Bad debts hit new and foreign banks too

The government approved nine fourth generation banks in 2013 to increase competition and also hoped they would open new avenues in the banking sector. But the trend of bad debts, which is common at old banks, affected them as well.

A similar situation was observed at foreign banks in the past few years. They were once deemed examples of good governance. But in the last five years, they were also hit by bad loans, although the amount was considerably lower than that at government banks.

Analysing data on default and bad loans of 59 banks from 2016 to 2020, it was found that bad debts, although low in amount, increased rapidly at fourth generation banks, and such loans at six foreign banks were almost 100% of the total amount of their default loans.

The National Bank of Pakistan is in the most critical situation among foreign banks when it comes to bad loans. Its bad debt has been 100% of total defaults in the last five years. It has already closed the Sylhet branch but the Motijheel, Gulshan, and Chattogram branches are still operating.

There have been reports in international media that the bank is on the verge of completely shutting down operations in Bangladesh, but Md Kamruzzaman, country head of the bank, has denied this.

He told The Business Standard there was no plan to close Bangladesh operations completely. Commenting on bad loans, he said the amount of such loans is 100% of its classified loans and the bank is unable to disburse new loans.

As for loan recovery, he said the bank is emphasising alternative dispute resolution by allowing some concessions rather than going to court and the move is yielding positive results. 

Former banker and economic analyst Mamun Rashid told The Business Standard that the National Bank of Pakistan is not a multinational bank. He termed it a regional bank, which is a government bank of Pakistan.

There is lack of good governance at government banks in Bangladesh and such banks in neighbouring countries are no exception, he added.

Standard Chartered Bank Bangladesh Country Chief Executive Officer Naser Ezaz Bijoy said foreign banks offering retail and SME banking have a bit more of bad debts. He thinks multinational banks operating in Bangladesh are in a very good position when it comes to good governance. 

Mamun said local banks usually want to show less bad debts than the original figures but multinational banks do not have this tendency.

That is why the rate of bad loans in terms of total defaults is much higher at foreign banks, even though the rate of default loans at these banks is much lower than the average rate in the banking sector, he added. 

Overall, most of the default loans in the banking sector are now bad debts. In the last five years, the amount of bad debts increased by Tk24,752 crore and reached Tk77,000 crore, which is about 87% of the total amount of default loans.

The amount of bad debts is equivalent to the cost of building two Padma bridges or three metro rails or four ports like the Matarbari deep sea port.

The biggest challenge of bad loans is that they are not easy to recover. After taking legal and other lengthy steps, recovering bad loans becomes difficult for banks in many cases.

Officials say new banks approved under political consideration are committing irregularities in disbursing loans and bad loans are increasing there as they provide traditional banking services.

They think multinational banks are better in terms of good governance but bad loans have increased at regional banks as their situation is similar to that of local banks in the country.

Bad debts at fourth generation banks

Bad debt at Padma Bank, formerly Farmers Bank, increased 32 times in five years to reach over Tk3,000 crore, which is more than 90% of the total amount of default loans.

The bank has been near the top on the list of bad debt for five years. Its Managing Director, Md Ehsan Khasru, could not be reached for comment on the phone despite repeated attempts.

Although the amount of bad loans at other fourth generation banks is considerably less than that at Padma Bank, such loans at those banks rose between two and 250 times in five years.

Mohammed Nurul Amin, former managing director at Meghna Bank and former chairman at the Association of Bankers, Bangladesh, told The Business Standard that due to the political allegiance of the boards of directors of these banks, approved under political consideration in 2013, a vested group had been formed and it has been committing irregularities in disbursing loans.

Moreover, a shortage of skilled manpower, failure to launch new products, providing conventional banking services, and the tendency to not learn from the mistakes of old banks are the reasons for the rapid increase in bad loans at these banks, he added.

Bad debts at government banks

The amount of bad loans was the highest at state owned banks in the last five years. Last year, the amount of such loans at nine state owned banks – six commercial and three specialised – stood at Tk42,450 crore, which was 55% of all bad loans in the banking sector that year.

Sonali Bank was in the worst position in 2016 and 2017 due to bad debts, but Janata Bank has been in that position for the last three years. In five years, Janata Bank's bad debts more than quadrupled, amounting to around Tk13,000 crore.

The bank's Managing Director Md Abdus Salam Azad could not be reached for comment on the phone despite repeated attempts. He did not respond to text messages either.  

Bad debts at private banks

Bad loans at private banks increased by more than Tk13,000 crore in five years, reaching about Tk33,000 crore.

AB Bank has the highest amount of such loans among private banks at present. Its bad debts increased seven times in five years and now stands at around Tk4,000 crore.

The bank's Managing Director, Tarique Afzal, could not be reached for comment. Muhammad A (Rumee) Ali, chairman of the bank and also former deputy governor of the Bangladesh Bank, said they are trying to do better.

Speaking about reducing bad debts in the banking sector overall, he said this needs political will.  

He said banks have to hold meetings with their clients while legal hurdles have to be removed as well.

Now is the time to find a way to recover bad debts without blaming anyone, he added.

Banks that reduced bad debts

Only 15 banks were able to lessen their bad debts in the last five years. Of them, Krishi Bank reduced bad loans by Tk1,300 crore, with the amount of such loans standing at Tk2,320 crore at the end of last year.

The bank's Managing Director Md Ali Hossain Prodhania told The Business Standard, Krishi Bank had not reduced bad loans through write-offs.

He said there had been positive results after increasing debt collection measures.

Pubali Bank reduced bad debts by Tk233 crore, UCBL by about Tk350 crore, and Dutch-Bangla Bank by Tk524 crore in five years.

Dutch-Bangla Bank Managing Director, Abul Kashem Md Shirin, told The Business Standard this was the result of strengthening debt collection and monitoring and not giving further opportunities to wilful defaulters.

When does a debt turn bad?

If the instalments of a loan remain unpaid for three to nine months, it is classified as a substandard loan. If this period is more than nine months but less than 12 months, it is a doubtful loan while it is a bad/loss loan if the period is above 12 months.

Banks have to keep provisions at 20%, 50%, and 100% for sub-standard, doubtful, and bad/loss loans respectively. Many banks fail to keep this provision. Last year, 11 banks had a provision deficit.

If default or bad loans increase, so does provisioning, which reduces banks' earnings. The disbursement of new loans is also hampered due to non-repayment of old loans, causing the health of the bank to become weak.

Banks also fail to maintain capital adequacy ratio if they have to keep provisioning high. Last year, three private and seven government banks failed to maintain this ratio.

Asset management company to recover default loans

The government will form an asset management company to recover default loans. This company will recover banks' bad loans by buying those at low prices.

But the International Monetary Fund believes this initiative has not been successful in many countries. Instead, the organisation is in favour of increasing surveillance in the banking sector and allowing the central bank to operate independently.

What the central bank says about bad debts

Asked about bad loans, Md Serajul Islam, spokesperson and an executive director at Bangladesh Bank, told The Business Standard that banks try to recover loans according to the central bank's circulars on default loans and also make their own efforts.

Default loans will not increase if a bank selects a good client at the time of lending, if the collateral is right, and if there is monitoring, he said.

He further said the central bank occasionally gives bankers instructions in this regard.