Maintaining soundness and preserving a stable condition in the banking sector are prerequisites for the sustainable development of a country. The importance of stable funding in the banking sector is an even more stringent issue for the developing country that has a dominating banking system in economy. In Bangladesh, the banking sector controls over 90 per cent of the total financial system. According to recent statistics of Bangladesh Bank (BB), around six state-owned commercial banks, two specialised banks, forty private commercial banks, and nine foreign commercial banks, in total 57 scheduled banks are operating in Bangladesh. Bangladesh Bank (BB) enjoys the sole authority to provide licence for these 57 scheduled banks under its regulation. Bangladesh Bank (BB) performs the job of the central bank, the top regulatory body of financial system along with Insurance Development Regulatory Authority (IDRA), Micro Credit Regulatory Authority (MRA). One of the pivotal roles of the banking sector is to balance the economy by assuring money demand supply.
According to IMF, when the collection of loan, principal amount and interest are overdue for more than 90 days, it is termed as Non-Performing Loan (NPL). Over the last few years the topic of non-performing loan has become one of the alarming issues. The commercial banks are facing severe trouble with Non-Performing loans. According to Bangladesh Bank, the banking sector has been going through a tough time in recent months. Banks' NPL hit Tk. 88,589 crore in March this year, which is 10.78 per cent of the total outstanding loans. This forecasts that the loan defaulter has been increasing at an alarming rate since last year which is approximately Tk. 803.07 billion. And additional write off is Tk. 450 billion. If it were added back it would cumulate a total default loan amount of Tk. 1253.07 billion. The monetary body, IMF shows great concern about the current default loan scenario of Bangladesh. And it urges for greater supervision and monitoring of all economic activities that the commercial banks are involved in. Some factors which are identified as assisting this current default scenario might be – lack of monitoring among the banks to ensure good corporate governance, lack of discipline in allotment of credits, lack of verification in original documentation, tough competition and huge pressure of target achievement among the employees. Moreover, the approval of new generation banks, where some existing banks are already facing liquidity crisis, is creating the situation more complex. Long default resolution time, and in some cases, involvement of bank staff in fraudulent activities have also been observed.The recent scenario takes a lot to consider the involvement of directors in banks’ default loan. The latest issues for bad loans and Long Default Resolution Time (DTR) among some of the banks bring back the topic of bank liquidity crisis once again in front of us. Approximately 19 banks are found responsible for providing loans to their own directors, which accounts for about Tk. 4 billion. And in some cases, it shows the involvement of bank directors as a personal guarantor in the loan sanction process. Lack of accountability and good governance is one of the significant reasons behind rescheduling loans and inducing loan defaults.
According to the data provided by Bangladesh Bank (BB), the top five loan defaulter banks found in the list are mainly newly permitted banks having the age less than six years. The first bank from the defaulter list shows almost tk. 3.78 billions of default loans; the second position held by another newly permitted bank with an amount tk.1.94 billion, 3rd position holder bank has tk.1.52 billion default loans, fourth and fifth position also carried by another two newly permitted banks with tk.460 million and tk. 150 million default loans.
Some other new generation banks are also in the list of default and failure to collect rescheduled loans. Non-performing loan can have adverse effect on banks’ profitability and reliability. The Non-Performing loan affects the profitability of banks as it forces the bank to offer higher interest rate to its clients. To minimise the risk of default loan in no time the necessary steps must be taken care of -
• The newly permitted banks must be taken under great monitoring system in respect of their credit activities;
• The existing banks must monitor and declare their default clients’ profile on a regular basis;
• Banks must ensure good governance to ensure accountability;• A policy must be enacted regarding director’s loan;
• To ensure a proper checking of Default Resolution Time (DTR) on a regular basis as the longer the DTR the greater the possibility of loan default; and
• Maintaining credit risk up to a tolerable level to ensure credit portfolio management.
The bank must ensure its clients’ confidentiality as well as their ability to pay back the loans. The bank-client relationship must not act as a hindrance to the due collection processes; rather it must assist in quick repayment and ensure the lesser amount of bad loans. All responsible parties including CA firms, the banks audit committees, bank boards and Bangladesh Bank should be involved in restructuring the whole monitoring and collection process so that none of the parties can avoid responsibilities.
In a recent session the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) has suggested for the punishment of wilful loan defaulters. The proximity to defame and punishment may eventually minimise some default loans. But in the long run, more precise actions and defaulter identification are badly needed for minimisation of the risk of liquidity crisis in the banking sector.
The writer is a lecturer, School of Business Studies, Southeast University.