There has been a lot of talk in recent times about bad loans and recovering those bad loans. But before delving into the matter of recovering default loans, we first need to discuss how and why these bad loans come about in our banks. From my long experience in risk management overseas, I can say that bad loans stem from weaknesses in credit risk assessment, failure to follow the proper procedures in providing loans, lack of adequate and proper collateral against the loans, inadequate internal cash generation of a business, inability to survive against competition and if competitors receive extra facilities.
Then there is the matter of excessive loan distribution and also lack of proper business succession. Also to be taken into consideration, alongside credit risks, are business risks due to fraud and market risks due to price fluctuations.
In our country, during the last government, we have also seen an increase in loans provided on political consideration or due to orders from above. This is particularly true in the case of state-owned banks and also commercial banks that were in proximity with the government. The massive non-performing loans of BASIC Bank, Janata Bank and Sonali Bank are proof of this.
Then again, in many cases the weaknesses of the credit risk management departments in certain commercial banks leads to bad loans mounting up. Also in many cases, at a later date the credit administration does not look into the conditions under which the loan was given against the collateral. That is why of the total loan volume of around Tk 16.5 lakh crore of the banks in Bangladesh, Tk 2 lakh 11 thousand crore is classified, according official records.
Meanwhile, at the request of the International Monetary Fund (IMF), the central bank itself ran a stress test and revealed that the loans that are not likely to be recovered due to weak collateral and credit utilization, total Tk 3 lakh 77 thousand crore.
IMF had long been estimating this to be above 20 per cent or even above 25 per cent. Many feel that this is even higher due to the central bank’s repeated concessions in loan repayment on grounds of Covid, the Russia-Ukraine war and the slump in business.
The authorities concerned of the new government have said that there will be no concessions in recovering default loans. They say that deliberate defaulters and companies of their groups, no matter how powerful they may be, will not be able to avail loan facilities from the banks. No loans taken through irregular means will be rescheduled. But all these commitments were made by others in the past too, even by senior military officials.
While it is true that there is no alternative but to identify the defaulters and recover the loans through legal means, there are always elements lurking around who aid and abet the defaulters. The measure that had been taken up to prevent rescheduling default loans by means of amending the Bank Company Act is praiseworthy, but there is still a quandary about actually putting it into effect.
Meanwhile, no country has been fully successful in recovering all the defaulted loans through legal battle. In some cases this has been successful, but only after inordinately long legal battle and central bank reforms
We know that a lot of these loans taken on shaky grounds have been siphoned overseas. If this could be brought back, many say, then a lot of the bad loans could be adjusted and also this would help in overcoming the country’s existing economic crisis. But no one yet has spelt out how to go about this difficult task. There is also no clear concept of how this can be put into effect without taking stern action against the politically favoured deliberate defaulters, big and small.
There is no guarantee either that the bad loans will be recovered by adopting a stern stance, but evading legal complications. Threats and coercion haven’t worked in many countries. To the contrary, there are allegations that the bank directors and management are in cahoots with the defaulters.
Meanwhile, no country has been fully successful in recovering all the defaulted loans through legal battle. In some cases this has been successful, but only after inordinately long legal battle and central bank reforms. In this regard, China, South Korea and India have successfully used the services of international asset management and accounts institutions or consultants. India has used the Insolvency and Bankruptcy Code (IBC) and China and South Korea used the US asset management firm Carlyle to restructure many bad loans and sell these at a profit. The consultancy firm Alvarez and Marsal did well in restructuring loans for Sri Lanka and Greece during their economic crises. The World Bank itself did a good job in this regard in Indonesia. India assigned large accounting firms to look into the daily financial management of the large defaulting companies. The banks which had provided the loans were quite upbeat about this.
We now have to think outside of the box and increase our efficiency and capacity.
Many are of the opinion, including myself, that it will be possible to go ahead to a considerable extent to recover default loans using the existing rules and regulations of Bangladesh Bank and the commercial banks. But this will call for no unnecessary interference. The task becomes extremely difficult when the regulatory body is influenced by the government’s political objectives or get caught up in the bribery culture. The bank directors in Bangladesh also behave like politicians or cannot break away from vested group interests.
We certainly put our hope in this new environment of government. We really do not have much choice either. Unless we can lessen the power of this bad financial influence, we will lag behind in establishing overall accountability in the economy. Once again we will be caught up in shameful failure.
* Mamun Rashid is an economic analyst