Defaulted loans have to be brought down by 2 yrs

A logo of IMF
Reuters file photo

Six state-run banks – Sonali, Agrani, Janata, Rupali, BASIC, and BDBL – have got 28.66 per cent of their total loans defaulted.

The International Monetary Fund (IMF) asked the Bangladesh Bank (BB) about the latter’s strategy to bring down the rate to 10 per cent.

The lending agency advised not only the state-owned banks but the entire banking sector to keep the defaulted loans within 10 per cent.

In response, the central bank briefed the IMF that the overall rate of defaulted loans is less than 10 per cent in the country and it eyes a significant improvement in this regard by June 2024.

According to the Bangladesh Bank data, the total amount of defaulted loans stood at Tk 1340 billion in September, where the six state-run banks make up Tk 600 billion.

The BASIC Bank topped the list of the banks with defaulted loans as some 59 per cent of its total loans are now defaulted. The Bangladesh Development Bank Limited (BDBL) has 40 per cent of defaulted loans while the rates of Janata, Rupali, Agrani, and Sonali banks are 28 per cent, 17 per cent, 19 per cent and 17 per cent respectively.

Experts have called the authorities into question as the amount of non-performing loans is increasing every year and no certain policy has been formulated to rein in the situation.

At the same time, the IMF asked the banks to prepare a report reflecting the rescheduled loans along with the defaulted loans, in an effort to understand the picture of real assets. The Bangladesh Bank replied that it would be done by June 2023.

An IMF delegation visited Dhaka from 26 October to 9 November as part of the agency’s negotiation with Bangladesh over a loan proposal for USD 4.5 billion. They held meetings with the central bank and provided various suggestions for improving the banking sector, including reduction of bad loans.

The IMF also sought specific timeframe for internal capacity building for changes in reserve calculations, reflection of loan write-offs in the annual financial stability report, formulation of negotiable instrument and bankruptcy laws, biannual monetary policy, macro prudential stress test and pursue climate stress test.

The global lender has suggested to reduce the time the banks currently take to write off the defaulted loans.

Bankers said the banks have to provision from their profits in a bid to write off the defaulted loans. However, the bank owners are reluctant to take this step, instead they are interested in repeated rescheduling of the defaulted loans.

The Bangladesh Bank promised the IMF that it would take action in this regard by next June.

According to sources, the central bank will give instructions to reduce the time to write off the defaulted loans.

Former IMF official and executive director of Policy Research Institute (PRI), Ahsan H Mansur said all, alongside the IMF, want to see a reduction in defaulted loans. But the government’s sincerity should be in focus.

“The financial sector will benefit if the government implements what the IMF said before giving a USD 4.5 billion loan. The loans will come and be spent. But if the government does not have good intention, the possible conditions of IMF will not be fulfilled and the country will not benefit in the long run."

EDF likely to be downsized

Currently, the size of export development fund (EDF) is $7 billion. Exporters borrow from this fund and repay it. The IMF advised cutting the EDF size by a little on the ground that small EDF size contributes to bigger reserve size. Bangladesh Bank is positive on this matter albeit the central bank is yet to set a deadline.

Bangladesh Bank added $7 billion of EDF and other $8 billion to foreign reserve. IMF suggests excluding of $8 billion in account reserve count and Bangladesh Bank said they would prepare two separate counts within June.

Speaking to Prothom Alo, Bangladesh Bank executive director and spokesperson GM Abul Kalam Azad said IMF has imposed nothing including reduction in defaulted loans that is impossible to comply. However, everything will be finalised at the IMF board.

Stopping Covid preiod stimulus

IMF wants Bangladesh stop providing Covid stimulus to banking sector within December so that sector returns to regular operation.

Bangladesh Bank said such facilities have already been withdrawn that loans of big industries would not be shown as defaulted loans even if they fail to pay.

However, stimulus for very small, small and medium enterprises (SME) and borrowers in the flood affected areas meaning for the agriculture sector will be in place and its duration may be extended for six more months.

IMF wanted to know about deadline for the passage of the bankruptcy act and the negotiable instrument act. The finance ministry’s Financial Institutions Division is working on it and the lending agency has been informed that both laws will be passed in a couple of months.

Question on standard of financial report

No money has recovered from the people involved in BASIC Bank scandal over five years due to a lack of proper financial report. The same happened to now defunct Oriental Bank.

The IMF raised question on the standard of financial report in the country saying financial statement does not reflect actual scenario in the banks and weakness remains in dark. The IMF recommended following the International Financial Reporting Standards (IFRS) in preparing financial statement.

Bangladesh Bank informed the IMF delegation that initiative would be taken to introduce IFRS in banking sector within 2027 and sought technical assistance from the lending agency.

Speaking to Prothom Alo, Institute of Chartered Accountants of Bangladesh former president Mahmudul Hasan Khosru said, “I welcome the IMF recommendations for the sake of economy and I don’t understand why it will take so much time, until 2027. With the Covid, we are passing a transition period, but we have to take a preparation right now.”

*This report appeared in the print and online edition of Prothom Alo and has been rewritten in English by Mishbahul Haque and Hasanul Banna