Banking reform on display as Bangladesh’s default loan rate rises to world’s highest

Special Correspondent

Ukraine’s banking sector, which has been at war for four years, is not as weak as Bangladesh’s. While Ukraine’s default rate was 26 percent in September this year, about 36 percent of loans given to Bangladeshi banks are now in default.

To legitimize the riots and violence that were created to change the political landscape in the country through movement and violence, various propaganda including opacity, irregularities and corruption were allowed to be carried out in the banking sector. Dr. Yunus’ interim government, which seized power by pressing the shoulders of the violent people, also spread the hope that financial discipline would be restored in the country, the banking sector would be stabilized through reforms, the foundation of the economy would be strengthened by taking action against loan defaulters… etc.

However, even after one and a half years, the reforms have not yielded any results, on the contrary, the economy has started to go backwards. Industries and factories have been closed one by one. Established businessmen have been forced to close their businesses solely due to political vendetta. These factors have adversely affected every aspect including domestic production, import-export, tax management. As a result, defaulted loans have also increased at the same pace.

Analysis of data from the world’s central banks and renowned research organizations shows that Bangladesh is now the worst in the world in terms of default rate. In fact, no country has a default rate above 30 percent. Countries that have experienced recent wars, high inflation, and economic crises also have much lower default rates than Bangladesh.

Tunisia, which sparked the Arab Spring and is still in political and economic turmoil, has a default rate of 14.7 percent. Lebanon’s rate is below 24 percent. Russia has kept default rates under control even during the war—at just 5.51 percent. However, the country’s banking sector has always had a high default rate due to the influence of oligarchs in the past.

In most countries in Asia, Europe and South America, which are facing various crises, including exchange rate instability and inflationary pressures, the default rate is now decreasing. For example, in Turkey’s banking sector, defaulted loans fell to 2.29 percent in September. Greece, which went bankrupt a few years ago, has now reduced its default rate to 3.6 percent. Even in Argentina, the rate is now only 1.6 percent, where more than 20 percent of the country’s loans were in default at the beginning of the millennium.

Bangladesh has the worst non-performing loans (NPLs) in South Asia. Bangladesh’s NPLs are many times higher than those of other countries in the region. Only Sri Lanka has a slightly higher NPL rate—12.6 percent. The country declared bankruptcy three years ago and was in a dire political crisis. But with elections and political stability, Sri Lanka is now slowly moving towards economic recovery.

Pakistan, which has been in economic and political uncertainty for a long time, has also been able to control inflation and reduce non-performing loans in the banking sector in the last two years. Currently, the country’s non-performing loan rate is 7.4 percent. The rate in India’s banking sector is even lower—only 2.3 percent. In Nepal’s case, the default rate is also limited to 4.4 percent.

Other Asian countries with similar economic structures and competitive markets, such as Bangladesh, also have relatively low NPLs. For example, Singapore has a NPL rate of 1.3 percent, Malaysia 1.4 percent, Thailand 2.7 percent, the Philippines 3.3 percent, Vietnam 5.4 percent, and Indonesia 2.1 percent. In China, the world’s second-largest economy, the rate is only 1.5 percent, while banks in the United States have a NPL rate of 1.7 percent.

According to the latest data released by Bangladesh Bank, the amount of non-performing loans in the country’s banking sector stood at Tk 6,44,515 crore at the end of September this year (September 30), which is 35.73 percent of the total loans disbursed. In December last year, this amount of non-performing loans was Tk 3,45,765 crore and the rate at that time was 20.2 percent.

This means that in just nine months, defaulted loans have increased by Tk 2,98,750 crore—an unprecedented increase. At the same time, the defaulted loan rate is currently at its highest level in the last twenty-five years.

When the Awami League government led by Sheikh Hasina took power on January 6, 2009, the amount of non-performing loans in the country’s banking sector was Tk 22,482 crore. The amount of non-performing loans reached Tk 2,84,977 crore in September last year, the month after Sheikh Hasina’s government was ousted through violence. Many non-performing loans have been rescheduled in the last decade and a half.

Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank (MTB), said that the abnormal rate of defaulted loans in the country’s banking sector was not unexpected. He said, “The fact that the rate of defaulted loans has exceeded 35 percent is not unexpected at all. Because the Governor Sir said six months ago that the rate of defaulted loans in the banking sector can be up to 35 percent.”

He believes that defaulted loans will have to be reduced in the future; he said, ‘What has happened has to happen. Now, realistic steps must be taken to reduce defaulted loans. The central bank is coming forward with policy support. Hopefully, defaulted loans will be reduced by December. And initiatives must be taken to revitalize the economy. Because the loan growth rate in the private sector has now fallen to its lowest point in history.’

Bangladesh Bank publishes data on defaulted loans of the banking sector every quarter. Earlier, the report for the March quarter was published. At that time, the total amount of loans disbursed in the banking sector was Tk 17,41,992 crore, of which Tk 420,335 crore was defaulted.

According to the latest published September quarter data, banks have disbursed a total of Tk 18 lakh 3 thousand 840 crore in loans, of which the amount of defaulted loans has increased to Tk 6 lakh 44 thousand 515 crore. This means that currently 35.73 percent of the loans disbursed in the banking sector are in default.

Banks lend money from the deposits of depositors. Therefore, to ensure the safety of deposits, a certain amount of reserves or provisions have to be kept against each loan. If a loan defaults, an amount equal to that loan has to be allocated from the bank’s operating profit to create reserves. A reserve deficit means that that amount of deposits is at risk and the bank’s capital is also at risk.

Due to the abnormal increase in defaulted loans, the reserve deficit in the banking sector is also increasing at a terrible rate. According to the Bangladesh Bank’s calculations, the required reserve in the banking sector stood at 4 lakh 74 thousand 598 crore taka at the end of September this year. But the reserve has been kept at only 1 lakh 30 thousand 366 crore taka. In this, the reserve deficit stands at 3 lakh 44 thousand 231 crore taka.

The deficit was Tk 1,70,655 crore in the March quarter. This means that the reserve deficit increased by Tk 1,73,576 crore in six months, indicating that the banks were unable to reserve any protective funds against the huge amount of defaulted loans.

After taking office as Governor, Dr. Ahsan H. Mansoor took various steps in the name of reforming the country’s banking sector. He dissolved the boards of 14 private banks. At the same time, changes were made in the boards and management of state-owned banks. The work of merging the five Islamic Sharia-based banks that were the most affected by irregularities and corruption into one bank is now in its final stages. Although economists have already called such a decision the beginning of a future disaster. They see it as a plan to hand over the banking sector under the control of a radical political party. It is believed that the work of merging or liquidating several more banks is progressing in the future.

Economist Dr. Mustafa K. Mujeri does not consider the steps taken by the Yunus government and the central bank to be sufficient compared to the overall damage to the banking sector. The former economist of Bangladesh Bank said, ‘Dr. Yunus’ interim government could have implemented reform programs if it wanted. But they failed. If the wilful defaulters were punished, others would have learned, but we have not seen any such steps. It is quite difficult to complete the reform programs that have been taken. However, we want to be optimistic. The central bank should do something in the next two months to control defaulted loans.’