Notwithstanding the fact that we all know ballooning bad loans has a detrimental impact not only on the financial health of the banking sector but they damage the overall economy of a country as well, this troubling trend remains deeply entrenched in Bangladesh. The bank authorities, in spite of taking up and implementing a good number of measures over the years, have not been able to tackle this issue in an effective manner.

Take a look at this concerning picture: in 10 years until December 2023, the volume of non-performing loans or NPLs in the country's banking sector more than tripled to Tk1.45 lakh crore and exacerbated cash crunch in banks, according to a recent survey report by the Centre for Policy Dialogue (CPD). If another chunk of banks’ liquid asset stuck up as rescheduled loans is added up, the amount of dud money banks are bearing will come to Tk3.78 lakh crore. Also, there is Tk1.78 lakh crore of unpaid debts against 72,543 cases pending with the loan courts. Altogether, the total amount of default loans will be Tk5.6 lakh crore, says the CPD report.

The roots of this crisis lie in a complex web of factors.

Even though state-owned banks, both commercial and specialised, were the primary culprits while private banks managed better in the past, the situation has changed dramatically over the past several years. A good number of previously well-performing private banks have now fallen victim to the same fate as their government-run peers and are now teetering on the brink of collapse. This crisis is fuelled by pervasive lack of good governance and widespread irregularities, often orchestrated by bank directors, in loan disbursement.

Allegations run rife that a group of individuals having political connections took out large loans from government banks and then defaulted on them intentionally. Later on, those people established private banks using the funds swindled out of the state-run banks. These defaulters, now directors of the new banks, repeated their deceitful strategy, further entangling the private banking sector in a web of corruption and financial instability. What is more, many unscrupulous businessmen also defaulted on loans and sought political refuge to evade legal repercussions. Political parties also used the loan defaulters because they need financial support from these people for their survival. This symbiotic relationship between defaulters and political parties has given rise to a dangerous business-politics nexus, fostering a culture of impunity, eroding accountability and transparency.

The adverse impact of rampant NPLs extends far beyond financial losses. If banks are burdened with a mountain of unrecoverable loans, they become risk-averse. As a result of liquidity crunch, banks' lending capacity shrinks, suffocating investment -- the lifeblood of economic growth. Without getting adequate capital support, businesses struggle to expand, which hinders job creation and economic dynamism. And, the ripple effect of this financial paralysis impacts everything from infrastructure development to social programmes of the government, hurting the very fabric of a nation's prosperity.

Therefore, keeping in mind the long-term damaging impacts that unabated loan defaults can put on the national economy, we must find some way out of this disturbing situation. To that end the role of the central bank as the regulatory body in this sector will be vital. It is amply clear from the current scenario that Bangladesh Bank has so far attained little success in this respect. It is highly desirable that the regulatory body takes a zero-tolerance attitude towards loan defaulters and also the corrupt bank high-ups, who patronise such anomalies. Yet even then there remains a question with regard to attaining full success in this regard.

Informed people know it very well how the Banking Companies Act itself has made the central bank incapable of applying its power against board members or the chairmen of the state-owned banks, which are suffering from defaulted loans most. Therefore, in order to get a full success in tackling the bad culture of loan defaulting, the government needs to take measures to remove loopholes in the legal framework and make Bangladesh Bank powerful enough to address the issue strictly. Sunlight is the best disinfectant, and the same holds true for the banking sector. Independent audits, robust credit risk assessments, and a commitment to public disclosure of bank information are essential to fostering a culture of good governance.

A dedicated asset management company (AMC) can act as a shock absorber, purchasing bad debt and freeing up bank capital for lending. Additionally, streamlining legal processes for loan recovery can expedite debt resolution and deter future defaults. The country must also dismantle the business-politics nexus at any cost and this requires unwavering political will. Holding both loan defaulters and bank officials accountable, regardless of political affiliation, sends a powerful message while selective justice only perpetuates the problem.

Besides, efforts must be made to promote responsible borrowing. Public awareness campaigns can play a crucial role in educating borrowers about loan repayment responsibilities and the long-term consequences of loan defaulting. Developing a culture of financial responsibility is the key to preventing future NPL crises.

To sum up, the fight against NPLs is a collective one. It requires a strong commitment from the government, regulatory bodies, financial institutions, and the public. This crisis, though daunting, presents an opportunity for systemic reform. By implementing robust reforms to address the root causes of NPLs, fostering good governance, and promoting responsible borrowing practices, we can build a healthier and more resilient banking sector, paving the way for a more prosperous future for the nation.
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The writer is News Editor of the Daily Sun. Email: [email protected]