The amount of bad loans in the banking sector has been increasing rapidly in recent years, as reflected in data from Bangladesh Bank (BB), according to the recently released White Paper. In June 2021, BB data showed the defaulted loan rate was 7.9 percent. By the end of June this year, it had exceeded 12 percent. Around 88 percent of these defaulted loans are categorised as bad quality loans, according to the report. The severity of the issue has been described as the 'black hole' of the banking sector, with a depth three times greater than what is visibly apparent. The central bank’s statement at the end of last June revealed defaulted loans amounting to Tk211,391 crore. This figure surged to over Tk288,000 crore by September. Domestic economists and international organisations have consistently questioned the accuracy of the defaulted loan data presented by the central bank. Following an independent assessment of banks’ assets by a committee comprising domestic and international chartered accountants, the defaulted loan ratio could rise to 25 percent, according to experts. Bangladesh Bank Governor Dr Ahsan H Mansur told UNB that the current defaulted loans ratio of 12.50 percent may double after the assets evaluation. “We have to accept the reality, which was hidden earlier. But there is no solution to the problems by hiding the information of banks’ bad loans,” he said. The White Paper formally released on December 2, shows that in the country’s bad debt data, Tk272,856 crore were re-disbursed, Tk75,389 crore were written off, Tk39,209 crore were in special mention accounts, and Tk76,185 crore were tied up in High Court cases. These loans have also become defaulted. Altogether, the actual default amount totals Tk675,000 crore. This staggering figure is equivalent to the construction cost of 13 metro rail projects or 22 Padma bridges. Crony capitalism created an undemocratic attitude: Rehman Sobhan Banks are required to maintain a 100 percent provision against bad loans. However, at the end of June, banks had kept only Tk89,355 crore in provisions, falling significantly short of the required Tk176,889 crore. Approximately 55 percent of the defaulted loans originate from the manufacturing sector. The dire situation in the banking sector has been attributed to the actions of senior central bank officials and influential external actors. Their combined influence has been particularly evident from 2015 to 2024. The white paper highlights that during this period, amendments to the Bank Company Act, influenced by economic and political factors, contributed to the sector’s decline. In 2023, the term for entrepreneur directors was increased to 12 years, up from 9 years in a 2018 amendment. The number of directors from a single family was reduced to three in 2023, after being increased to four earlier. Workshop on financial inclusion, rural transformation towards achieving SDGs begins Besides, a critical provision was removed: previously, if one company in a group defaulted, loans from others in the group would also be considered defaulted. This removal, the report notes, has further weakened the banking sector.  

The visiting International Monetary Fund (IMF) delegation has advised Bangladesh Bank to disclose detailed and complete information regarding bad and risky loans fin the public interest. Meeting sources said that the visiting IMF delegation gave this suggestion in the meeting held with the BB officials on Sunday (April 28).  In the meeting, the IMF asked to make the financial health of the banks and the inspection report open to the customers. At the same time, it urged to increase the number of inspections to prevent irregularities-corruption and loan scams. Officials concerned in the meeting said that bad loans or risky assets are increasing in banks due to various irregularities including big loan scams. Several banks have weakened which also acknowledged by the BB Governor.  Therefore, the IMF believes that the deposits of those banks which are in trouble are also at risk. In such a situation, the global lender suggested that the banks should disclose the full report of risky assets to the customers.  Read more: DUJ, DRU, TIB condemn ban on journalists entering Bangladesh Bank According to the IMF Officials, “If these reports are published, the customers will be able to make informed decisions about keeping their deposits.” In the meeting, the IMF sought to know whether the central bank's inspection of banks' financial health is continuing or not. Clarification has also been sought as to whether inspection reports are disclosed to customers or not.  In addition, the IMF delegation suggested increasing the quality and number of inspections to prevent irregularities, corruption and loan scams, sources said. When asked about the meeting with the BB, the executive director and spokesperson of the BB Mesbaul Haque said that the meetings with the IMF are ongoing. This meeting will be held step by step till May 8. He did not agree to make any comment other than that and said the details will be given in future. Read more: Islamic Banking in Bangladesh: Commendable contribution to the country’s economic growth

In any country, a safe and sound banking system is the sine qua non of a strong economy. By channelising funds from savers to borrowers, banks help keep the wheels of the economy moving, in the way boosting the confidence of businesses, investors and consumers. But for years, state-owned banks in Bangladesh have been foundering under the weight of stressed or non-performing assets -- or bad loans, in lay man's term -- all thanks to irrational lending and inadequate evaluation and monitoring of debtors. Read: SMEs, women-led enterprises need access to stimulus loans Any loan that remains overdue for over three months is termed as a stressed asset in the banking sector. And today, this huge pileup of bad loans threatens to derail the economic revival in Bangladesh by choking the credit supply channel of the economy, as against export earnings and the resilience of the private sector in fuelling growth amid Covid. In fact, the cumulative non-performing loans (NPL) of six state-owned commercial banks (SCBs) currently stand at Tk 43,836 crore against that of the combined figure of Tk 49,191 crore of 42 private commercial banks (PCBs). Read Bangladesh Bank announces 4 pc export subsidy on bicycle, cement sheet, and MS steel For years, Bangladesh Bank (BB) -- the central bank -- has been underscoring the need for state-owned banks to strengthen the recovery of loans lying unrealised by defaulters, many wilful. At the same time, banks have been advised to take necessary steps in meeting the capital deficit and creating a professional asset liability management ecosystem. Md Serajul Islam, central bank's spokesperson and executive director, told UNB that the stressed assets of the state-owned banks increased "marginally due to the higher volume of total outstanding loans". Read Bangladesh Bank tops Cyber Drill 2021 Implementation of a slew of stimulus packages has caused an increase in the outstanding loans in the country's banking system during the first half (H1) of the year, he said. The amount of outstanding loans rose by more than 3% to Tk 12,13,164 billion as of June 30, 2021, from Tk 11776.59 billion quarter on quarter, as per BB data in UNB's possession.