Loan defaults in the banking sector jumped 19.3% year-on-year in the first quarter of 2022 to one of the highest levels in Bangladesh’s history, due to the withdrawal of the easing policy from classification of loans.
Non-performing loans (NPLs) totaled Tk 113,441 crore in March, only behind Tk 116,288 crore of defaulted loans, the highest ever in September 2019.
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Analysts, however, blamed deteriorating corporate governance amid lax Bangladesh Bank oversight for higher NPLs.
Previously, the central bank had taken several measures, including relaxing rescheduling and loan classification rules, to get rid of NPLs. But these measures largely failed to produce the expected results and restore financial discipline in the banking sector, which was reflected in the increase in delinquent loans in the January-March quarter.
Loan defaults increased by 9.84% in March from three months ago, when they stood at Tk 103,274 crore.
The delinquent loan ratio was 8.53% of outstanding loans in March, down from 8.07% a year earlier.
Syed Mahbubur Rahman, chief executive of Mutual Trust Bank, said the withdrawal of the relaxed loan classification, which the BB had introduced to help borrowers stay afloat amid the pandemic-induced downturn in business, was the one of the main drivers of soaring prices. NPL.
The central bank maintained a standstill facility for borrowers throughout 2020.
As a result, banks did not reclassify borrowers’ credit status, bringing NPLs down to Tk 88,734 crore, down 6% from 2019.
Under the policy, borrowers were allowed to avoid slipping into default in exchange for giving just 15% of total installments payable last year.
The policy easing continued last year, as well as the coronavirus pandemic, continued to hurt the economy and businesses.
Rahman says small and medium-sized enterprises (SMEs) have been hit hard by the pandemic as demand has plummeted, and many of them are still facing difficulties.
“Many SMEs have become insolvent.”
The banker notes, however, that delinquent loans generally increase in the first quarter of a year, with banks opting for the period to classify loans so that borrowers repay during the rest of the year.
Emranul Huq, chief executive of Dhaka Bank, said some customers may not have repaid their loans obtained under the stimulus packages declared by the BB to compensate for the slowdown.
Central bankers say many banks have their defaulter-filed briefs overturned in court in the first quarter, sending high NPLs.
Salehuddin Ahmed, a former central bank governor, believes a group of delinquent borrowers are not repaying their loans under the guise of the pandemic.
The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), the country’s apex trade body, recently asked the central bank to extend the relaxed loan classification policy until December.
“The central bank should not accept the FBCCI proposal because previous experiences with easing policies did not bring any positives for the economy,” Ahmed said.
The central bank has eased its supervision of the banking sector due to the ongoing currency crisis. Lax supervision is not a positive sign for the financial sector, he said.
“Instead, the health of the banking sector should have strengthened at this time, as the economy is now battling the global crisis resulting from the Russian-Ukrainian war.”
Monzur Hossain, research director at the Bangladesh Institute of Development Studies, also echoed Ahmed on central bank oversight.
“The ongoing global trade crisis has had a negative impact on local businesses, so NPLs are on the rise,” Hossain said.
He says the number of habitual defaulters is increasing, contributing to the increase in NPLs.
Bangladesh Bank data showed that 46.5% of delinquent loans were in nine state-owned banks.
NPLs in state-owned banks rose 11% year-on-year to Tk 52,753 crore in March.
Forty-one private commercial banks held overdue loans of Tk 57,804 crore, up 28% from a year ago, while NPLs in nine foreign banks rose to Tk 2,885 crore from Tk 2,458 crore Tk.
In an article yesterday, the Center for Policy Dialogue said that due to the long-standing moratorium on loan classification, the current level of NPLs is hardly representative of reality.
“It is feared that the actual volume of NPLs is much higher than the official figures show.”
NPLs are expected to rise further in the coming days as lending under Covid-19 liquidity support programs has not been provided in a transparent or accountable manner, the CPD said.