Default Loans: Cancer for the Banking Sector of Bangladesh

“At a time when the country's economy was on its way for a turnaround from pandemic-
induced losses, the banking sector has fallen into deep trouble with default loans shooting
up by Tk22,000 crore in the first six months of the current year after the end of the
moratorium facility in December last year.” -The Business Standard (12 August 2022)
The banking sector of Bangladesh is currently undergoing a number of challenges such as
lowering lending rate to a single digit, bringing down advance-deposit ratio, tackling
corruption, ensuring good governance, maintaining adequate liquidity, reviving and
retaining depositors' confidence weakened by scams, frustrating deposit interest rate and
rumors of bankruptcy, and recovering gigantic default loans. The biggest challenge,
however, is the recovery of default loans.
Default Loan:
Defaulting on a loan happens when repayments aren't made for a certain period of time.
Loan default occurs when a borrower fails to pay back a debt according to the initial
arrangement.
"Defaulting on a loan means the borrower hasn't held up their end of the agreement with
the creditor," -Leslie H. Tayne, Debt settlement attorney in New York.
The Current Scenario of Default Loan in Bangladesh:

[Infographic: TBS]
According to data from the Bangladesh Bank, the default loans stood at Tk1.25 lakh crore
at the end of June,2022 from Tk1.03 lakh crore in December,2021. according to data from
the Bangladesh Bank.
 According to the provisional data of BB, the amount of default loans increased by
Tk 118.18 billion (11,818 crore) during the April-June quarter with classified loan
totaling over Tk1.25 trillion.
 Banks have disbursed loans of Tk 1,398,592 crore (over 13.98 trillion) till June
2022, of which Tk 125,258 crore (over 1.25 trillion) is declared as being defaulted.
It means 8.96 per cent of loans have been made classified which is the highest ever
in the country.
 Three months ago, in the January-March quarter, the amount of default loan was Tk
113,440 crore (over 1.13 trillion).
 Besides, defaulted loans have increased by Tk 260.63 billion (26,063 crore) from
June 2021 to June 2022. In June 2021, the amount of defaulted loans was over Tk
990.20 billion.

Causes of Default Loan:

The following points indicate the causes underlying massive default.
1. Absence of moratorium on loans.
2. Rise in willful defaulters.
3. Crisis faced by small business.
4. Deterioration of BB monitoring.
5. Feeble business from pandemic
6. Business slowdown in global market,
7. Incompetence of bank personnel
8. Poor governance
9. Ineffective judicial system
 10.Loan is provided by the bank without necessary inspection. The lenders might have
bad credit record. But still bank employees provides them loan without sufficient
inspection.
11.Most of the loan provided by political consideration id resulting in defaulted loan.
12.The central bank is not taking necessary steps to stop loan default.
13.As bank charges higher interest rate, the general tendency of the lenders is to default.
14.There exists an unhealthy competition between the private banks. They themselves
approaching to the lenders and giving them more loans then necessary. The excess
amount of loan is resulting in defaulted loan.
15.In private banks, the managers of the banks are transacting the loan among
themselves. The MDs are bound to give them loans. As a result, loan default
increases.
16.Loans are taken in the name of companies and institution that doesn’t even have any
existence. An article was published in daily Jugantor, where we got to know, in 2001
Govt’s Equity and Entrepreneurship Fund provided loan without interest rate and
among the lenders 77 of them have no existence at all.
17.Number of banks is very large compared to the economy of Bangladesh. So
unhealthy competition exists among the banks.
18.No punishment of the defaulters has also increased the rate of default in Bangladesh

Adverse effects of Loan Default on Banking Sector:

Persistence of large amounts of defaults gives rise to a number of adverse consequences.
Such as:
 People's confidence in banking system may become shaky.
 The recent slowdown in the deposit growth in Bangladesh may be partly due to
continuing high levels of defaults.
 Bank's income generation is unfavorably affected by defaults. As a result, they tend
to charge higher interest rates on new loans to compensate for the loss of income
from defaulted loans.
 The high interest rates, in turn, can adversely affect the competitiveness of the
borrowing enterprises and aggravate default.
 Delinquent loans adversely affect the ability of banks to cover all expenses -
servicing interest to depositors, payment of employee salaries, government taxation
etc., especially banks which tend to have large NPLs.
 Default scams erode the image and positioning of the bank. For instance, the Hall-
Mark scam has become a defamatory hallmark for Sonali Bank Limited.
 Overburdened NPL threatens the survival of the bank because of continued loss and
lack of public confidence and customers' patronage.
  NPL policy tends to reduce total loan portfolio of the banks, thus affecting the
interest earnings on loans.
 Credit and CAMELS (Capital adequacy, Asset quality, Management, Earnings,
Liquidity, and Sensitivity) rating of the bank become worse.
 If loans become bad, banks fail to make profit and cannot pay interest to depositors
and meet their expenses. Ultimately, they will incur loss and there will be bank
failures.
 Most banks are unable to remain competitive in the turbulent financial
sector/industry due to high default rate.
 NPL scams demolish the reputation and goodwill, and thus negatively affect the
share price of the bank.
 Loan default minimizes the efficiency of banking system. Banks become inefficient
when the size of the defaulted loans increases. The assets of the banks are reduced
due to default. The banks can even fail due to increased loan default.
 Default loan can hamper the financial system of the economy of a country. It slows
down the economic growth of an overall economy.
 Banks faces liquidity crisis due to loan default. The profitability of banks reduces
because of it.
 Default creates imbalance in the balance sheet and income statement of the bank.
 When the default loan ratio is high, credit quality falls.
 Banks become unwilling to provide loans to new borrowers due to loan default.
 Default loan causes hindrance in the money creation process and slows down the
flow of cash.
 Default loan closes down the opportunity of getting interest rate on the defaulted
money.
 Default spoils bank’s reputation. So, international institutions are not interested to
go for a new agreement with the bank.
 Rate of interest increases due to loan default as the banks try to recover the lost
money by charging higher interest rate to the new borrower.

The Way Forward:

The causes cited above intrinsically suggest remedial actions for the future. A few are
mentioned below:
 In order to reduce the defaulted loan in Bangladesh, good governance in the banking
sector is very much needed for instance banking must stop the family business and
there should be strict monitoring cell to observe loan recovery system;
 There should be proper rules for an appointment and cancel the bank's director. In
this case, the government and the Bangladesh Bank must have the authority to
observe this issue;
  There should be proper policies and surveillance in the evaluation of the
performance of the Fourth Generation Banking;
 Basically, Non-performing loans are affected by the capital to risk-weighted assets
ratio (CRAR). So, this will work to improve the quality of the CRAR and
 Mandatorily to implement Basel III guidelines alongside prudent implementation of
the banking law for all banks.
 The analytical competence of the bank staff has to be improved.
 Sound corporate governance of banks has to be ensured.
 The disposal of cases stuck up in courts has to be expedited. The Central Bank, the
Finance Ministry and Attorney General's office should jointly seek help from the
Honorable Chief Justice to achieve this objective.
 There has to be a strong commitment by the political authorities to deal with the
problem. There should be no political intervention in approval of loans,
rescheduling/ restructuring and initiation of timely legal actions.
 The Central Bank should make honest self-assessment of the effectiveness of its role
as the designated guardian of the banking system.

Default loan (non-performing) culture has been found in different countries of the world,
in Bangladesh, this problem has become apparent in the last few years. Default loans have
curtailed money flow in the economy and growth in the private sector. Thus, it is
diminishing employment opportunity and pulling back GDP and development growth of
the country. So, tackling the defaulters with an iron hand is a must to give the banking
sector and the economy a better shape and a sustainable pathway to make the country a
developed one by 2041.

References:
1. The Daily Star
2. The Financial Express
3. The Business Standard
4. Bankingnewsbd.com
5. Dhaka Tribune
6. Bb.org.bd