Default loans have surpassed cost of megaprojects many times over: CPD

The default loans in the banking sector have surpassed the cost of multiple megaprojects. 

By recovering the total non-performing loans in the banking sector – which, according to Bangladesh Bank data stood at Tk112,425 cro res as of June this year – three Padma bridges can be constructed.

The total cost of building the Padma Multipurpose Bridge is Tk30,193 crores.

However, the Centre for Policy Dialogue (CPD) assesses that the true amount of non-performing loans (NPLs) could actually be more than double the reported amount, if written-off bad debts are taken into account.

The recovered amount would also be able to bear the cost of three railway bridges similar to the Padma Bridge Rail Link, the CPD said at a press briefing in Dhaka on Sunday.

CPD further estimated that the default loans could fund three 1,200MW Matarbari Ultra Super Critical Coal-Fired Power projects.

Other analogies put forward by the CPD included: funding five metro rail projects, worth Tk21,985 crores; six single line dual gauge track from Dohazari to Cox's Bazar via Ramu and Ramu to Gundum, worth Tk18,034 crores; and seven Rampal 1,320MW Maitree Super Thermal Power projects, by recovering NPLs.  

"There was hope for private banks, but their situation is gradually becoming worse," said Fahmida Khatun, executive director of CPD, adding that default loans are severely affecting private banks alongside state-owned ones.

All major parameters of the banking sector indicate its persistent fragility, with no signs of recovery any time soon.

As of June 2019, both private commercial banks and foreign commercial banks had NPLs greater than 5 percent of total loans, while state-owned commercial banks had NPLs in excess of 30 percent of total loans.

The CPD found that the amount of default loans is greater than the annual budget allocation for both education and health combined, constituting 4.43 percent of the gross domestic product (GDP) of Bangladesh.

Budget allocations for education and health are 2.10 percent 0.90 percent of the GDP, respectively.

However, this does not present the full picture, as data shows massive rescheduling and writing off of loans even by private banks in recent times.

During the April-June period this year, loans worth Tk15,469 crores were rescheduled, and as of June, loans worth Tk54,464 crores were written off by banks.

CPD estimates that if the total amount of loans rescheduled and written off could be allocated for social protection, then the annual budget for social safety net programmes in Bangladesh could be doubled.

"This could lead to a twofold increase in the number of social safety beneficiaries, or double the benefits for the existing beneficiaries," said Fahmida Khatun.

The total number of social safety beneficiaries were raised to 7,747,600 people in the current fiscal year, with an allocation of Tk74,367 crore or 2.58 percent of GDP for the programmes.  

Due to the high amount of NPLs, banks are also facing capital inadequacy, according to CPD findings. 

''Without reducing NPLs, capital adequacy cannot be improved, since high default loans lead to increased provisioning requirements, which result in capital shortfall,'' explained Fahmida.

State-owned commercial banks have already failed at maintaining minimum capital adequacy.

From 2009-2017, the government spent Tk15,705 crores in recapitalising the banks – an amount sufficient to build four deep sea ports like Payra Port. But, recapitalisation information after 2017 is not available.

The CPD also criticised the government move of rescuing the former Farmer's Bank with a bailout package of Tk1,100 crores, claiming it set a bad example for the sector and will further embolden banks involved in irregularities.

'Central bank measures contradictory to reducing NPLs'

Earlier on May 16 this year, the central bank issued a circular that allowed defaulters to reschedule their loans up to 10 years upon a down payment of just two percent of the total loan amount.

"These measures are completely contradictory to the broad vision of reducing NPLs that was mandated in the election manifesto of the ruling party,'' the CPD said.

In essence, it appears that the central bank has offered such privileges on the premise that loan defaulters are mostly honest and are genuinely finding it difficult to repay loans because of the high interest rate, the think tank said.

The current ailing banking system cannot sustain the ambition of high economic growth, the CPD further said. 

''This banking system is not suitable for a middle-income country,'' said Debapriya Bhattacharya, distinguished fellow of CPD.

At present, the problems of the banking sector are being tackled through government support, which is possible now since banking assets constitute only about 56 percent of the GDP.

''When banking assets will increase, the government may not be able to do so,'' Debapriya added.

In more developed countries, the share of banking assets in GDP is much higher – 168 percent in China, 135 percent in Malaysia, and 130 percent in Vietnam.

The CPD also expressed concern about the increasing concentration of wealth in a certain group of people alongside increasing default loans, saying it raises concerns about willful default.

If this continues, creating an inclusive economy will not be possible, and income disparity will increase, said Fahmida Khatun.

CPD blamed the current condition of the banking sector on a lack of good governance and accountability at four levels – the Bangladesh Bank, the Ministry of Finance, commercial banks and the judicial process.

Bangladesh Bank has completely failed to guide commercial banks and financial institutions, as well as upholding its sovereignty.

The central bank has not only been bullied by the finance ministry, but also by influential individuals with political connections, the CPD said, adding that the finance ministry has been disrupting the autonomy of Bangladesh Bank in all major spheres.

The think tank added that the owners of commercial banks have also become the de-facto supervisors of the organisations, undermining the authority of bank management in improving internal governance.

Criticising the judicial process, the CPD stated lengthy disposal of default loan cases has created a huge backlog in the settlement of debts.

"An overall reform of the banking sector is urgently needed," the Centre for Policy Dialogue said.