Forced loan ticks up Jul-Aug

The volume of forced loans soared by Tk181 crore to Tk15,228 crore in the first two months of the current fiscal year thanks to surged import and export leading to a higher letter of credit (LC) opening and low LC settlement. 

"It might happen [rise in forced loan] due to delays in LC settlements as the economy is rebounding rapidly. But we cannot call it bad loans," Md Serajul Islam, spokesperson and executive director of the Bangladesh Bank, told The Business Standard. 

Forced loans are created when clients fail to make their LC payments on maturity dates, and yet banks have to meet up their obligations to foreign banks. Delay in LC settlement can happen both in import and export.  

Serajul Islam said export payments on due time against the LCs depend on the foreign entities, and in most cases, they do not have any exclusive bargaining power to force the entities to clear the payments.

Central bank data show forced loans decreased by Tk2,280 crore to Tk15,228 crore in the last fiscal year as the country witnessed a fall in both import and export amid the pandemic.

Apart from the LC settlement issue, businessmen said forced loans rose as banks have been deducting stimulus instalments from their export proceeds.    

Mohammad Hatem, executive president of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said banks are deducting stimulus loan instalments first from the export proceeds and then they are moving for the LC settlement.

Mohammad Hatem said more and more exporters are now opting for air shipments to meet the foreign garment demand immediately. The growing trend may drive the forced loans in upcoming days riding on costlier air shipments. 

The business leader said forced loans always put a squeeze on them since the interests are 2%-3% higher than the market rates.    

In the six months until June, forced loans of Sonali, Janata and Agrani banks increased by Tk309 crore. But Rupali Bank was able to recover some of its forced loans – the amount ultimately decreasing by Tk75 crore.

According to the Bangladesh Bank, the amount of Sonali Bank's forced loan increased by Tk6 crore from December 2020 and stood at Tk2,728 crore in June. The forced loan of Agrani Bank increased by Tk267 crore and that of Janata Bank by Tk36 crore. At present, Rupali Bank has Tk915 crore of forced loans.

In this regard, former governor of the Bangladesh Bank Dr Salehuddin Ahmed recently told TBS, "Most of the banks do not properly scrutinise the businesses when guaranteeing an LC." 

"If the bank assessment is not appropriate and strict, the amount of this loan will increase in future," he added.