Rescheduling NPL: Oxygen masks for banks

In the times of coronavirus people are wearing masks to protect themselves from being infected by the deadly virus. The spree of rescheduling of soured loans in our banking sector indicates our banks also wore masks, but not to protect themselves from being infected by any new virus. It has long been infected by a deadly virus: defaulted loans.

Under the burden of huge amount of non-performing loans (defaulted loans), the banking sector has been suffocating for years. Some half-hearted efforts in the past could not salvage them. In such a situation, they were in a rush to reschedule a record amount of soured loans – more than Tk50,000 crore – last year, highest ever in a single year. It pushed the total soured loan figure down to a four-year low. This has been oxygen masks for them to fight the breathing problem.

Our finance minister also can claim credit for drastically reducing soured loans; he announced in January last year that default loan would not increase and the government's merciful loan rescheduling policy started working.

Of the total sum, more than Tk18,000 crore was regularised under the central bank's relaxed policy announced on May 16 last year. The policy allowed defaulters to reschedule their classified loans with a down payment of only 2 percent of the outstanding amount instead of the existing 10-50 percent. Banks recovered only Tk479 crore in down payments from the loans rescheduled under the relaxed policy. The recovery amount is not a big thing to celebrate.

What happened to rescheduling the soured loans once again upheld our made-easy strategy to fix quickly any pervasive crisis without applying proper medicine through diagnosis to get rid of the root causes of the diseases.

The success in rescheduling a huge amount of default loans now gave a breathing room for ailing banks. But this is for a temporary period. Wearing oxygen masks is not a permanent solution to improving financial health of banks just as masks cannot keep a patient alive and healthy for long.

The reasons are simple. The rescheduled loans, experts predict, are facing the risk of turning into default loans again as banks regularised those on a wholesale basis without verifying the defaulters' ability to repay. Their prediction is based on the central bank's data which shows more than Tk13,000 crore of the soured loans, regularised last year, has already become defaulted.

The merciful strategy for rescheduling default loan may not also be able to produce a long lasting result as it failed in the past. In 2015, the Bangladesh Bank offered a special package of loan restructuring for large borrowers having default loan over Tk500 crore. The policy helped reduce default loans at a historic low of 8.8 percent in December that year. Eleven corporate groups restructured loans of around Tk15,000 crore under the policy. But it did not last long as not a single client who availed the facility continued instalment payments complying with the policy conditions. As a result, the default loan continued to increase further and prompted the government to offer another similar exit policy.

Default loans have increased by around four times in the last decade due to mainly, as experts say, rampant violation of the rules and regulations for loan sanction and disbursement. This has continuously been exposing poor governance in the banking sector for years. Numerous media reports in the past have also exposed how loans were given to friends, relatives and politically connected people whatever the merit of their loan proposals was. Loans were sanctioned in many cases under political influence. Ineffective judicial system also contributed to the rise of huge amount of soured loans. Thousands of cases remain stuck in the money loan courts. Many large defaulters managed stay orders from the superior courts, frustrating the banks' efforts to recover the default loans.

No effective reform was made to improve the overall governance system in the banking sector. Formation of a banking commission to address the pervasive problems still remains a distant cry. In such a situation, the spree of rescheduling a large amount of default loans may work as oxygen masks for the ailing banks for a temporary period. They may be able to show hefty profit. They may be able to lend more money. This will not yield any long lasting impact on the ailing financial health of the banking sector as feared by banking sector experts.

The disease the banking sector has been facing has long been diagnosed. But its health could not be improved due to mainly the absence of proper medication.