—Niranjan Roy—

Economist Thomas Malthus explained that a country’s food production increases at an arithmetic rate, while population grows at a geometric rate. An arithmetic rate refers to a sequence in which growth occurs at a fixed pace, such as 1, 2, 3, 4…. In contrast, a geometric rate refers to a sequence in which growth accelerates progressively, such as 2, 4, 8, 16…. If such growth continues, a country’s population will double every 25 years.

The population theory of Malthus, which many of us learnt during our student days some four decades ago, perhaps offers the most appropriate framework for explaining the growth of non-performing loans (NPLs) in Bangladesh’s banking sector. Recently, a local newspaper published a report based on Bangladesh Bank’s annual report, presenting an alarming picture of the rise in NPLs in the banking sector. According to that report, the total volume of defaulted loans in the country’s banking sector has reached Tk6.44 trillion, compared with Tk1.46 trillion just a year and a half ago.

What is most worrying is that the total volume of loans disbursed by Bangladesh’s banking sector stands at Tk18.03 trillion, of which Tk6.44 trillion is classified as non-performing. In other words, nearly 36 per cent of total loans have turned into bad loans. This is not the end of the story. Reports published in newspapers from time to time indicate that in several banks, non-performing loans account for between 75 and 85 per cent of their total loan portfolios. This means that, apart from loans backed by cash collateral, almost all other loans in those banks have defaulted. How those banks are still surviving with such an enormous volume of bad loans, and how the country’s overall banking sector is functioning at all, has now become a major question.

The abnormal surge in non-performing loans within just a year and a half is often attributed to weak management, irregularities in loan disbursement, politically influenced lending, and the sudden tightening of loan classification rules. All these factors are valid, but they are not the only reasons. The reality is that the problem of non-performing loans in Bangladesh’s banking sector is a long-standing one. From the early days of private banking in the 1980s—or even earlier, when industrial banks and development finance institutions were created in the name of industrialisation—the culture of loan default took root. The corruption associated with borrowing loans under false or proxy names that began at that time was never effectively addressed. Instead, such corruption and loan scandals continued to grow at an excessive pace, eventually leading to today’s dire situation.

Although these problems and irregularities represent four decades of accumulated mismanagement, the real reason why non-performing loans jumped from Tk1.46 trillion to Tk6.44 trillion in just a year and a half lies elsewhere—namely, the severe downturn in the country’s business and commercial activities.

Since the political changeover last year, businesses across the country have faced immense challenges and losses. While many entrepreneurs have been directly affected, others have been unable to conduct their business operations smoothly. At first glance, it may appear that the business community has been in difficulty for the past year and a half, but in reality, they have been under pressure for nearly five years.

In 2020, the global economy entered a recession due to the Covid-19 pandemic, and businesses in Bangladesh also faced severe hardship. Before they could properly recover, the Russia–Ukraine war began, triggering high inflation and an acute dollar shortage. This pushed businesses into yet another serious crisis. Before that situation could ease, political instability emerged in the country, dealing a further blow to businesses—this time on an unprecedented scale. As a result of these multiple shocks, the sales, profits and cash flows of small, medium and large businesses alike declined sharply, making it impossible for many to service their loans. This had a severe negative impact on non-performing loans. Even many well-performing businesses that had previously repaid their loans regularly were unable to continue doing so due to the economic downturn, causing their loans to become non-performing as well. There is a close relationship between business activity and non-performing loans: when business conditions are good, the volume of bad loans remains low; when business conditions deteriorate, bad loans increase—as has happened in Bangladesh.

In this difficult situation, the tightening of Bangladesh Bank’s criteria for classifying non-performing loans has had a further adverse effect—akin to adding insult to injury. Following recommendations from the IMF, Bangladesh Bank introduced stricter conditions for loan classification, under which a borrower’s loan is classified as non-performing as soon as they fail to repay on the scheduled date or miss an instalment. Undoubtedly, this is a standard practice followed in developed economies. The problem, however, is that such standard practices work only when the overall economy is operating under stable and well-managed conditions. When such systems are applied in a poorly managed economy, they are bound to backfire—and that is exactly what has happened in the case of Bangladesh’s non-performing loans.

This situation can be compared to experienced drivers from the United States or Canada attempting to drive in Bangladesh. Even if someone is accustomed to driving at very high speeds on North American highways, doing the same on Bangladeshi roads would lead to an accident within moments. Most importantly, there is an appropriate time for imposing strict measures. When the economy and business environment are weak, rules should be relaxed rather than tightened. Otherwise, a bad situation becomes even worse, as has occurred in Bangladesh’s banking sector. As a result, non-performing loans are now growing at a rate even faster than Malthus’s geometric progression.

The volume of non-performing loans has now reached a point where the entire banking sector is on the verge of insolvency. At the same time, there is no scope for resolving a problem that has accumulated over four decades in a short period. Bangladesh Bank Governor Dr Ahsan H Mansur recently stated at a discussion that it would take five to ten years for the non-performing loan situation to improve, though he did not explain how this would be achieved. Experience gives us little reason for optimism. Bangladesh Bank has no magic wand with which to resolve this mountain of problems. Only a comprehensive action plan, backed by special assistance or a bailout programme and spanning at least 20 to 25 years, can realistically address the issue.

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Author: Certified Anti-Money Laundering Specialist and banker, Toronto, Canada