A healthy flow of credit is the lifeblood of economy. At present in our economy there is no dearth of bank loans.
The flow of credit is being felt everywhere – from small entrepreneurial ventures to multi-billion dollar investment projects, and both the rich and the poor are availing themselves of bank loans. However, interest rate on bank loans is still very high.
Over the last two decades, credit flow increased manifolds. According to Bangladesh Bank, the total credit balance of the banks was Tk. 52,731 crore in 1999, ten years later in 2009 when Dr. Atiur Rahman was made the tenth Governor of Bangladesh Bank the banks’ total credit balance was Tk. 243,977 crore, and then in the next seven years it rose to a staggering amount of Tk. 58,400,615 crore.
Despite this phenomenal rise in total volume of loans between 2009 and 2016, the ratio of classified loans or loan defaults, in fact, decreased to a considerable extent. The ratio of classified loan was of two-digit numbers only in 2012 in these seven years. The average figure was always in single digit. Around the same time the risk-taking capacity of the banking sector improved significantly. However, the sector witnessed a comeback of unusually high loan defaults in September 2017 when the ratio of low default jumped again to the two-digit marks again.
Of late, a vernacular daily made a maligned report saying that amongst the last five governors of Bangladesh Bank, Dr. Atiur Rahman’s tenure witnessed the highest amount of defaulted loan. Avoiding the standard definition of classified loan as percentage of the outstanding loans the report deliberately mentioned the absolute figures which ought to be larger as he was for a longer period. Moreover, during his governorship credit flow increased three and half times. Data collected from Bangladesh Bank shows, the banks lent Tk. 209,050 crore in 2008-09 fiscal year, but it rose to Tk.731,626 crore in 2016-17 fiscal. Also the size of the economy grew more than double during those seven years.
Now let us take a look at the ratio of Non-performing Loan or classified loan during the tenure of Dr. Atiur: The ratio of NPL was 10.8% in 2008. But in the following year, when Dr. Atiur took over, it came down to single digit and remained so until 2016 except in the year of 2012. The ratio of NPL stood at 9.21% in 2009, 7.27% in 2010, and 6.12% in 2011. Although it went up to two digits in 2012 mainly because of tightening the definition of loan classification to bring this to global standard, again it was brought down to single digit in the following year and remained so till 2016 (9.23%) when Dr. Atiur Rahman resigned from the post of governor. However, the ratio crept up to 10.67% in September 2017.
So, it appeared that written off loan aside, the ratio of classified loan was the lowest during the tenure of Dr. Atiur. This is the fact. Considering the world economic recession and local political unrest during the period, it was no mean feat to keep NPL ratio down to a single digit.
The noted economist and professor of Dhaka University Dr. Atiur Rahman served the Central Bank as its 10th governor from May 1, 2009 to March 15, 2016. As he came from a humble background and struggled in his early life, the interest of the poor has been at the heart of his economic policies. Initially, many looked askance at his pro-poor policies, but in the end he gained enviable success and acceptability. His outstanding policies brought the country’s banking sector to the world’s attention and he was awarded as the ‘Central Banker of the Year 2015’ from Asia Pacific region for stimulating growth and stabilising economy. He also received plaudit for inclusive banking, green banking and corporate social responsibility.
During his tenure, Bangladesh Bank managed to establish a firm control on the banks by redefining the definition of supervision and loan classification. It was in 2012 when an initiative to revise regulations on loan classification, provisioning and re-scheduling was taken which has upgraded the loan classification system to international level. Before the revision, loans that remained outstanding for six months were classified as “Sub-Standard (SS)” while outstanding loans of nine months and 12 months were classified “Doubtful (DF)” and “Bad Loan (BL)” respectively. Even the range of what could be called a bad loan was narrowed down through the new regulation which has put three months’ outstanding loans in SS category, six months’ outstanding in DF and nine months’ outstanding in BL categories.
On the other hand, as per the guideline of new loan re-scheduling, deadline of repaying the re-scheduled loan has been decreased and down payment was made compulsory. As a result, since then the banks have been preserving more loan loss provision than before. As per the guideline, Banks maintain 20% provision against Sub-standard loan, 50% against Doubtful loan and 100% against Bad/Loss loan.
When this reform in financial sector was introduced in 2012, the ratio of classified loan went up a little bit in that year but still it was one fourth than the ratio of classified loan in 1998 or 1999 (when it ranged from 31.49% to41.11%). Dr. Mohammed Farasuddin was the governor of Bangladesh Bank then.
The central bank introduced the policy on writing off loans in 2003 when Fakhruddin Ahmed, former interim government chief adviser, was the BB governor with a view to cleaning up banks’ balance sheets. Bangladesh Bank’s loan classification and write-off policy was formulated as per the recommendation of Wahiduddin Mahmud committee formed in 2001. Since the policy was introduced in 2003, written off loans and classified loans are shown separately. But recently, a newspaper report mixed up the two categories of loan only to inflate the rate of classified loan. As per the Bangladesh Bank guideline such practice is not acceptable because written off loans cannot be considered as classified loans.
Different other indices of banking sector were also positive over the last one decade.
In order to ensure financial inclusion of the total population of the country, poor people including street children and physically handicapped people were brought to banking system, by allowing them to open bank account and take loan. Today as many as one crore seventy two lakh no-frills accounts are in operation for those who were earlier unbanked. More loans to women and SME sector gave a boost to women empowerment. Bank loan interest rate had come down to single digit. At the same time, the country’s foreign reserve increased manifold.
Capital adequacy is the primary indicator of the banks’ financial fitness and stability. After successful implementation of Basel II guideline in regards to the adequacy of capital, Bangladesh Bank is now in the process of implementing Basel III guidelines which is an international regulatory framework for banks. In the last eight years and nine months banking sector posted 338% growth in capital accumulation. In 2008, the total amount of capital in banks was Tk. 20,578 crore and it rose to Tk. 90,101 crore in September, 2017.
At the same time savings at banks increased more than three times. At the end of 2009 the banks had a deposit of Tk. 278,680 crore, which rose to Tk. 877,883 crore at the end of 2017.
Positive changes were also brought about in the banks’ liquidity management. There was no liquidity shortfall in banks during the entire tenure of Dr. Atiur and the economic outlook was always positive. The Export Development Fund in foreign currency increased from 200 million USD to 2.2 billion USD during his tenure. The interest rate of loans came down to single digit and inflation was literally halved from 12 per cent to less than 6 per cent. All entrepreneurs including SME and women entrepreneurs were happy with the developmental central banking introduced by Dr. Atiur. But now a number of banks are facing liquidity crisis which has been triggered by Farmers’ Bank.
Bangladesh Bank data also shows that credit flow to agriculture sector rose by 126%, and the amount of loan distributed in agriculture sector doubled. In 2008-09 fiscal year, the banks distributed Tk. 9,284 crore as farm loan, but it rose to Tk. 20,999 crore in 2016-17 fiscal.
The rate of SME loan distribution also increased to a considerable extent. From June 2010 to 2017, the banks and financial institutions distributed Tk. 4,121,000 crore SME loan to 704,563 entrepreneurs. Of the total SME loan, Tk. 25,273 crore went to women entrepreneurs, while new entrepreneurs received Tk. 91,864 crore.
Besides, as the country achieved self-sufficiency in food production, food import cost decreased dramatically, which helped save a lot of foreign currencies. Coupled with other factors, such as increase in export and remittance sent by expatriates, the country’s foreign reserve went from strength to strength. At the end of 2008-09, the country’s foreign reserve was USD 7.5 billion and it shot up to USD 33.5 billion in the 2016-17 fiscal. However, the reserve decreased to 32.8 billion in the current fiscal; still it is enough to meet seven months’ import cost of the country.
The external sector demonstrated stunning stability during Dr. Atiur’s entire tenure. The balance of payment was always surplus and hence Taka became stronger. The exchange rate of US Dollar to Taka remained below Taka eighty. The exchange rate stability during his tenure was as good as Japanese Yen in the past. Apparently this stability of exchange rate has been broken apart. A USD now costs more than Taka eighty six. This may even go up further as there is a huge imbalance in trade and as well as over all balance of payment. This will lead to higher imported inflation as all imported goods will cost more in Taka terms. The cost of business will certainly go up and this may lead to undesired financial instability.
Anyway it cannot be denied that bad loan was and is a serious problem, but casting blame upon a former governor, who had so diligently served the banking sector and the economy, will not help solve the problem.
In a recent field survey report Bangladesh Bank identified a series of causes of Non-performing Loans, which includes:
1. Higher interest rate, various other service charges and also some hidden charges increased the size of instalments of borrowers that contributed as the leading factor to loan default.
2. Banks failed to keep the commitment of delivery of loans to borrowers on stipulated time. Borrowers invested partially in the business/project before getting bank loan relying on banks’ commitment and finally they incurred huge loss due to lack of timely finance (long delay in actual disbursement).
3. Sanctioning of loans without adequate collateral and proper analysis of business.
5. Lack of proper monitoring by bank.
6. Loan sanctioning in favour of politically exposed persons (PEPs) either because of nepotism or by being pressurised.
7. Wilful defaulters who take loans from banks with mala fide intention of not paying back the loans. Very often banks failed to properly identify this class of people.
8. A section of dishonest bankers disburse loan to risky clients.
9. Some clients become loan defaulter due to lack of financial literacy.
These are reasonable causes of acute NPL problem. Apparently, the major banks have serious problems in their internal control and compliance system. It is hoped that Bangladesh Bank will hold accountable those responsible and force necessary adjustments. Besides, in order to handle bad loan problem more efficiently, the Artha Rin Adalat Ain should be reformed. The law is riddled with loopholes and loan defaulters are making full use of it.
The writer is a columnist