NPL's unstoppable rise

Infographic: TBS

Finance Minister AHM Mustafa Kamal, soon after taking over in January 2019, had asserted that non-performing loan (NPL) would not grow "by even a single penny from today". Four years later, it emerged as even a bigger problem in the central bank's new monetary policy statement as default loan has soared by nearly Tk38,000 crore since then to Tk131,621 crore now.

"The country's financial sector has also been burdened by a high non-performing loan," says the latest MPS unveiled on 18 June.
The outgoing monetary policy, announced in January this year, also stated how a high level of NPLs was considerably disrupting the stability within the financial sector.

The banking system has been scourged by bad loans for decades concerning previous finance ministers as well.

Kamal's predecessor, AMA Muhith, whose two terms witnessed the country's biggest banking scams one after another, had promised back in 2018 to form a banking commission "very shortly" and recast the bankruptcy law to deal with what he termed a "serious matter". A bank director sanctioning a loan to another bank director is one of the problems in the banking sector, he identified, finding that "no directive had proved effective".

Muhith also spoke about a state-owned asset management company to recover bad debts and the ministry even drafted a law to that end in 2020. A law on a "debt recovery agent company" was drafted even earlier, in 2016.

Such initiatives brought success in taming default loans in many Asian countries such as Indonesia, South Korea, Vietnam, Malaysia, Thailand and the Philippines.

But those drafts were shelved and nothing much was done to heal the chronic woe of the banking sector – the heart of the economy.
Its result: default loans kept growing, from Tk62,000 crore in 2016 to Tk94,000 in 2019 to Tk1.31 lakh crore today. It is now the deepest wound in the banking system, drying up their liquidity and draining of taxpayers' money to refill the empty vaults to save ailing banks from near-collapse.

Big borrowers got the benefits of the steps like rescheduling, one-time exit by making a meagre down payment, and moratorium on interest during pandemic – giving banks enough ruse to make their books look good and hide the real face.

In its latest move, the Bangladesh Bank on Tuesday further relaxed repayment of all sorts of term loan, saying borrowers may avoid being classified as defaulters by repaying only a half of the instalments due for April-June.

The move worried the bankers. One of them told TBS, "For the past three years, businessmen had been receiving huge loan moratorium facilities. If giving facilities to traders in this way continues, the banks will not be able to overcome the liquidity crisis."

Those who defaulted managed to remain scot-free, for, in the words of Finance Minister Kamal, action cannot be taken against the "big shots" and "powerful persons" who are the main drivers of the economy.

"The powerful persons account for 82% of the economy. How can we go forward without these 82% holders?" the finance minister told the same programme in January 2019 where he asserted no further rise in NPL.

After ending his tenure, the late finance minister Muhith spoke his mind on why he could not take steps against the scammers of BASIC Bank and Farmers Bank.

In an interview with The Business Standard in December 2019, he described Sheikh Abdul Hye Bachchu (former chairman of BASIC Bank) as "an incredibly evil person who destroyed a good bank". "But he could not be punished because of a strong culture of impunity," he said.

He also admitted his failure to reduce default loans and the faults of his large loan restructuring policy, his wrong decision to allow troubled Farmers Bank to run and the amendment to the bank company act giving bank directors more privileges.

The decision to keep the private sector bank running artificially had a cost. A fresh capital amounting to Tk715 crore was injected from public money through state-owned banks. To help six state lenders cover capital inadequacies, the government poured Tk18,000 crore of the people's tax money in ten years between FY2009 and FY2018.

This is how scammers got an easy exit instead of being punished, taxpayers' money wasted to refinance failed banks and banking governance turned worse.

Of late, the former BASIC Bank chief Bachchu has been chargesheeted in as many as 56 cases filed in connection with the Tk4,500 crore scam that occurred a decade ago.

But the damage is done already. Muhith left the banking sector drowned with 10% of total loans being defaulted. Now it is bigger, leaving the central bank with an uphill battle.

Now, many more banks are in ailing states and suffering from a serious liquidity crisis.

For instance, Islamic banks that had strong financial health a few years back are now in a severe liquidity crisis.

Some Islamic banks could not even meet up the mandatory Cash Reserve Ratio (CRR) with the central bank due to the liquidity crisis.

The overall NPL situation now is so unsustainable that the Bangladesh Bank governor, despite acknowledging the default loan buildups as a burden on banks, stopped short of showing any specific way out, maybe, for reasons cited by the finance ministry boss that keeping "big shots" unharmed.

When unveiling the latest monetary policy on 18 June, Governor Abdur Rouf Talukder also admitted the CRR shortfall of Islamic banks, saying they were given a timeline till September to meet up their CRR shortfall.

CRR refers to the certain percentage of cash required to be kept in reserves against the bank's total deposits.

High NPL and loss of depositors' confidence in banks now caused a liquidity crisis in the banking sector, prompting the Bangladesh Bank to print money to provide the government with budgetary support.

The Bangladesh Bank in its latest monetary policy announced for the first half of next fiscal year also addressed NPL as the reason behind the liquidity crisis.

"The slower growth of deposits in banks, along with the sustained burden of NPLs, has also contributed to the tightening liquidity situation," said the monetary statement.

Are the measures enough to reduce default loans?

The IMF review team visited in April expressed concern over the growth of default loans as reducing toxic loans was one of the conditions for the $4.7 billion loan package.

Bangladesh Bank made a commitment to the IMF that it will reduce the NPL of government-owned banks to 10% and for the private sector banks to 5% by 2026.

Moreover, Bangladesh Bank will have to calculate a rescheduled loan with NPL which will come into effect by June.

The amount of rescheduled loan was Tk27,279 in 2022 and if this figure is considered total default loan will shoot up to Tk1.60 lakh crore.

Loans of Tk1,66,886 crore remained pending in money loan court as prolonged legal procedures slow the banks' efforts to recover bad loans.

Dr AB Mirza Azizul Islam, former finance adviser to 2007-08 caretaker government, had suggested political intervention should be stopped for sanctioning loan and pending cases in the Artharin Adalat be disposed of.

Bangladesh Bank in its existing monetary policy for the second half of FY23 identified high NPL ratio as a major concern for financial stability.

"The prevailing NPLs and good governance practices in the financial sector of Bangladesh are not at the desired level," the central bank commented in its current monetary policy unveiled in January.

In the new monetary policy announced on 18 June for the first half of FY24, Bangladesh Bank also termed NPL as a big burden for the banking industry and pledged a raft of measures to deal with it. 

"In its efforts to mitigate the high NPL ratio, BB has bolstered its oversight of banks and large borrowers," said the monetary statement.

"Furthermore, BB has taken a proactive role in amending the existing Bank Company Act of 1991, aiming to address the challenges associated with the high NPL problem."

The draft Bank Company (Amendment) Act 2023, which is under the process of approval in the parliament, will be useful to identify and take appropriate punitive actions against wilful loan defaulters and reduce families' influences on bank boards, the central bank hopes. It also cited work on updating the Finance Company Act, drafts of Bankruptcy Act, Money Loan Court Act, and Negotiable Instrument Act among its efforts to strengthen banking sector discipline and corporate governance.

The central bank introduced a new monitoring mechanism to keep close watch on state-owned commercial banks under a Memorandum of Understanding (MoU) and signed such MoU with eight domestic private commercial banks targeting to reduce their NPL, improve their performance and governance, according to the two consecutive monetary policy statements.

The MoUs will help the central bank to enforce single borrower exposure limit, restriction of loan purchasing, and appointing an observer/coordinator to mitigate the banking sector risks. 

Moreover, it has planned to disclose rescheduled loans alongside the NPLs of banks in the annual financial stability report as part of its efforts to improve supervisory capabilities in line with international best practices.

To ensure good governance in the Non-Bank Financial Institutions (NBFIs), the central bank tightens the eligibility of directors.

Are the steps stated in the new MPS enough to deal with the biggest scourge of the banking sector? What more could have been done?

Ex-governor of the central bank Dr Salehuddin Ahmed, however, has not seen any clear instructions in the new MPS on reducing default loans.  "The monetary policy unveiled on Sunday should have strict instructions on how to address the high NPLs in the banking sector," he felt.

He explained how.

"For example, the Bangladesh Bank could say that it will not provide money in repo (Standing Lending Facility, according to the new policy) to banks that fail to recover NPLs. Additionally, it could refuse to offer forex support and take action against those who do not repay. A contractionary monetary policy worked well then."