Appeasing the bank loan defaulters

Update:

The authorities in the country’s banking sector seem to be hell bent on appeasing the loan defaulters rather than punishing them. This is serving to entice even the good borrowers to drift towards default.

In a circular issued on Sunday, Bangladesh Bank brought about changes to the loan classification policy which facilitates loan defaulters. This new regulation will come into effect in June this year.

Under the new provision, businesspersons can be free of default even if their loans are not paid six months after deadline. A businessperson will now thus get three to six months more time than at present to repay his or her loan.

Prior to this, on 2 April the finance minister AHM Mustafa Kamal said that loan defaulters could repay their loans at a 9 per cent interest rate, after a one-time 2 per cent deposit. Before that he had said the interest rate would be 7 per cent, but changed this to 9 per cent after facing a volley of criticism.

Despite all these facilities, no matter whether wrong or right, the banking sector remains in dire straits. Default loans have mounted to over a trillion taka. Given this size of our economy, this is a cause for consternation. The government should have taken a stern stance towards loan defaulters, but instead it is becoming more lenient, at the cost of the banking sector as a whole.

The bankers used the pre-election period as leverage to ensure that directors could remain on a board for nine years and four persons of the same family could also remain on the same board of a bank. Also, the ceiling for government funds to be kept in private banks was raised from 25 per cent to 50 per cent and corporate taxes of the banks were lowered by 2.5 per cent.

Given these facilities, the bank owners had committed to lower interest rates, but that has not been done. Some banks had lowered the interest rates last year, but are now going back to the previous original rates. The prime minister herself has expressed displeasure over the matter. It is obvious that the banks are heading towards crisis with the owners and defaulters are being facilitated further.

The finance minister might be pleased with the concessions being given to the defaulters, but this will not bode well. The loan defaulters have been given such concessions in the past too. When they struggle to pay their loans and cannot deal with the banks, they resort to the financial loan court.

In 2009, default loans in the banking sector stood at 224.810 billion. This now stands at 1.3 trillion taka.

The finance minister’s plan to classify good borrowers and bad borrowers is not justified either. There is no scope for the bad borrowers who are in default now, to become good borrowers.

The World Bank has also expressed concern at the state of the banking sector. There is no doubt that this predicament of the banking sector will have a negative impact on the overall economy of the country.

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