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Banks bulging with defaults

The amount rises by Tk 16,708cr in nine months

Rejaul Karim Byron
Loan defaults have swelled by Tk 16,708 crore in the first nine months of the year, a development which has put the central bank in a state of great worry.
"It is a matter of concern," said Atiur Rahman, Bangladesh Bank governor, at a meeting with chief executives of all banks yesterday.
At the end of September, the total defaults stood atTk 57,290 crore, which is 11.60 percent of the total outstanding loans, according to central bank statistics.
On December 31, 2013, it was Tk 40,583 crore, which was 8.93 percent of the total outstanding loans at the time.
Between January and September, the state-owned banks saw their defaults increase by Tk 4,191 crore, the private banks by Tk 7,878 crore, the foreign lenders by Tk 335 crore and the specialized ones by Tk 4,304 crore.
Though the macroeconomic indicators were positive this year, the banking sector's classified loans still increased steadily from quarter to quarter, Rahman said.
Loan defaults rose by Tk 7,589 crore in the first quarter, Tk 3,172 crore in the second quarter andTk 5,946 crore in the third quarter.
If the trend continues, the banking sector's defaults may cross the Tk 60,000 crore-mark by the end of the year. "The last quarter is lying ahead -1 hope you will take effective steps to cut
down rate of classified loans before the end of the year. For this, you will have to give your utmost effort to realise the loans," Rahman said.
The BB governor went on to advise the banks to bring down the loan defaults -- at all costs.
"I repeat, in the quarter ending in December, your main aim will be to cut both the amount and percentage of classified loans."
To trim down the default loan portfolio, the central bank has advised banks to adopt three steps: write-off, reschedule and restructure.
However, the existing rules would still have to be followed and down payment taken.
In case of restructuring, BB said if the some of the banks' problematic loans are down to the same large single party, the banks should sit together and come up with a joint proposal instead of handing in individual ones.
Meanwhile at the meeting, the CEOs said a good part of the precarious loans are those
extended to commodity traders, who are defaulting after being struck by the vicissitudes of price fluctuations and demand.
For instance, the managing director of a private bank cited the case ofagroupoftraders who took loans to import sugar. Now, they are struggling to sell-off the stock and pay the bank.
And, with the rising bad loans, the banks' capital adequacy ratios are shrinking. This comes at a time when the central bank is preparing to implement BASEL-111, the global regulatory standard on bank capital adequacy, stress testing and market liquidity risk.
In December last year, the banks' capital adequacy ratio stood at 11.52 percent of their risk-weighted assets. At the end of September, that ratio slipped to 10.57 percent.
Subsequently at the meeting, Rahman said the central bank will soon issue an amended roadmap for maintaining capital in line with the BASEL-III standards.
Basel-Ill implementation will start in January next year and will continue through to December 2019. "I hope we will be able to ensure complete implementation of BASEL-III from the first day of2020."
Anis A Khan, managing director of Mutual Trust Bank, advised the central bank to organise a workshop to implement BASEL-III, as it will then be easier to convince the banks' boards to maintain capital in line with the globally-adopted standard.