Intentional or not, a loan defaulter remains loan defaulter

Banking plays an extremely crucial role in the economic development of any country. Particularly in Bangladesh, where the capital market is relatively weak, the significance of banking accounts for a substantial portion of the nation's economy. Entrepreneurs in Bangladesh often need to approach banks primarily to meet the financial requirements for establishing industries, factories, and business establishments.

For Bangladesh to sustain and further enhance the socio-economic progress achieved in past decades, a robust and dynamic banking system is crucial. However, the banking sector in Bangladesh is currently in a fragile state. Consequently, banks are unable to provide the desired level of support to entrepreneurs. The banking system in Bangladesh is fraught with various challenges and deficiencies. These problems have not arisen overnight but have accumulated over the years.

The banking sector in Bangladesh faces numerous issues and drawbacks. These issues have not arisen suddenly but have been accumulating over the years. The extent and depth of problems are increasing day by day. Therefore, it is imperative to streamline and revitalize this sector.

At this moment, one of the most discussed issues regarding banking accounts in Bangladesh is the staggering level of non-performing loans (NPLs). Non-performing loans of substantial amounts are obstructing the natural flow of operations within banking accounts. If the situation persists, it will pose a significant threat to the country's banking accounts in the future. According to information published in newspapers citing Bangladesh Bank's statistics, as of December 2023, the amount of non-performing loans in the country's banking accounts stood at 1,45,633 crore taka, which accounts for 9 percent of banks' total loans. However, this high rate is not the real picture; the reality is much worse. This is because these displayed non-performing loans exclude written-off loans, rescheduled loans, and loans claimed under pending projects. Although there may be debates about the figures of non-performing loans, it cannot be denied that the substantial amount of non-performing loans and the failure to recover them have created a severe problem for these accounts.

Several banks in Bangladesh have faced stricter regulations in managing their normal banking operations due to an unusually high amount of non-performing loans (NPLs). Particularly, those banks with non-performing loans exceeding 14 percent of their total loans have faced these regulatory restrictions. Discipline has been enforced to accommodate the tolerable level of non-performing loans swiftly. In other words, banks are held accountable for loan recovery, and pressure is exerted on them. However, those borrowers who are responsible for the creation of non-performing loans, meaning those who fail to repay loans taken from banks, do not face such pressure.

I have always emphasized that those who do not regularly repay installments on loans taken from banks should face pressure, and they must be held accountable. Simultaneously, investigations need to be conducted into bank officials who were involved in approving non-performing loans, and appropriate actions should be taken in case of discrepancies. Were they appropriate individuals or entities to receive loans? Or are there individuals who have granted loans for their own benefit or through collusion with loan applicants who are inappropriate individuals or entities, or who cannot repay the loans? This needs to be identified.

It appears that among a certain class of loan recipients, there is a prevalent misconception that there will be no consequences if they do not repay loans taken from banks. This is because those engaging in such activities are not held accountable. Fundamental changes in this mindset must be achieved through the adoption of appropriate measures. Even though individuals have the capability to repay loans, they are not doing so due to the lack of information held by banks or regulatory authorities. It is not true that recovering non-performing loans will become difficult if there is firm political commitment to retrieve funds from loan defaulters. Conversely, if loan defaulters are not held accountable, the propensity for defaulting will increase. Therefore, effective implementation of laws regarding loan recovery is essential, and if necessary, amendments to the law should be made to enforce it.

Bangladesh Bank's policy intervention has resulted in an increase in interest rates on commercial bank transactions. The goal of this initiative is to make borrowing more cost-effective and profitable for banks, which can lead to increased liquidity in the market and consequently mitigate inflationary pressures. This is a common economic strategy for controlling high inflation. In recent times, central banks of many countries, including the United States, have raised policy rates multiple times in response to global inflationary pressures. Inflation is generally controlled in these countries across various sectors; however, this formula has not been effective in Bangladesh. One major reason for this is the absence of effective implementation of policies and measures due to the presence of vested interests in certain areas. If these vicious cycles are not brought under control, the benefits of correct measures cannot be realized. Institutions will also fail to function properly. Imported and domestically produced goods are both affected by these vicious cycles and are priced accordingly.

Several banks are facing deposit crises. Reports indicate that even those with surplus funds are not depositing them in banks; they are holding onto the money. One reason for this may be the lack of trust in banks by people. If people lose trust, banking operations cannot function properly. To address the various crises in banking accounts, it is necessary to ensure an improvement in people's trust in these accounts. It is not entirely correct that those who own surplus funds are holding onto them. Many are smuggling them abroad. According to statistics from a Bangladesh bank, suspicious transactions in banking accounts increased in 2023. However, an increase in suspicious transactions is not entirely welcome news. Investigative measures need to be taken to understand why suspicious transactions are increasing and to take corrective action. Many are taking high-interest loans from banks and then smuggling dollars abroad.

Identifying intentional loan defaulters is something that is occasionally heard, but not many admit to being intentional defaulters themselves. It has a widespread impact in Bangladesh. Therefore, the initiative to identify intentional and unintentional defaulters may not yield much result. Whether it's intentional or unintentional defaulters, it's not a matter for me to judge. A defaulter is a defaulter. If someone falls into crisis due to any inevitable reason and cannot repay the loan, then it should be taken up with the appropriate authorities. This issue is not easy to address.

n the future, the most important aspect of reducing default loans will be exercising caution during loan disbursement. It is not appropriate to lend to someone who may not be able to repay the installments in the future. Therefore, it is advisable to implement precautionary measures before any incident occurs rather than taking corrective measures after the incident has happened. Sometimes, certain banks provide loans without thoroughly verifying and scrutinizing the influence of individuals, which leads to loan defaults. Conversely, sometimes loan applicants and bank officials collude to facilitate loan disbursement. Such loans often turn into defaults in the future. Therefore, by properly verifying and selecting suitable individuals or entities before granting loans, the risk of default can be reduced.

During the loan disbursement period, it is essential to accurately evaluate the economic valuation of mortgaged assets. Under no circumstances should the valuation of mortgaged assets be overestimated. Proper valuation of mortgaged assets will significantly reduce the tendency for loan defaults. Currently, against the applied loan, banks often grant collateral at a ratio of 100:125 or 100:150 in favor of the bank. No one wants to lose their assets worth several times the loan amount, but it is often observed that the valuation of mortgaged assets is overestimated. As a result, if there is a need to sell mortgaged assets for any reason, it may not be possible to recover the funds for loan repayment.

At different times, it has been observed that some banks provide loans to various institutions under the same ownership. Sometimes, a loan defaulter within the group is providing loans to other institutions of the same group. This happens when there is collusion between bank officials and loan applicants. In some cases, loans are provided to incompetent projects due to the incompetence of bank officials. In reality, various powerful entities are withdrawing money from banks in the name of loans in various ways.

These vicious cycles must be broken. Otherwise, normalcy will not return to banking accounts. Some loan defaulters may appear 'very powerful,' but they are certainly not more powerful than the government. Therefore, I believe the government can bring these vicious cycles under control if it wishes. Prime Minister Sheikh Hasina has directives in this regard. Those involved in management must be accountable. Otherwise, they too must be held accountable.

Recently, some legal reforms have been made to the country's banking accounts, which are being criticized in various ways. Some argue that these legal reforms have been made precisely to accommodate loan defaulters. The rationality and practicality of these legal reforms need to be thoroughly scrutinized to take necessary action. However, it is imperative to swiftly bring the amount of default loans in banking accounts to a tolerable level. Political and other influences on banking accounts must be stopped, and good governance must be established. There is no alternative to this.

Author: Economist and Chairman, Dhaka School of Economics.
Transcribe: M A Khaleque