The international criteria of loan classification have been revised recently. In that context many of the readers may recall immediately after the 2018 election, the finance minister at the time, AHM Mustafa Kamal, announced that from that day on default loans would not increase by even a single taka. He took up various strategies to materialise his announcement. This minister, who was also an expert accountant, resorted to all sort of ploys like relaxing conditions and changing definitions, in order to conceal default loans. Due to all these statistics and percentage calculations, the rate of default loans may not have increased, but these moves to indulge defaulters have rendered the country’s banking sector extremely vulnerable.
Within four months of that finance minister taking over office, the system of classifying default loans was changed in order to hide such non-performing loans. According to the new regulation imposed in April that year (2019), other than in the case of term loans, if any loan or installment was not paid on the specified date, it would become defaulted the very next day.
If these loans remain overdue for 3 to 9 months, these are classified as ‘sub-standard’, for 9 months to one year, these are ‘doubtful’ and for over 12 months, these are “bad/loss”. In the previous policy all loans were classified according to international norms after falling overdue 3, 6 and 12 months respectively.
The first paragraph of the circular may seem very strict because the loans become overdue as soon as the specific date for repayment is crossed. But in the very next condition there is clear indulgence towards the defaulter. According to this condition, term loans will be considered overdue only six months after the due date. So the term loan borrower will get a six-month breather, while the bankers remain in tension. The borrower cannot be termed a defaulter for six months after the due date of repayment. In this definition the loan will only be catergorised as ‘sub-standard’ nine months after falling overdue. In other words, only 15 months after the specified day for repayment of a term loan will it be classified as ‘sub-standard’.
Only bankers and businessmen caught on to this stunt. Small and medium term borrowers also got scope in this system, but the main objective was to facilitate the big defaulters. After all, it is easy for the banks to keep watch on default loan recovery and difficult to hide defaults on installments. There is no specific pattern for repayment of other loans (such as overdrafts in the case of working loans) because these do not involve installments. Also, if a working loan is stuck, that too becomes a term loan. Big borrowers take a large part of their loan as term loan against factory buildings, etc. So a large part of their loan may be classified if the installments are not repaid in time. That is why large concessions were granted in the case of such loans.
Even the elderly finance minister at the time, AMA Muhit, seemed helpless and weak in the face of the bank owners
After this policy was changed, when the rate of default loans increased by the year end, the finance minister in 1991 pointed to the example of Tk 5000 crore loans in default against the total bank loans of Tk 19,000 crore, that is, 26 per cent. He argued that over the next 28 years the default loans stood at Tk 1 lakh 12 thousand crore against the total loans of Tk 9 lakh 62 thousand crore, that is, 12 per cent. To the apparent eye it may seem that the rate of default had dropped. But a little deep digging reveals the manipulations in percentage calculation. The percentage rate of default loans can be brought down in two ways, by relaxing the term for the loan becoming defaulted or increasing the total volume of loans. But the best thing is to recover default loans. This is a tough task given the reality of circumstances in our country. So the easiest way of not allowing the rate of default loans to spiral up is to take up those two easy ways out.
The finance minister at the time came up with yet a new theory that our interest rate is so high because interest on our loans is calculated in compound interest rates. And that is why default loans are not falling. In reality, it is quite the opposite. It is because default loans are high that the banks have to impose high interest rates. The minister took an unprecedented stand in siding with the influential persons who are unwilling to repay their loans, saying that the influential businessmen in Bangladesh make up 82 per cent of the economy. You can’t sidestep them and run the economy with the remaining 18 per cent. In other words, there was no compulsion for these influential persons to return their loans.
Indulging the influentials was the norm of our banking system. Under pressure from the bank owners, in 2009 the number of directors from one family in a bank was increased from 2 to 4. Their term in the board was also increased from 6 years to 9 years.
In 2015 another new opportunity was offered to the large defaulters. A regulation was put in place to the effect that with just a 1 per cent to 2 per cent down payment, default loans of over Tk 500 crore could be rescheduled for 12 years. Taking opportunity of this regulation, Tk 15 thousand crore was removed from default loans, but even then the concerned companies did not eventually meet the conditions.
In an unprecedented incident of banking history, under pressure from bank owners, in 2018 the Cash Reserve Ratio (CRR) was brought down to 1 per cent. Yet this cash reserve ratio is directly linked to many sensitive matters such as cash supply in the market, inflation and so on. Under pressure from this coterie, instead of 25 per cent, 50 per cent of government funds would be deposited in private banks. Even the elderly finance minister at the time, AMA Muhit, seemed helpless and weak in the face of the bank owners.
The defaulters were given yet another chance for rescheduling their loans and an exit in 2019 by scope for 2 per cent down payment, repayment in 10 years and other attractive conditions. Even after all that, default loans continued to go up in leaps and bounds. In 2022 once again a policy was made to appease defaulters by giving defaulters of over Tk 500 crore the chance to reschedule their loans for a 29-year term with a down payment of 4.5 per cent. There is no evidence of how successful this initiative proved to be.
Under pressure of bank owners (2023), yet again the term of directors was extended, this time to 12 years. The previous regulations were relaxed so that even if the company of any industrial or business group was in default, the other companies of the groups were eligible to avail loan facilities.
After much vacillation and unwillingness, in 2023 the issue of deliberate loan defaulters was included in the Bank Company Act. But given the hassle involved in taking action against defaulters under this law, there is no guarantee that our banks will be successful in this regard. We do not know of any instance where it has been possible so far to take action against any deliberate defaulter.
After the change in government, all quarters look forward to an end to indulging defaulters, to the clout of the influential defaulters, to the dawdling over default loan recovery and such. After all, the present interim government has no visible political agenda linked to the banking sector. Necessary policy support will be required from all quarters in order to cure the deep and festering wound in the banking sector caused by the various machinations of the previous government.
* Faruq Mainuddn is a banker and writer. [email protected]
* This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir