Bad loans continue to break records

Defaulted loans in the banking sector rose further to Tk 6.44 lakh crore, or nearly 36 percent of total disbursed loans, at the end of September, indicating the continued fragile state of the country's financial sector.

At the end of the third quarter, total disbursed loans stood at Tk 18.03 lakh crore, of which Tk 6.44 lakh crore became defaulted, amounting to 35.73 percent of all disbursed loans, BB data showed. This is the highest bad loan ratio since 2000.

A year earlier, the ratio of bad loans was 16.93 percent of total outstanding loans.

Big borrowers such as S Alam, Beximco, AnonTex, Orion, Abdul Monem and Sikder Group defaulted on a large scale after the fall of the Awami League government in August last year, causing an unprecedented jump in bad loans.

Bad loans stood at Tk 2.82 lakh crore at the end of September last year, meaning defaulted loans increased by Tk 3.61 lakh crore in just one year.

After August 5 last year, many businessmen fled the country and many of their businesses shut down, which pushed up bad loans, said the chief executive of a private bank.

"Ahead of the upcoming election, an atmosphere of uncertainty is prevailing in the country, which is hindering trade and commerce. Because of these factors, many good companies have turned into defaulters," he added.

Due to the high volume of defaulted loans, the banking sector is facing a significant provisioning shortfall: Tk 3.44 lakh crore until September.

"This is not a good sign," said Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank.

Banks' profitability will decline and the funds available for lending will shrink due to the high bad loans, said Rahman, also the former chairman of the Association of Bankers, Bangladesh, a platform of bank MDs.

However, defaulted loans may decrease in December because the central bank has introduced policy support. Many defaulted loans are being rescheduled.

Recovery needs to be strengthened, he said.

"Legal procedures must be made faster. More courts and more judges are needed. But the challenge is that the election is ahead, so business conditions are weak," he added.

About 35 percent of the loans are now classified as non-performing, a level that has far-reaching effects, said Toufic Ahmad Choudhury, former director general of the Bangladesh Institute of Bank Management.

When defaulted loans rise, banks earn less as they have to set aside larger provisions. This leads to the erosion of their capital base.

"As a result, foreign investors think twice, and international banks raise transaction charges. The country must come out of this situation. Exemplary punishment should be ensured for loan defaulters."

The higher figure partly reflects the central bank's decision to classify loans in line with international standards, he said.

In 1999, bad loans in the banking sector stood at a record 41.1 percent, the highest on record.

Since then, the ratio began to decline and fell to 6.1 percent in 2011.