In spite of a business-friendly environment for the most part, default loans continued to swell throughout 2014, much to the regulator's concern.

Between December 31 last year and September 30 this year, default loans surged 41 percent to Tk 57,290 crore.

It also increased in 2012 and 2013, but the rise then can be attributable to scams, political unrest and global recession.

The logic that default loans

increased last year for either of these reasons as well is no more acceptable, said Nazrul Huda, a former deputy governor of Bangladesh Bank.

In fact, the year saw no major political unrest following the January 5 elections or any big financial scam.

"It is a matter of concern," BB Governor Atiur Rahman said at a meeting with banks' chief executives in mid-December.

The sector's default loans increased steadily from quarter to quarter despite the positive macroeconomic indicators, he added.Loan defaults rose by Tk 7,589 crore in the first quarter, Tk 3,172 crore in the second quarter and Tk 5,946 crore in the third quarter of the year.

The pandemic affected more or less all banks, from scam-hit to well-run ones.

For instance, BASIC Bank, which has been plagued by financial irregularities for the past few years, saw its default loans balloon 319 percent to Tk 6,148 crore in the nine months to September.

On the other hand, bad loans at Islami Bank, a well-regulated bank, soared 110percenttoTk2,868crore during the period.

Between January and September, the state-owned banks saw their default loans increase by Tk 4,191 crore, the private banks by Tk 7,878 crore, the foreign lenders by Tk 335 crore and the specialised ones by Tk 4,304 crore.

The stability of the banking system in Bangladesh remained stressed throughout 2014, reflecting the lingering impact of a series of financial scams and resultant loan defaults in state-owned commercial banks, Zahid Hussain, lead economist of the World Bank's Dhaka office, said.

The top management of the banks collaborated with some unscrupulous borrowers to swindle large amounts of money under different instruments.

"Neither the management nor the boards of these banks have been held accountable in most cases for these largescale frauds."

Consequently, the banks which, in a large measure, are outside the control of BB are now technically

insolvent in terms of financial prudence criteria.

The state banks have struggled to overcome insolvency, yet they continue to function because of their privileged access to government accounts and surplus balances of state-owned corporations, authorities and agencies, Hussain said.

Moreover, people feel assured that their deposits are safe because of their state ownership, he said.

Private banks are not immune from governance failures either, he said, adding that their loan portfolios need to be closely monitored as well.

There are allegations that the board members of some private banks pressure the managing directors to extend loans to their favourite companies and individuals. MDs are fired or made to resign if they do not listen, according to the WB economist.

"Overall, the financial sector remained shaky in 2014 because of limited actions to improve corporate governance and accountability," Hussain said, adding that the sector remains vulnerable to potential term shocks and economic slowdown.

Meanwhile, Huda said it is not necessary to sound the alarm bells every time the default loans rise. "If it is an acceptable level, there is nothing to be worried about."

He cited the case in the 1990s when default loans rose to 34 percent, but was later brought down to 7 percent though reforms and governance.

At that time, the banks' capital base was very weak, he said. "But now, it is much stronger - their shock absorbing capacity is much higher." What is more worrying is that many of the

banks do not give accurate information of loan situation, Huda said, while urging the central bank to look into this matter seriously.

Furthermore, 'insider lending' and lending under 'sweet-heart arrangement' have increased much in recent times, according to the former central banker.

As per banking rules, bank directors are not allowed to take out loans from their own institutions.

To circumvent it, many unscrupulous directors use their family members' names or come up with fake ones and take out loans from their own banks. This is called insider lending.

A sweet heart arrangement is one in which bank directors from two banks make an arrangement to take out loans from each other's banks.

Huda went on to urge the central bank to crack down on such forms of lending. "Otherwise, it will become a huge headache for them."

Meanwhile, private bank officials blamed the billowing default loans on Chittagong-based commoditytraders.

As of September 2013, their total loans against trust receipts stood at Tk 48,312 crore. Of the amount, Tk 9,352 crore turned into term loans or default loans as those were not paid timely, according to a BB study.

Price fluctuations of commodities in local and global markets, ill competition among banks and lack of best practices in granting loans were the reasons for the large defaults of LTR loans in the Chittagong area, the study found.

A private bank MD cited the case of a group of traders who took loans to import sugar as an exam-

ple. Now, they are struggling to selloff the stock and pay the bank.

Another MD said banks have huge amounts of loans stuck in the shipbuilding industry, which is going through choppy waters after many foreign buyers cancelled orders.

For instance, Islami Bank saw a large portion of its loans turn bad for the shipbuilding industry's change of fortunes, he added.

MA Mannan, MD of Islami Bank, said besides shipbuilding, the bank's default loans are on the rise for commodity loans against imports and the housing sector.

Meanwhile, the central bank's new loan classification policy also did not help matters, bank officials said.

"In the middle of 2014, we witnessed a one-time jump of default loans, which happened because of various reasons including new best practice of classification and provisioning rules as well as political instability," the BB said in a statement on Tuesday.

The central bank has brought down the net default loans to a moderate level through improved supervision and close monitoring, it said.

The banks which were held responsible for default loans had to take the hit in their balance sheets by way of higher provisioning requirements.

"Bangladesh Bank will not be lenient in this regard in the coming days as well - banks must embrace the culture of disbursing quality loans."

"Bangladesh Bank may extend some facilities to the credible borrowers now in trouble, but it will never hesitate to take stern measures against the bad borrowers," the BB added.