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Defaulted loans hit all-time high

ARM Zamir Uddin
Defaulted Ioans surged 24 percent to Tk 116,288 crore in September compared to that in December last year, the amount being the highest in the country's history, largely because of the central bank's inertia to crack down on wilful defaulters.
The previous record was broken after the third-quarter figure released by the Bangladesh Bank yesterday revealed that Tk 22,377 crore in classified loans had been added to the tally of December.
Delinquent loans now account for 11.99 percent of the total outstanding loans in banks, up from 10.30 percent in December 2018. The previous highest non-performing SOURCE: BB loans (NPLs) were recorded in June this year at Tk 112,425 crore.
"Defaulted loans are rising as the government and the central bank are persistently encouraging defaulters," said Khondkar Ibrahim Khaled, a former BB deputy governor. "Defaulted loanswill increase further in the days ahead if the ongoing trend continues."
At the turn of the year, defaulted loans totalled Tk 93,911 crore. But as the rumours started spreading that the central bank plans to extend a host of facilities to loan defaulters, many stopped paying instalments hoping to avail the benefits.
The rumours were confirmed on May 16 when the BB unveiled a set of extraordinary facilities for the defaulters.
As per the new policy, defaulters are allowed to reschedule classified loans by providing only 2 percent down payment, instead of the existing 10-50 percent.
A maximum 9 percent interest rate is levied on the rescheduled loans, lower than the existing 12-16 percent. The time for repayment was also generously set at 10 years with a grace period of another year.
The policy says the accrued interest on the defaulted loans could be waived, based on a bank's relationship with a client, and the defaulter could only pay the principle amount and the new 9 percent interest rate.
The move came hot on the heels of the BB's attempt to ease the loan classification rules, including giving borrowers more time to pay off instalments and relaxing the loan write-off policy.
These facilities have just inspired the delinquent borrowers not to repay their loans to banks, Khaled said.
"No country in the world encourages defaulters. But this is not applicable to our country."
For instance, China confiscates the passport of defaulters the instant a borrower enters the defaulted zone, Khaled said.
The new policies have also created moral hazard as the habitual defaulters are rescheduling their NPLs in a relaxed manner, he said.
The defaulted loans may go down in the coming quarters because of the new polices, but the trend will not be sustainable in the long-run, Khaled said.
BB data showed more than 50 percent of the defaulted loans were with the eight state-run banks. As of September, the eight banks had Tk 59,622 crore defaulted loans, up 11.47 percent from that nine months ago.
Forty-one private banks held defaulted loans of Tk 54,574 crore, up 43 percent from that three quarters ago.
“The rise in the defaulted loans has created crisis in the private sector. The credit growth in the sector has come down alarmingly in recent periods," said Salehuddin Ahmed, a former governor of the central bank.
He said banks have been facing an unabated liquidity crisis as a large amount of their funds are stuck with the defaulters.
Small and medium entrepreneurs are suffering because of the large volume of the NPLs as they don't get loans, Ahmed said.
"We have to arrest the defaulted loans at any cost in the interest of the financial sector," said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh, a forum of managing directors of private banks.
"The continuous upward trend of the defaulted loans is not a good indicator at all. The authorities should make an all-out effort to tackle NPLs."
The high ratio of NPLs has led to an increase in the cost of doing business as well, Rahman said.