NPLs at historic Tk2.85 lakh crore as Hasina-era hidden defaults exposed

Nonperforming loans (NPLs) in Bangladesh's banking sector have surged by a staggering Tk73,586 crore in three months through September, marking a record quarterly increase. 

The latest figures, released by the Bangladesh Bank yesterday, show total NPLs now stand at Tk2,84,977 crore, accounting for nearly 17% of the country's outstanding loans of nearly Tk16.83 lakh crore.

This represents a sharp rise from Tk2,11,391 crore recorded in June. 

The surge follows the end of Sheikh Hasina's 15-year-plus rule, during which practises like "window dressing" allowed banks to conceal defaulted loan figures. 

Analysts also attribute the increase to the reinstatement of international standards for defining NPLs. These stricter measures, which were suspended during the Covid-19 pandemic in 2020, have provided a more accurate – though sobering – assessment of the sector's financial health. 

Selim RF Hussain, managing director at BRAC Bank, told The Business Standard, "The information about defaulted loans is now coming to light. These loans had already defaulted, but the details were kept hidden for a long time. It is under the new interim government that these details have finally been revealed."

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, attributes the increase in defaulted loans to the inability of borrowers, affected by the recent mass uprising, to continue their loan instalments.  

"Many borrowers were unable to repay their loans due to the student protests and internet blackouts in July and August. This also contributed to the rise in defaulted loans," he added.

Officials from the credit departments of several banks said the banks that were recently freed from the control of S Alam Group, former prime minister's private industry and investment adviser Salman F Rahman, and former land minister Saifuzzaman Chowdhury also contributed to the increased default loan figures by exposing the real extent of loan defaults. 

Bangladesh Bank spokesperson Husne Ara Shikha attributed the surge to the adoption of international practices. 

"Previously, the grace period for a term loan was six months. This has now been reduced to three months, leading to an increase in defaulted loans. Additionally, the economic slowdown has caused a decline in loan repayments further contributing to the rise in defaulted loans," she explained. 

At the end of September, defaulted loans at state-owned banks amounted to Tk1.26 lakh crore representing 40.35% of their total disbursed loans. 

NPLs at private banks stood at Tk1.49 lakh crore accounting for 11.88% of their total disbursed loans. 

Defaulted loans at foreign banks amounted to Tk3,245 crore, while specialised banks reported defaulted loans of Tk5,813 crore. 

What bankers say on rising bad loans

Seasoned banker Selim RF Hussain stated that comments from Bangladesh Bank Governor Ahsan H Mansur, Financial Adviser Salehuddin Ahmed, and economist Debapriya Bhattacharya have made it clear that the information provided by the previous government was inaccurate. 

"Our banking sector has long deviated from international norms for loan classification. The definition of overdue for fixed-term loans was reduced from six months to three months starting from the September 2024 quarter, leading to a significant rise in defaulted loans," he said. 

He added, "If the valuation of assets and liabilities, along with the irregularities in our banking sector, is conducted with foreign technical assistance, the true extent of the sector's issues will be revealed." 

Syed Mahbubur Rahman, another veteran banker, said, "Previously, many banks concealed their defaulted loans. Since the formation of the new interim government, banks have voluntarily disclosed the hidden NPLs, bringing the real figures to light." 

He further explained that the Bangladesh Bank somewhat tightened the term loan default conditions in September; it will be strictly implemented from March next year. Fully international procedures will be implemented then, which he fears could lead to another significant increase in defaulted loans.

Reason central bank sees in bad loan increase 

Classified loans have increased due to the resetting the time for term loans to be overdue, as per a circular issued by the central bank in April. 

The amount of classified loans rose as several large loans were classified as bad by the bank inspection department of the Bangladesh Bank. Additionally, the non-renewal of current loans has contributed to the increase in classified loans. 

Additionally, rescheduled loan instalments that were not paid on time have also added to the rise in classified loans. The increase in the dollar exchange rate has also played a role, as some borrowers were unable to repay their loans. 

In January, TBS published a report titled "Bangladesh bank moves to harden loan classification rules as per IMF conditions," which stated that the implementation of this new policy is expected to result in an increase of Tk80,000 crore in defaulted loans.