IMF concerned over rising default loans, poor recovery

The visiting review team of the International Monetary Fund (IMF) has expressed concern over the growth of default loans, reducing which was one of the conditions for the IMF loan package, according to officials of the finance ministry's Financial Institution Division.

The IMF team, during a meeting with the division's Secretary Sheikh Mohammad Salim Ullah on Wednesday, also expressed disappointment over the poor recovery of default loans as it was below the target set by the banks, officials who were present in the meeting told The Business Standard requesting anonymity.

The secretary informed the IMF officials about the government's initiative to increase the default collection target for banks and to form asset management companies to reduce default loans in the future.

In a separate meeting with the National Board of Revenue (NBR), the IMF proposed imposing 15% Value Added Tax (VAT) across the board to increase revenue collection. NBR officials, in response, said it does not have the capacity to implement a unified 15% VAT rate at the moment. However, according to the conditions of the IMF, the agency has outlined a detailed plan to increase the revenue by 0.5% of GDP in the next fiscal year.

In the meeting with the Financial Institution Division secretary, ministry officials presented a graphical comparison showing the ratio of defaulted loans and capital adequacy of the last three years. It shows a default loan rate of 7.66% in 2020, 7.93% next year and 8.16% at the end of last year. The presentation also highlighted the capital adequacy information of the banks.

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One of the officials, present in the meeting, told The Business Standard, "The presentation did not show a separate picture of default loans of state-owned banks, because the default loan rate of these banks is very high."

At the end of last December, the amount of default loans stood at Tk1,20,657 crore, which is Tk17,383 crore higher than the same period last year.

According to the Bangladesh Bank data, at the end of last December, the average rate of default loans of the six state-owned banks Sonali, Agrani, Janata, Rupali, BASIC, and BDBL was 28.66%.

After seeing the increase in the rate of defaulted loans since 2020, the IMF officials asked if the trend continues, how will default loans be reduced, said the official.

In response, the division said, "Targets are always set higher to make it difficult to achieve. This is nothing to worry about. In the future, the target will be increased and the amount of default loans will be reduced by increasing collection."

However, Secretary Sheikh Mohammad Salim Ullah told TBS that there was no discussion about default loans in the meeting with the IMF team.

"This is a routine meeting of the IMF," he said.

In its commitment to the IMF, Bangladesh has said that by 2026, the non-performing loans (NPL) of government-owned banks will be reduced to 10% and the non-performing loans of the private sector banks will be reduced to 5%. For this, MoUs are being signed with the banks, where the capital adequacy ratio and target of 100% safety reserve against default loans has been set.

Bangladesh will prepare a policy note by next June to reduce default loans. The IMF has also emphasised increasing the capital adequacy of banks.

Bangladesh has also told the IMF that the banks' rescheduled loans are being brought under the NPL account which will come into effect by June. The financial stability report of the Bangladesh Bank will contain this information. Besides, the financial reports of the concerned banks will accurately reflect the information of risk and defaulted loans. The report will also contain information of rescheduled loan, against which security deposit will be maintained as per rules.

The IMF asked the division to sign an Annual Performance Agreement (APA) with the Bangladesh Bank to reduce defaulted loans, but the ministry did not agree to it.

However, the Financial Institute Division ministry had been okay earlier with signing such a deal but the Bangladesh Bank did not agree.

NBR's plan

The NBR said in their meeting with the IMF team that the Medium Term Revenue Strategy (MTRS) is being formulated to increase revenue collection, with details of the steps to be taken to increase the tax-GDP ratio by 0.5% in the next fiscal year to meet the loan conditions. The World Bank has submitted a concept note on MTRS and NBR is working on the first draft report.

The NBR said, they have withdrawn the VAT exemption facility from some sectors and have planned to withdraw the exemption facility in the upcoming years which will ultimately lead to less tax expenditure and improved tax to GDP ratio.

The revenue board will form five more functional VAT commissionerates within 2 years, in addition to the existing 12. The NBR informs IMF that they are taking additional measures for additional revenue growth, such as – plans to reduce duty exemptions to collect additional revenue, reorganise duty rates, strengthen duty recovery process, take initiative for speedy disposal of cases, enact new customs laws, automation of duty collection process and fully operationalise Customs Risk Management Unit within three years, which the NBR will present to the IMF team.

After reviewing the revenue growth data from Value Added Tax (VAT), Income Tax and Customs for the last few years, the agency found that even with the existing rate of growth, an additional revenue of around Tk16,000 crore is required to meet the IMF conditions.

According to the NBR's calculations, to achieve the tax-GDP ratio as agreed with the IMF, the revenue authority will have to collect an additional Tk4,828 crore in the customs sector, additional Tk5,547 crore in the income tax sector, and additional Tk4,800 crore from VAT.

The NBR will reduce tax exemptions in the next budget to meet the conditions of increasing revenue.

It is expected that proper and effective audits will increase revenue. NBR will not grant any tax exemptions beyond its pre-commitment besides exceptional circumstances, the revenue board informed IMF.