Default loans fall, but for a different reason

The banking sector saw a Tk1,820 crore fall in default loans in the first three months of this year as the Bangladesh Bank suspended reporting of default loans from January to help businesses tide over the coronavirus pandemic.

The total amount of default loans stood at Tk92,510 crore at the end of March, which was 9% of the total outstanding loan in the banking sector, according to the latest Bangladesh Bank data.

Earlier on March 19, the Bangladesh Bank, as part of its crisis management strategy, directed banks not to classify any loan if borrowers fail to repay those during the pandemic.

The facility had been announced for a period of six months till June this year. On June 15, the central bank extended the facility for further three months.

The amount of default loans witnessed a fall as loans were not classified despite non-payment of instalments, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

He argued that default loans may spike after September as many defaulters will fail to make payments when their accumulated instalments come due.

Fearing the coming surge in default loans, banks shied away from disbursing fresh loans during that period, which also helped to reduce default loans, said industry insiders.

The private sector credit growth came down to 8.20% in March, lowest in recent history, due to the banks' reluctance to issue loans, according to central bank data.

Default loans showed a downward trend since last December due to a loan rescheduling spree under a special package at 2% down payment offered by the Bangladesh Bank in May last year.

The government's lenient rescheduling policy apparently paid off as default loans fell drastically by Tk22,000 crore in three months till December last year.

Soon after taking charge in January last year, Finance Minister AHM Mustafa Kamal had announced that default loans would not increase anymore.

Subsequently, the Bangladesh Bank relaxed its loan rescheduling policy that made it much easier for defaulters to turn their default loans into regular ones.

The central bank took the move with the expectation that it would bring down default loans significantly and that would pave the way for implementing a single-digit lending interest rate.

However, default loans ended up increasing by Tk22,377 crore in the first nine months of last year. As a result, banks did not implement the government instruction to bring down lending interest to a single digit.

Default loans soared because the eased rescheduling policy could not be implemented fully due to a stay order from the High Court.

In November last year, the High Court cleared the implementation of the policy extending the deadline for three more months to avail the one-time exit policy until February 4.

Subsequently, the banks started massive loan rescheduling causing the drastic fall in default loans.

The default loan rate which went up to a decade high of 12% in September last year came down to 9.19% in December, which was the lowest in the last four years.

The total default loan stood at Tk94,422crore in December 2019.