High default loans pose a big threat to financial sector: BB

Bangladesh BankFile photo

Bangladesh Bank has described the high volume of default loans in the banking sector as a big threat to the advancement of the country’s financial sector. 

In its quarterly review report on currency and exchange rates, the banking sector regulator also blamed the default loans for capital shortfall in the banks. 

“If the amount of default loans becomes high, it necessitates increasing provisions against these default loans. Actually, the defaults are responsible for the capital shortfall in the banks and the capital situation is unlikely to improve unless the default loans are minimised,” it noted. 

The observation came at a time when the banking sector is grappling with loan irregularities, willful defaults, and high volume of defaults due to relaxed policy of the regulator.

According to the central bank, the volume of defaulted loans stood at Tk 1206.58 billion at the end of December 2022, which was 8.16 per cent of disbursed loans. The volume surged to Tk 1553.98 billion at the end of September 2023, representing 9.93 per cent of total loans. Later, it came down slightly to Tk 1456.33 billion in December, which was 9 per cent of total loans. 

The review report noted that the state-run banks have been failing to maintain the minimum capital adequacy ratio over the past one decade. The specialised banks are also facing a capital shortfall. 

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The Bangladesh Bank pointed out special liquidity support, devaluation of taka, foreign exchange deficits, and borrowing by Islamic banks to address their liquidity deficits as key challenges for the banking as well as the financial sectors. 

It feared that failure to address these challenges may affect the overall economic activities in the long run.

The report also noted a 1.70 per cent rise in currency supply to Tk 19090 billion at the end of October-December quarter of the current financial year 2023-24. The domestic borrowings surged by 2.11 per cent compared to the preceding quarter and reached Tk 19710 billion.