Willful loan defaulters are enemies of nation and economy

The banking sector in Bangladesh is in trouble. Renowned economist Dr. Ahsan H. Mansur recently spoke at a seminar organized by the Economic Reporters Forum (ERF) on the topic "Problems in the Banking Sector and Solutions to Overcome Them." He pointed out that the figures for non-performing loans (NPLs) reported by the Bangladesh Bank do not reflect the true picture. According to Bangladesh Bank's statistics, as of June, the amount of NPLs in the banking sector stands at approximately 1.83 trillion BDT. However, this figure does not include written-off loans, restructured loans, or loans involved in legal disputes.

If the loans that have been kept outside the category of NPLs through various mechanisms are added, the total amount of NPLs would exceed 4 trillion BDT. After the interim government assumed power, Dr. Ahsan H. Mansur was appointed Governor of the Bangladesh Bank, which has raised hopes among stakeholders. Having successfully served as Chairman of the privately-owned BRAC Bank, Dr. Mansur is well-acquainted with the country's banking system. The failure to recover NPLs is damaging the economy in multiple ways. Banks are struggling to provide loans to the private sector at the desired level.

Due to the liquidity crisis and contractionary monetary policy, even the government is unable to borrow from the banking sector when needed. As a result, the Bangladesh Bank is forced to print new money to meet the government’s demands, which in turn increases inflation in the domestic market. The inflationary pressures caused by Bangladesh Bank's misguided policies have not been brought down to manageable levels. Notably, when the war in Ukraine triggered global inflation, central banks in 77 countries, including the U.S., raised their policy interest rates significantly, discouraging borrowers due to higher interest rates on loans. Consequently, these countries managed to reduce inflation to tolerable levels.

Bangladesh Bank, following the U.S. Federal Reserve, increased its policy interest rate from 5% to 8.5%, but it kept the maximum interest rate on bank loans fixed at 9% until recently. Many believe this decision was made to provide unethical advantages to certain groups, despite the central bank knowing it would have adverse effects. With the maximum interest rate on loans fixed at 9%, borrowing from banks became relatively cheap, especially when inflation was running at 9.5% or higher. In one implemented monetary policy, the growth target for private-sector loans was set at 14.1%, but the actual growth rate reached 14.7%.

During that period, however, imports of raw materials and intermediate goods for industries fell by 14%, and imports of machinery also decreased significantly. Many believe that influential groups borrowed from banks during that time and diverted the funds elsewhere, with accusations of some even laundering money abroad. A report from a private organization highlighted that 11 trillion BDT was laundered out of the country over the past 15 years, with a large portion of that money originating from bank loans. There is an urgent need to recover the laundered money by establishing bilateral legal cooperation agreements with the countries involved. In addition to efforts to recover laundered money, it is crucial to prevent future capital flight.

The current fiscal year’s budget offers a provision for whitening black money by paying a 15% tax, which is highly undesirable. Regular taxpayers may have to pay as much as 25% in taxes on their legitimate income, so allowing black money holders to whiten their funds with a lower tax rate only encourages such activities. This provision should be withdrawn immediately. After assuming office, Dr. Ahsan H. Mansur stated that those who are not repaying their loans or have embezzled funds from banks will not be allowed to live in peace. Notably, in the past 15 years, there have been 24 major corruption incidents in the banking sector, resulting in the embezzlement of 922.61 billion BDT, according to a report by the Center for Policy Dialogue (CPD).

The banking sector is suffering from a severe lack of internal governance. Due to this lack of governance, an influential group has been siphoning off funds under the guise of loans. These individuals are extremely powerful and have historically enjoyed the patronage of those in power. To determine the actual amount of money embezzled from the banking sector and the true extent of NPLs, a comprehensive initiative is needed. The newly appointed governor of the Bangladesh Bank has announced plans to publish a white paper on corruption and mismanagement in the banking sector within the next 100 days.

Once the proposed white paper is released, it will enable accurate assessments of the real problems facing the banking sector and facilitate effective solutions. The banking sector is currently unable to meet the financial needs of entrepreneurs, which is problematic for an emerging economy like Bangladesh. Entrepreneurs here often struggle with a lack of capital and rely on banks to meet their funding needs, but banks are unable to provide the necessary capital due to the massive pile-up of NPLs. Even when banks extend loans, they are often unable to recover the repayments on time.

This raises the question: How are NPLs hurting the banking system? Banks do not operate with their own funds. They collect deposits from the public, promising a certain interest rate. The banks then lend these funds to entrepreneurs and general borrowers at a higher interest rate. If banks fail to recover loan installments along with interest on time, they incur losses because they still need to pay interest to depositors. When loans default, banks must set aside a certain percentage of the outstanding loan as a provision, reducing their profitability and diminishing their pool of investable funds.

Loans are categorized into five classes, each requiring different levels of provisions. For example, loans that are being repaid regularly require a 1% provision, while loans that are occasionally irregular but return to normal status require a 20% provision. For loans where banks are uncertain about recovery, a 50% provision is required. Finally, for bad loans, banks must set aside 100% of the loan as a provision.

We do not know the exact amount of NPLs in the banking sector because there is a tendency to hide rather than report them, much like sweeping dirt under the carpet to make the room appear clean. While Bangladesh Bank's tough stance on recovering NPLs is commendable, the first step is to determine the true amount of NPLs. However, does Bangladesh Bank have the capacity to do so? The central bank must first be empowered to accurately assess the volume of NPLs in any situation. A special expert committee, composed of officials from Bangladesh Bank, prominent bankers, and economists, could be formed to determine the real amount of NPLs, investigate the causes behind them, and recommend measures to eliminate the culture of willful default.

Based on those recommendations, strict actions must be taken against defaulters. The Financial Loan Court must be strengthened. In short, willful defaulters should face full enforcement of the law, including confiscation of their assets, disqualification from participating in state functions, restrictions on foreign travel, and, if necessary, imprisonment and fines. Willful loan defaulters are enemies of the nation and the economy and should not be given any leniency. However, those who are unable to repay their loans due to adverse circumstances, despite their willingness to do so, should be supported based on their past repayment history to help them regain their ability to repay.


Dr. Mahfuz Kabir is Research Director at the Bangladesh Institute of International and Strategic Studies (BIISS).

Transcribe: M A Khaleque