Rising defaulted loans leave no room for leniency

The amount of defaulted loans in the January-March quarter increased by around T101.67 billion to around T1,134.4 billion from around T1,032.74 billion. At the end of March. Economists cite the expiry of regulatory forbearances and the current economic situation, largely caused by the prolonged Covid epidemic, as the main reasons for the sharp increase. When Covid-19 broke out in Bangladesh in early 2020, banks offered a relaxed repayment term, including a one-year loan moratorium, amid criticism at the time that such facilities did not would not actually help to improve the situation. The amount of defaulted loans, even cosmetically, decreased by about Tka 60.48 billion in 2020 when borrowers used the standstill facility. An increased number of loans in default has now occurred as Covid-time exemptions expired in December 2021. The economic fallout from Covid may also have affected the repayment capacity of many borrowers. All this has led to an alarming situation.

Cosmetic measures to improve the appearance of the portfolio of delinquent loans do not actually benefit the banking sector and, therefore, the national economy. Rather, such measures create a false sense of security at the expense of economic growth. The loan amount defaulted ratio increased to 8.53% from an outstanding loan amount of around 13,297.36 billion taka at the end of March. Economists say the ratio should hover between 10 and 11% and the central bank could keep the ratio below what it should be at the maximum with regulatory exemptions. But experts say the ratio could reach 20% if loans that have been cancelled, loans that remain uncollected following legal proceedings and loans that have been rescheduled are counted. The amount of loans in default reached a record high of 11% of outstanding loans of around Tka 1,162.88 billion at the end of September 2019. The current situation therefore does not bode well for the banking sector. When pundits have time and again urged the government to take tough action against defaults, concerned authorities have instead repeatedly granted regulatory forbearances to borrowers. The current situation suggests that none of the measures the government has employed to deal with defaults have been successful.

Authorities should not decide on further easing of the repayment process and could instead leave such decisions to the discretion of banks if it helps in individual cases. The government must also take strict measures for the recovery of defaulted loans and against defaulting debtors. It must also crack down on banks in the event of default.

Garland K. Long