Default loans rise Tk11,000cr in Jan-Mar amid IMF pressure

Infographic: TBS

The country's banking sector has witnessed a rise in default loans by Tk11,000 crore in the first three months (January-March) of this year.

The toxic loans kept rising at a time when the country's banking sector is under pressure to reduce default loans to comply with the International Monetary Fund (IMF) conditions over releasing instalments of $4.7 billion loans approved in March.

The total default loan in the banking sector stood at Tk1,31,620 in March, which was 8.80% of the total outstanding loans.

The default loan was lower in December last year at Tk1,20,656 crore (8.16% of the total outstanding).

Bankers said default loans are mounting up due to several factors – exporters delaying shipments, buyers cancelling orders, buyers delaying payments, and non-availability of special concessions for repayment of term loans amid the global economic crisis.

According to central bank data, at the end of March 2023, non-performing loans of state-owned banks stood at Tk57,958 crore, which is 19.87% of total loans. The loans were Tk56,460 crore in December 2022.

If compared year-on-year, default loans have increased by Tk9,221 crore in March 2023.

Besides, non-performing loans of private banks stood at Tk65,888 crore at the end of March this year, which is 5.96% of total loans. The amount stood at Tk56,434 crore at the end of December 2022. On this account, defaulted loans in private banks increased by Tk9,454 crore, the Bangladesh Bank data shows.

Moreover, Tk1,66,886 crore is stuck in the money loan court. These loans were also classified as bad loans but banks later wrote them off the balance sheet.

Why default loans rise at year start

Arfan Ali, former managing director of Bank Asia, told The Business Standard, "Borrowers delay the payment of loans due to various reasons. Banks classify many borrowers as defaulters at the beginning of a calendar year to get back loans from those customers.

"In case of default, the borrower faces policy problems to get loans from other financial institutions, which forces the borrower to repay the loan faster. This is another reason why defaulted loans surge in the first quarter of a year."

He further said, "Businessmen increase the amount of investment at the beginning of the year. If the borrower is in default, he/she tries to reschedule the loan towards December. Otherwise, it will be difficult for the borrower to get fresh loans."

The Bangladesh Bank will have to adopt international best practices in loan classification by June this year, according to the IMF country report on $4.7 billion loan approval for Bangladesh.

The central bank also committed to the IMF that it will reduce average non-performing loan (NPL) ratios to below 10% for state-owned commercial banks and below 5% for private commercial banks by 2026.

Syed Mahbubur Rahman, managing director & CEO of Mutual Trust Bank, told TBS, "Banks have been experiencing a rise in stressed assets as exporters are facing shipment delay, order cancellation, and deferred payment by buyers amid the global economic crisis."

"Moreover, the high devaluation of the taka, energy price hike, low gas pressure and import restriction, slowed down industrial production, and reduced debt servicing capacity of borrowers are causing huge forced loans in banks," Mahbubur said.

"In the coming days, the default loan situation may worsen further as our imports and remittances are declining, along with investments," the Mutual Trust bank CEO added.

AB Mirza Azizul Islam, the former financial adviser of the caretaker government, claimed that defaulted loans are increasing as no real action is taken against defaulters.

"Those who are not paying back the loans have been exempted in various ways without being punished. If this situation continues, default loans will increase. It is not right to offer concessions to defaulters. Debt collection must be ensured and those who do not pay the debt should be punished," he said.

Effect of loan rescheduling policy

In October and December of last year, the banking sector saw default loans significantly decline by Tk13,740 crore thanks to a new loan rescheduling policy and relaxed repayment options offered by the central bank.

A senior official of the central bank, wishing not to be named, told TBS that non-performing loans in banks increased in March because the central bank audits banks at the beginning of the new year. 

"Many banks hide some non-performing loans which come up in central bank audits and show up in the default list in the first quarter of the new year. That is why the amount of non-performing loans has increased," he said.

Borrowers got a waiver in full loan repayment for the year 2020-2021 due to Covid. 2022 had different forms of loan repayment concessions. But all concessions in loan repayments were withdrawn in 2023, which is another reason behind rising default loans, the official continued.

Another reason for the reduction of defaulted loans last December is that a borrower could get rid of the defaulter status if he/she could repay 50% of outstanding loans in the December quarter of last year – a facility which became unavailable since January 2023, the central bank official added.