Spare the defaulters and spoil the banks

A group of small investors recently held a token hunger strike against the continuous slide in share prices. These investors have an organisation, can demonstrate and bring out processions to express their discontent. But bank depositors have no such organisation, no platform from which to protest or hold hunger strikes. Yet they have all reason to be anxious as their deposits are being squandered.

In full knowledge of the government and the bank owners, their deposits are being frittered away. Given that they own 90 per cent of the capital, the depositors are the genuine owners of the banks. The so-called owners own only 10 per cent. Unfortunately, they are allowed to squander the money. And the government talks about sparing the defaulters. In fact, this is exactly what the finance minister indicated in parliament on Sunday.

The finance minister was changed in January after 10 years. Taking over the responsibility, the new finance minister announced that default loans will not be increased any more. He announced this after a meeting with bank owners and businessmen on 10 January. But later, the definition of default loans changed. As per the new definition, the loans will be defaulted if not paid within six months. Earlier, it was three months. The default loans will thus decrease and the profit of banks will increase. The previous loan classification rules were of international standard. Bangladesh now steps back from that.

As per another decision, the loan defaulters are allowed to repay their loans at a 9 per cent interest rate. They have to deposit two per cent at a time. The remaining amount can be paid over a span of 12 years. According to the latest decision, the loan defaulters are being spared. It was reasoned loan defaulters were similarly spared in other countries too, but there has been no apparent evidence of this.

Loan defaulters are barred from flying in China. In Nepal they do not get passport facilities. In Middle East countries, loan defaulters are sent to jail.

It is not that loan defaulters were never facilitated earlier. But despite all concessions, they have never amended their ways. The central bank issued a loan restructure guideline in 2015. At that time, 11 industrial groups were given the scope to regularise their loans of Tk 150 billion. After availing these facilities, only two groups paid up their loans. So nobody expects that the loan defaulters will repay their loans regularly in future.

According to a report of the Asian Development Bank, in the entire Asia only Afghanistan has higher default loans than Bangladesh. The latest report says Bangladesh’s default loans stand at over Tk 1,300 billion. In the beginning of 2009, the default loans were Tk 224.81 billion.

On the day it was declared in parliament that loan defaulters would be spared, the fragile state of the banking sector came up in a discussion of the Bangladesh Institute of Development and Research (BIDS) on that day (Sunday). In the meeting, former finance adviser to the caretaker government Wahiduddin Mahmud pointed out three reasons for which the banking sector was in such a pitiful state. These were: unwarranted interference of the board of governors to control banks, simplification of loan restructuring conditions, and changing the definition of default loans.

The Association of Bankers Bangladesh (ABB) president Syed Mahbubur Rahman said the situation would change if loan defaulters were given exemplary punishment. Borrowers would be made to keep in mind that the loans have to be repaid.

We don’t know how Bangladesh Bank and the finance ministry will respond to these statements.

The question is, why are the loan defaulters spared instead of punished? Why was the definition of default loan changed? Economist Wahiduddin Mahmud indicated that the definition was changed under pressure from a section of businessmen. At an event on 23 April, it was said from the Centre for Policy Dialogue (CPD) that a certain quarter was making policy decisions and controlling the government.

The crisis in the banking sector was not created overnight. Nor will it be resolved overnight. It is urgent for the government to send out the message that it is serious about resolving the crisis. Sparing the loan defaulters will not send out this message. It is more important to send out the message that no one will be spared and the defaulters will be punished.

Interest rates cannot be fixed by force. The banking sector cannot be fixed on the basis of ‘advice’ from any particular quarter. The sooner this is understood, the better.

* The piece, originally published in the Prothom Alo print edition, has been rewritten in English by Rabiul Islam