The banking sector in Bangladesh is passing a very fragile time and presently facing three major challenges- a big volume of non-performing loans (NPL), the implementation of single digit interest rate and the COVID-19 hit recession. The big budget deficit of the upcoming fiscal year is also putting extra pressure on the turmoil banking sector in addition to the above three big challenges.
Alarmingly it has been observed that the prevailing COVID-19 hit economy has also faced a number of new challenges i.e. hefty borrowing from the banking system by the government, fall in export receipts, lower GDP growth, declining import of raw materials and capital machinery, soaring non-performing loans in the banking sector, slow collection of revenues, low turnover in the capital market, shrinking and firing in the job market, upturn of the new poor segment and private sector poor credit growth in the current fiscal year 2020-21.
The banking sector has considered the COVID-19 time banking management, business, investment, loan disbursed, loan recovery, profit target etc based on the pre COVID-19 pandemic period and basically non of the banking activities are easy to cope with the COVID-19 time. The success of the COVID-19 hit banking sector depends on the sincerely of the stockholder, expertise of the management, transparency, discipline, positive attitude of the clients and finally prudent monitoring and follow-up of the Central Bank.
According to Bangladesh Bank (BB), banks have disbursed Tk. 10118.28 billion upto December 2019 out of which Tk. 943.31 billion become defaulter which was 9.32 percent of the total loan and upto September 2019, total defaulter loan was Tk. 1160.00 billion which was 12 percent of the total loan but it has excluded the write-off defaulter loan of Tk. 560.00 billion and it is totally uncertain to recover in the coming days.
On the other hand, International Monetary Fund (IMF) said, total defaulter loan was Tk. 2401.66 billion upto June 2019 and if the write-off loan of Tk. 544.63 billion was added with the above defaulter loan, then the total loan was near about Tk. 3000 billion which was 25 percent of the total loan. In the same way, South Asian Network for Economic Modeling (SANEM), a local economic research firm, assessed that if we considered the write-off loan, non recoverable rescheduled loan, so-called restructured large loan, stay ordered on the loan by different courts, then it would be crossed Tk.4000 billion and the scenario is really mind-boggling.
According to BB latest report, banks have disbursed Tk. 10497.25 billion upto June 2020 out of which Tk. 961.16 billion become defaulter which was 9.16 percent of the total loan disbursement and upto March 2020, total defaulter loan was Tk. 925.10 billion, i.e. within three months the NPL have jumped Tk. 36.06 billion which was an alarming of the COVID-19 hit banking sector.
BB has instructed in April 2020 through an instruction circular to all the scheduled commercial banks and financial institutions not to mark the clients as defaulter even if the clients have failed to pay any outstanding loan amount during this COVID-19 crisis period and the classification status of the loans will be unchanged as like December 2019. This relaxation has been extended in several faces upto December 2020 through instruction circular, i.e, if any clients don't pay any single penny from January to December of 2020, the outstanding liability of the clients will be unchanged as like in December 2019.
The logic behind such instructions of the central bank is that the clients will not face any difficulties to avail any fresh loan during the COVID-19 hit economy and in the same time, the banks have neither feel any extra pressure to recover the defaulter loan nor in trap to disburse the stimulus package programme loans that is declared by the government.
A nonperforming loan (NPL) means by which the borrower is default and hasn't made any scheduled payments of principal or interest for some time and if somehow banks charge any interest but can't realise the same as income until recover the same. The IMF considers loans that are less than 90 days past due as non performing if there's high uncertainty surrounding future payments. However, if any loans become NPL, banks have to make provisions and as a result, banks operating profit reduces and share prices of the bank fall in risk in the share market as well as reputation loss in home and abroad.
A study of BIBM mentioned that the bulging non-performing loans are crippling up the credit expansion and the volume of bad loans and operating costs of banks have ballooned over the years, but the banks are not being able to address these problem by refixing their interest rates which is ultimately gobbled up the operating profit of the banking sector. This problem has started to be widening with an evil trend of loan embezzlement among the industrial borrowers in our country. Frequent scam series in banking industry is surely a red light and unfortunately the commercial banks are highly surrounded by it. The fact is that many banks are engaged in aggressive financing without considering the risk factors, which is distorting the market, increasing the NPLs and ultimately gobbled up the profitability.
Basically COVID-19 pandemic hits every sector of the economy and all of the sector have affected seriously. As a result, loan holders can't return the loan properly, even large business conglomerate, entrepreneurs, SME clients, credit card holders can't pay back the bank dues in time and as such bank profit reduces remarkably. However, due to the impact of COVID-19 pandemic, many business have already been closed, some of them sacked the employees to survive somehow and some are survived in a hardship way.
According to the bank insider's view, loan recovery has reduced drastically after COVID-19 hit economy and this time sales of business reduces remarkably, stocks are stockpiles, production of the many industry severely disrupted and as a result, their revenue has turned down and they can't pay back the bank loan in time. Many have either lost their jobs or reduced their salary and they couldn't pay the consumers loans properly, many houses have made vacant due to shift the low income people in rural areas and as a result, they couldn't pay their house loans installment.
However, some solvent loan holders are willingly reluctant to pay back the bank outstanding due to relaxation of the central bank instructions. However, due to the COVID-19 pandemic as well as central bank relax instructions, none of the banks can take any tight action against the defaulters nor file any legal action. The existing legal suits against the defaulters are not in a momentum as most of the courts were closed since long and as a result, many existing and potential defaulters are feeling too much reluctant and very comfort and they are taking the chance of relaxation.
So it is easily presumed that loan recovery is not satisfactory at all and a huge amount of unpaid loans are trapped in a gridlock of NPLs so much that the total volume of classified loans is growing concern for banking experts as well as government and all the unpaid loans outstanding is lying as dormant as like volcanic lava. This dormant NPL will hit in the next year after withdrawal of central bank instructions and it will be the biggest challenges of the bank and financial institutions after post COVID-19 pandemic period. So it is time to be more alert and caution, prudent monitoring and action plan shall have to taken to tackle the upcoming situation by the central bank as well as all the banks and financial institutions.
Md. Zillur Rahaman is a banker and freelance contributor .