—Zia Uddin Mahmud—

A couple of days ago, we came across the news that bad loans in Bangladesh have reached a new high. According to official sources, the amount of bad loan is around 2,84,977 crore (as of September, 2024), which is about 17 per cent of the total loan. This stat is really alarming. But the fact is that bad loan is a by-product of flawed policies undertaken by the former government and implemented by the central bank.

Different banks of Bangladesh are now suffering from liquidity crisis, capital shortfall, provision shortfall, decreasing profitability etc. which are the by-products of bad loan. In our country, bad loan has become a culture, which has created major loopholes in existing credit policies such as ineffective laws of recovery, discriminatory repayment rules for the defaulters and good borrowers, improper appraisal of loan and absence of good governance. Immediate reforms initiatives are necessary to overcome this situation.

First, loan appraisal from the branch level to head office must be done through trained credit analyst in a systematic way. Presently, there is no such specific rule that credit officer must be a trained credit analyst. As a result, it is seen that credit proposal are approved based on improper analysis or assessment which increases credit risk for the bank. Banks have to train credit analyst under the guidance of central bank or any other recognised organisation, which will help to create a homogeneous credit practice among different banks.

Second, good governance in the banking sector must be ensured. The role and responsibility of all the loan approval authorities ranging from branch to board of directors must be specified. The final approval authorities of any loan must be accountable for any anomalies or wrong assessment. Only then, top management will refrain from approving loan to any ineligible borrower. The controlling authority (central bank) should also be held accountable for lack of proper monitoring.

Third, some existing credit policies must be changed. For example, granting continuous loan in the form of cash credit must be stopped. Fund flow from continuous loan is hard to monitor; so, the borrower may divert it somewhere else easily. In most cases, it is observed that after taking loan for working capital purpose, the entire loan amount is considered as the business capital. It is easy to return if the loan has fixed repayment schedule. Term loans are easy to monitor and it can be recovered easily. So, the banks should focus on term loans.

Fourth, discriminatory rules for the defaulters and the good borrowers must be resolved. Existing loan reschedule policy is favourable for creating willful defaulters. A defaulter gets longer time with substantial moratorium period to repay the loan at the same interest rate at which a good borrower repays the loan within the less time constraints. Moreover, a defaulter becomes eligible to get a new loan immediately after he regularises the loan through rescheduling or repayment of the defaulted loan amount. Timely repayment of loan may be delayed due to such rescheduling facility. So, reschedule of loan must be made costlier by putting embargo on the defaulter. When a borrower becomes a defaulter, he should be slapped with different restrictions. He/she should face problems while getting licence, purchasing property, renewing passport and going abroad. Introducing higher rate of income tax for the defaulters might also discourage borrowers to be defaulters.

Finally, recovery strategies must be reformed. The Money Loan Court Act, 2003 (Artha Rin Adalat Ain) must be given teeth to deal with the loan defaulters. The highest punishment for the guilty under this law is six-month imprisonment irrespective of the defaulted amounts. This seems like a slap on the wrist, which creates no fear among those who intend to default the loan. The loopholes in this law must be addressed. For example – the highest punishment should be a minimum of ten years instead of six months only, taking into account the severity of the crime.  If such change can be made, the recovery process could be expedited.

Timely reforms in the banking sector are mandatory to build a sustainable banking industry. It is still possible to bring down the percentage of bad loan if the central bank and other stakeholders work unitedly to identify the actual problems and take immediate steps to address those.

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The writer is a banker and freelancer. He can be reached at [email protected]