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Volume:7, Number:37
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Business & Finance 2
THIS WEEK

Going from Bad to Worse

The banks are frequently cutting interest rates for different saving schemes to adjust cost in the face of growing bad loans

| Tanweer Hassan |

The banks are apparently failing depositors as deposit rates continue to decline riding on the back of bad loans. The rise in non-performing loans is also taking a toll on the banks’ financial health. According to Bangladesh Bank data, default loans increased by BDT108.01 billion last year taking the total figure of to BDT621.72 billion as of December 31, 2016. Whereas in 2015, default loans increased by only BDT12.16 billion and the total figure stood at BDT513.71 billion at the end of that year.

loan amount was written off. If this amount were taken into account the total defaulted loans in the banking system would have crossed BDT1,000 billion. Bank insiders said that at the end of 2016 some banks rescheduled large loans only to show their balance sheet in good light and to pay fat dividend to their shareholders. As a result, the real scenario of the defaulted loans did not come to he surface. When contacted, former governor of Bangladesh Bank, Dr Salehuddin Ahmed, said, “The efforts that are being made by banks to recover the loans are far from enough. A bank can neither force big businessmen to repay loans nor take any step in case of non-payment. Moreover, big loan defaulters are getting more loans. So, there is a vicious cycle of bad credit.”

“If defaulted loans cannot be recovered by taking strict action, other borrowers will lose interest in repaying their loans too,” he added. Meanwhile, in a desperate bid to adjust cost in the face of growing bad loans, the banks are frequently cutting interest rates for different saving schemes. Just going back five years, we can see that the banks used to offer 12-14 percent interest against fixed term deposits, but now the rates have come down to as low as 5 percent. In a time when inflation rate is 6.53 percent, the bank deposit rate of around 5 percent came as a dilemma to lower- and middle-income families, because they are going to lose out if they keep their money in bank as the saving accounts pay less than inflation. Against this backdrop, the central bank issued a guideline asking all the commercial banks not to lower deposit rate further. Instead, the banks were asked to go tough on loan defaulters and to strengthen their managerial capacities. Against this background, Dr Salehuddin Ahmed said, “The rise in Going from Bad to Worse The banks are frequently cutting interest rates for different saving schemes to adjust cost in the face of growing bad loans defaulted loans dealt a heavy blow to the banks’ capital. That is why they are cutting down interest rated for deposit schemes and taking various charges from clients to prop up their balance sheet. At the same time, new borrowers are also being deprived of loan facilities. So the rise in bad loan is negatively affecting both debit and credit, and thus, it is hurting the whole economy.”

Bangladesh Bank data show that the loan defaults of the six stateowned commercial banks swelled to BDT310.25 billion in 2016 from BDT23745 billion in 2015. In 2015, the total amount of defaulted loan of Sonali Bank was BDT81 billion, but it jumped to BDT102.29 billion at the end of 2016. During the same period, the non-performing assets of Janata Bank increased from BDT27.93 billion to BDT41.65 billion and Rupali Bank’s defaulted loan rose from BDT15.49 billion to BDT 27.93 billion, while Agrani Bank’s bad loan increased from BDT42.24 billion to BDT 5,877 crore.

On the other hand, the total amount of defaulted loan in 39 private banks was BDT230.57 billion in 2016, up from BDT207.60 billion in 2015. During the same period, the bad loans in nine foreign banks swelled from BDT18.97 billion to BDT24.05 billion, while the two specialized banks’ defaulted loans rose from BDT49.68 billion to BDT56.84 billion. Syed Mahbubur Rahman, vice chairman of the Association of Bankers Bangladesh, and also the managing director of Dhaka Bank, said: “At the end of the year almost all banks had rescheduled or regularized their defaulted loans. Recovery of loans was relatively high during the same period. As a result the amount of defaulted loans slightly decreased at the year end compared to where it stood in September.” However, Bangladesh Bank officials observed that rescheduled loans have turned bad again. A portion of the loans, BDT150 billion, that were regularized under the large loan rescheduling were defaulted again. This is the main reason behind the rise in bad loans. Besides, prevalence of corruption and irregularities in public and private banks also contributed to the rise in defaulted loans. In this regard former deputy governor of Bangladesh Bank, Khandaker Ibrahim Khaled, said: “The banks need to take some drastic steps to recover the money they owed. Non-performing loans have turned out to be such a big problem that now it is really difficult for the banks to overcome the situation.”

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