Tk1.34 lakh crore of rescheduled loans turn bad again

Nearly two-fifths of loans rescheduled to recover defaults have slipped back into non-performing status, exposing the fragility of the country's banking sector, according to the Bangladesh Bank's Financial Stability Report 2024 released on Tuesday.

The report shows that as of December 2024, banks had rescheduled loans worth Tk3.48 lakh crore, about one-fifth of the country's total outstanding loans. A staggering 38.42%, or Tk1.34 lakh crore, of this amount turned bad again, despite repeated policy forbearance.

Bankers say high inflation, dollar shortage, a weakened taka and a prolonged energy crisis have eroded businesses' repayment capacity. At the same time, industry insiders admit that poor governance in some banks, coupled with the tendency to conceal bad loans to inflate profits and reduce provisioning, has worsened the situation. 

Many manufacturers and other industries were hit hard. Even those willing to pay could not meet instalments on time.

Syed Mahbubur Rahman, MD and CEO of Mutual Trust Bank

Analysis of central bank data indicates a significant acceleration in re-defaulting loans. The amount of rescheduled loans that turned sour increased by approximately 148% in 2024, with Tk79,800 crore being added to the list of non-performing loans (NPLs) in that single year, up from Tk54,060 crore in the preceding year.

Explaining the relapse, Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told TBS that persistently high inflation, dollar shortages in the first half of the year, and an ongoing energy crisis had severely eroded businesses' repayment capacity. "Many manufacturers and other industries were hit hard. Even those willing to pay could not meet instalments on time."

Mahbubur also pointed to poor governance in weaker banks, where loans were rescheduled mainly to conceal bad assets and inflate balance sheets. "Often borrowers make a down payment to regularise their loans, but then stop repayments. This practice, especially in poorly governed banks, is driving defaults."

The total amount of rescheduled loans in the review year decreased compared to the preceding year. However, the overall classification status of the rescheduled loans deteriorated.

The banking sector's aggregate rescheduled loans in 2024 stood at Tk85,679 crore. Although it was lower than that of the preceding year, the long-run upward trend is apparent. 

The Bangladesh Bank promulgated a loan schedule and restructuring policy in 2022, in which banks were allowed to reschedule loans by taking a lower down payment and granting a relatively longer tenure to the borrower for repayment of their debts compared to the earlier policy. Furthermore, banks were permitted to reschedule particular special sectors' loans (such as shipbuilding and cold storage-related loans) for a longer tenure.

In 2024, the rescheduled loan ratio increased by 2.52 percentage points compared to the preceding year.

Sector-wise distribution shows the Industrial and RMG & Textile sector held most of the outstanding rescheduled loans, whereas industry-wise data indicate large and other industries had the highest level of such loans.

Out of the total outstanding rescheduled loans, the share of the top five banks was 38% while the top 10 banks possessed 57%.

Mahbubur warned that the situation will not improve quickly. "We still cannot ensure sufficient energy supply, and law and order must remain stable. Although the central bank is providing grace periods and repeated rescheduling facilities, many borrowers with no genuine intention to repay are exploiting these policies. The long-term recoverability of such loans remains doubtful," he said.

 Distressed asset crosses Tk7.56 lakh crore

Distressed loans in the banking sector surged to a record Tk7.56 lakh crore in 2024, equivalent to 45% of total outstanding loans, exposing the fragile health of the financial system.

According to the Financial Stability Report 2024, distressed assets stood at Tk7,56,526 crore against total loans of around Tk16.82 lakh crore as of December last year. The amount is almost equal to the size of the national budget for the 2025-26 fiscal year.

Distressed loans include defaulted, rescheduled, and written-off loans. Of the total, defaulted loans stood at Tk3,45,765 crore, rescheduled loans at Tk3,48,461 crore, and written-off loans at Tk62,300 crore.

Mahbubur said, "Distressed assets in the banking sector represent a significant burden. Their volume is rising steadily, driven by the increase in non-performing loans. A significant number of loan irregularities are occurring in banks due to a lack of good governance."

He said the distressed loans have already crossed Tk7 lakh crore and will continue to rise as nearly Tk2.5 lakh crore remains stuck in various courts. "Unless the top defaulters are tried in tribunals and the judicial process is expedited, there will be no way out."

Top borrowers pose risk

The report also warns that the default of just the top two borrowers at each of the existing 19 under-capitalised banks would cause an additional five to become non-compliant with the minimum required risk-weighted assets ratio (CRAR).

CRAR is compared with the minimum regulatory requirement of 10% along with the capital conservation buffer of 2.5% as per the Basel III capital framework.

At the end of December 2024, in the pre-shock scenario, the number of non-compliant banks in terms of maintaining the minimum required CRAR of 10% was 19, which was only 10 at the end of the previous year. Furthermore, an additional four banks were not able to maintain the capital conservation buffer of 2.50% with an existing CRAR of 10%.

The default of the top two borrowers is likely to have the highest adverse impact on the banking sector's resilience in terms of capital adequacy, which is followed by depletion in eligible collateral by 30% and an increase in non-performing loans (NPLs) by 3%.

Mahbubur explained that most banks focus on "wholesale banking" by targeting large corporate clients, as the operational costs for small loans are higher. He advised banks to diversify their loan portfolios to mitigate this kind of risk.

Capital adequacy slips to region's lowest

The report also reveals a sharp decline in the banking sector's CRAR, which fell by 8.56 percentage points to a dismal 3.08% at the end of December 2024. This is the lowest among major South Asian countries, trailing significantly behind India (16.7%), Pakistan (20.6%), and Sri Lanka (18.4%).

The overall drop in CRAR was primarily driven by poorer capital positions in state-owned commercial banks, specialised development banks, and a few of both conventional and Islamic private commercial banks.