IMF Mission: Bad loans on rise, forex crunch persists 

Bangladesh is grappling with a persistent crisis of foreign currency while the amount of non-performing loans is rising in the state-run banks with no remarkable momentum in loan recovery.

Meanwhile, the Shariah-based banks are dealing with a growing liquidity crisis as their clients are transferring deposits to the conventional banks.

The financial institutions division of the finance ministry presented the scenario during its meeting with the visiting staff consultation mission of the International Monetary Fund (IMF) on Wednesday, according to sources. 

The IMF team has been holding discussions with the offices concerned since Tuesday and will stay here until 2 May. Representatives of three departments of the Bangladesh Bank and six state-run banks, including Sonali, Agrani, Janata and Rupali, were present in the meeting, under the leadership of financial institutions division secretary Sheikh Mohammad Salim Ullah. 

The IMF granted a USD 4.7 billion loan in favour of Bangladesh in January, on the condition that it will bring down the rate of bad loans in the state-run banks below 10 per cent. 

The IMF mission has been apprised that Sonali, Agrani, Janata, Rupali, BDBL and Basic banks have loans and advances of Tk 2784.22 billion while their defaulted loans totaled at Tk 564.61 billion in February. 

Basic Bank has the highest default rate at 58 per cent, while the Sonali Bank has the lowest at 15 per cent. The average default rate of six banks is 20.27 per cent, which is more than double of the IMF target. 

The authorities have also informed the lender that the banking sector registered the loan default rate at 7.66 per cent in 2020, 7.93 per cent in 2021, and 8.16 per cent in 2022.  

It is mandatory to hold provisions against the defaulted loans. Sonali, Janata and BDBL managed to comply with the rules, but the other state-run banks failed to do so. 

The Agrani Bank has a provision shortfall of Tk 44.22 billion while the Rupali Bank has Tk 28.15 billion in deficit and the Basic Bank has Tk 45.36 billion.  

About the meeting, Sheikh Mohammad Salim Ullah said, “We have informed he IMF mission what it usually wants to know in such meetings.”

He, however, declined to elaborate on his comment. 

The Bangladesh Bank has memoranda of understanding (MoU) with the state-run banks, except for the BDBL. It also has annual performance agreements (APA) with the financial institutions division. 

According to the meeting sources, the IMF team expressed dissatisfaction over the achievement under the two deals. The financial institutions division reported to the IMF mission that the five banks had a loan recovery target of Tk 50 billion, but they managed to recover only Tk 18.5 billion. 

Also, they had a recovery target of Tk 15.72 billion from the written off loans, but the recovered amount is only Tk 3.46 billion. 

Under the bank recapitalisation process, a total of Tk 97 billion has been infused in the state-run banks, except for the BDBL, between fiscal year 2013-14 and 2017-18.  The financial institutions division also said some senior officials of the Bangladesh Bank have been included to the board of directors of the state-run banks, in an effort to improve their financial condition. The central bank also issued notifications to gear up monitoring of the loan recovery process.  

The banks have been advised to  go for alternative dispute resolution (ADR), instead of court, to recover defaulted loans. The central bank asked all the banks to form special monitoring cells under the leadership of the deputy managing directors (DMD). 

The banking sector regulator has also been working on a legal framework for the formation of public asset management company (PAMC).

The banking sector has a longstanding practice of acquiring loan liabilities of a bank by another. It has been instructed to seek the central bank’s permission from now on. 

The financial institutions division also noted that the foreign currency inflow is lower than the demand and the economy is suffering from a forex crunch. The authorities are struggling to deal with the crisis with the export earnings and the remittance. 

In consequence, the banks have reduced opening new letters of credit (LC) due to the dollar crisis. Bangladesh imported goods worth USD  8.32 billion in February last year, but it plunged to USD 5.14 billion in  February this year. 

The IMF mission has been informed that Bangladesh, like other countries, is suffering from high inflation, due to a disruption in the supply chain caused by the Russia-Ukraine war. 

The Bangladesh Bank, however, has taken initiative to increase remittance and export earnings, in addition to controlling imports. 

The IMF demanded amendments to five laws. The financial institutions division said the cabinet approved the bank company act on 28 March 2023 and it now awaits approval from the parliament.

According to the IMF, the authorities should not allow more than one member from a family in the board of directors of a bank. Currently, a maximum of four members from a family is allowed in the board for nine years at a stretch. 

The draft law limited the number of family members to three, but kept the nine-year tenure unchanged. It also incorporated rules for bringing the willful defaulters to book and deduct their institutional facilities.  

The IMF mission wanted to see the draft law, but the authorities declined, saying that it cannot be shown before presenting in the parliament. 

Apart from that, the draft amendment of the negotiable instruments act-1881 is now in the cabinet committee on scrutiny of draft laws. The bankruptcy act-1997 is being reviewed by the Bangladesh Bank and the Bangladesh Investment Development Authority (BIDA). 

The financial institutions act-1993 is being revamped. It was sent to the law and justice division of the law ministry for vetting on 5 April. The money loan court act-2003 is also waiting for vetting.  

The banks have to preserve a good amount of liquidity to remain afloat. The overall liquidity situation in the banking sector is good enough, but nine banks are going through a cash crisis. 

The financial institutions division informed the IMF team about the liquidity situation, without mentioning names of the nine banks with liquidity crunch. 

They said the Shariah-based banks have been going through a liquidity crisis as their clients have been transferring their deposits to the conventional ones throughout the last several months. 

The financial institutions division sought time when the IMF delegation looked for detailed information in this regard. 

Salehuddin Ahmed, former governor of the Bangladesh Bank (BB), said the division made a good presentation before the IMF. The state-run banks have administrative and management-related issues, in addition to the lack of good governance. Proper individuals are not being recruited in the banks to work diligently. 

He held the financial institutions division responsible for the situation as it recommends the recruitments. 

The former governor also said, “Whatever I heard about the reform of the banking and financial sector from the IMF, all seem to be superficial. If we take the issue of bank director, instead of four from a family for nine years at a stretch, a maximum of two family members should be there in the board for only three years.” 

He expressed disappointment over the draft amendment, saying, “The number is being limited to four, but the tenure of nine years remains untouched. Is it an amendment?”