If things continue in this manner, Bangladesh is bound to face a severe recession, similar to the financial crash faced by the US a few years ago" ("Default loans deplete Bangladesh banking sector", March 29, 2017). Of course, what the exact implications of such a crash would be is a topic on its own. It is, however, not very difficult to predict overall, that the consequences, whatever they may be, would be catastrophic.
But one side-effect that we have already witnessed, perhaps without even realising just how seriously problematic it is, has been the repeated bailouts of banks using taxpayers' money, in spite of the widespread criticism that the government has received from nearly all quarters, and the fact that bailouts have time and again proven to be futile.
For example, according to data from the finance division, the government had provided state-owned banks a total of Tk 116.6 billion in recapitalisation funds between fiscal year 2011-12 and 2016-17. With all that recapitalisation fund predictably failing to incentivise banks to improve their performances (why would it?), the government, in June 2017, had again allocated Tk 20 billion to recapitalise the state-owned banks, perhaps, in hopes of a miracle and, in all likelihood, not for the last time either.
In the midst of all these, what remains most worrying, however, is the government's complete unwillingness, for whatever reasons, to address or even recognise for that matter, the real root causes behind the banking sector being in a shambles, despite economists, business-experts, the media and even citizens constantly harping on them. And the real "root of the problem", as highlighted by The Economist in a June 26, 2017 report, is "poor risk management"; as state-owned banks have, for decades, "lent large amounts to big, influential borrowers, who have been known to be lax with repayments."
Moreover, the fact that "defaulters are rarely penalised" and loans "routinely restructured" instead "to permit further lending to the same borrowers", means that the "regulatory response to the banking sector's problems" itself, lies at the root of it.
A large part of the solution requires for the government to hold banks "strictly accountable" to achieve the "numerical targets agreed upon with the authorities" and to implement reforms that would "focus on improving supervision, containing risks from loan concentration and improving the legal and financial framework for loan recovery" as pointed out in an IMF report. Ultimately, what is needed first and foremost, is the "political will" which the IMF report generously terms as having "been limited so far"; but in truth, has been nearly non-existent.
That "political will", however, is not very likely to just automatically emerge from within the government on its own, as is often the case. The only realistic way to bring that about, is for conscious citizens, experts, activists and others to exert sustained pressure on the government to ditch its disastrous policies, which by now, is clearly meant to serve only the interest of a minor few, at the expense of everyone else in general and the nation and its economy as a whole.
Eresh Omar Jamal is a member of the editorial team at The Daily Star.