The tendency not to return bank loans is deeply rooted among a certain group of people of Bangladesh. Wealthy, influential and well-connected businessmen feel no obligation to repay their bank loans. And these are the businessmen who are now taking important decisions regarding the country's financial sector.
These are the findings of a team of the International Monetary Fund (IMF) that visited Bangladesh twice in the last six months at the invitation of the government. The team came to Bangladesh in April and in August-September.
In its analysis of Bangladesh’s economic sector, IMF, which works to foster global monetary cooperation and secure financial stability, said a very high amount of default loans have been kept hidden, monitoring by the central bank (Bangladesh Bank) is weak and the bank directors and management are reckless. They do not get punished for violating laws. As a whole, the banking sector of the country is very shaky and under grave threat.
Assessing Bangladesh’s economic sector for six months, the IMF has submitted a 68-page report to the government with 43 recommendations.
Hidden default loan
IMF has found the default loan in a very critical condition. It said the actual amount of default loan is much more than the number is published.
According to Bangladesh Bank, at the end of 2018, the amount of default loan stood at only 10.3 per cent. But IMF thinks some more things should be considered to calculate the actual amount of default loan. For example, due to the court’s stay order 4.1 per cent of default loans were not included, which is a must. At the same time, 5.6 per cent of the total loan has been kept as special mention account. Besides, the central bank has issued no objection certificate (NOC) in favour of many defaulters as they applied for it. The amount of such loans is 5.6 per cent of the total loan. IMF team thinks those three types of loans must be included to get the actual picture of default loans.
The IMF commented on the amount of loan calculated up to December 2018. But the Bangladesh Bank provided the information of default loan sized up up to June this year. The amount is Tk 112,425 crore, which is 11.69 per cent of total loan.
It has been learnt that 675 people have taken the NOC from the court. As a result, the Credit Information Bureau (CIB) of Bangladesh Bank does not include their names in the list of defaulters. The amount of their loans is Tk 79,242 crore.
Sometimes the default loans are rescheduled in special ways. There are examples of rescheduling loans reiteratedly at the behest of the government. The culture of rescheduling of large amount of loans has begun in 2015. According to Bangladesh Bank, the amount of such loan is Tk 27,192 crore. At the same time, several banks have regularised default loans of Tk 21,308 crore until June after taking NOC from the central bank.
This is how, the actual amount of default loan stands at Tk 240,167 crore. IMF is in favour of calculating the default loan adding up all those loans.
After taking charge of the finance ministry in January, AHM Mustafa Kamal changed the definition of default loan. Following the international standard since 2012, earlier definition categorised a loan substandard if it was unrepaid for three months. The time was changed to six months in the new definition. A loan was called doubtful if it was unrepaid for six months. The time for such loan has been increased to nine months. A loan was called bad if it was not paid for nine months but now the time is 12 months.
IMF insisted on following the international standard in categorising the loans. It recommended categorising a loan as default if it went unpaid for 90 days.
Former deputy governor of Bangladesh Bank, Khondoker Ibrahim Khaled told Prothom Alo that the local economists have been saying what the IMF said for long. Default loans are kept hidden in various ways and sometimes overlooked. The actual amount of default loan is much higher than the amount is published. Now we need a solution to all this.
Influentials are the decision makers
IMF cited an example of using power by the coterie of defaulters in its report. The board of directors of Bangladesh Bank in August took a decision to reschedule loans of Tk 15,180 crore took by 11 large defaulters. The loans were restructured in 2015 saying that the bank would take tougher action if anyone turns defaulter taking this special benefit. But those were just empty words.
IMF said the central bank decided to be tougher against the defaulters and would ask the banks to take action against those, who became defaulters after taking the loan restructuring benefit, under the Bankruptcy Act-1997, so that the influential borrowers understand that they will not get away with it. But finally, the central bank has given them the chance to reschedule the loan. This proves the influential people take the decisions of the financial sector.
IMF said such generosity to the defaulters destroys discipline in providing and repaying loans.
IMF also said a certain clique, who are powerful and have good connections with high-ups, do not feel the urge to repay the loans as they know they will not have to face any consequence for this. The small businessmen and poor people, however, repay loans regularly. It recommended creating such a system that would force the powerful to repay their loans.
Speaking to Prothom Alo, former governor of Bangladesh Bank, Salehuddin Ahmed said, “Everybody knows who are taking the decisions of the financial sector. This is why all the benefits are going in favour of bad customers. The good and small customers are losing interest in banks. There’s no incentive for them. There is negative incentive in the financial sector. That’s why unrest prevails in the sector.”
Bangladesh Bank’s reluctance to use authority
According to IMF the biggest flaw of Bangladesh’s financial sector is not following existing laws. Proper monitoring becomes tough if the banks do not follow the laws rigorously. Bangladesh Bank also does not use its authority. At the same time, the bank’s directors and managers are involved in practices for which they were supposed to lose their position. A director should have been indicted for misuse of power or negligence of duties. Action against wrongdoings could have been a powerful message. But no action is taken. The coterie of bank directors and managers must be broken, the IMF said.
IMF also thought Bangladesh Bank does not have sufficient autonomy. It recommended amending Section 58 of the Banking Company Act to make the central bank more powerful. IMF urged the government to give the power to acquire or temporarily close or shut down a bank if it ruins the customers or fails more than once to protect their interest.
It also asked to amend Section 46 of the Banking Company Act. According to the section, the central bank only can send a report to the government on any chairman or director of a bank.
Bangladesh Bank had sent such a report recommending abolishing the board of directors of BASIC Bank in 2013 when its corruption allegations were published. But the government did not take the recommendation into cognisance.
No new bank
IMF reported against giving approval to new banks and financial institutions. The new banks failed to create a competitive environment in the market and could not attract new funds. They invested with high risk. The number of banks in Bangladesh is higher in comparison to other South Asia countries but competency in running banks is low. New and competent management can take charge of old banks.
The number of banks in the country now is 59. Three more are in the pipeline. Fourteen of the banks were given approval by the ruling Awami League government after it came to power in 2009. In its earlier tenure in 1996-2001, the AL government approved 13 banks. The government of Ershad gave approval to nine banks while that of the BNP gave approval to eight banks in its 1991-1996 tenure. But it did not give approval to any new banks in its 2001-2006 tenure.
IMF recommended decreasing the number of bank directors. Currently every bank has 20 directors, which is high to ensure good governance, it said. It also recommended increase of independent directors from current number of three. It recommended ensuring of an environment where the audit and risk assessment committee can work independently. IMF also suggested raising the banks’ minimum fund to Tk 600 crore from Tk 400 crore by the next five years.
Banking sector at risk
IMF thinks Bangladesh is under threat of money laundering and all types of illegal use of money including terror financing. Bangladesh lags behind in taking actions in this regard especially in fighting money laundering. This has put the whole financial sector under threat. Banks of Bangladesh might face disadvantages in begin operations in the markets of New York if there’s any crisis in reputation. On 1 September, China has blacklisted 5 Bangladeshi banks. This is a warning for the country.
IMF also expressed concern for high loans in the energy sector. It recommended decreasing the ceiling of loans to any individual borrower or company from 35 per cent to 25 per cent. Otherwise only three defaulters are enough to make a bank bankrupt.
Commenting on the overall situation, Policy Research Institute (PRI) executive director Ahsan H Mansoor told Prothom Alo, “What the IMF said is already being discussed in the country for long. But the situation is going from bad to worse. Influential people are using banks and bringing changes in policy in favour of their interests. Many initiatives have been taken against the principles of the market. No supporting steps were taken for the banks in the last 10 years.”
Ahsan H Mansoor also said that laws were changed and banks were given to a few families. At the same time, a family has taken control of several banks. A few borrowers have taken loans in the name of various companies. Overall, the risk in banking sector has augmented.
*The report, originally published in Prothom Alo print edition, has been rewritten in English by Shameem Reza