Impact of loan default

Media reports suggest that loan management is not doing well. At the moment around 10 per cent of the total loans are in default category. Former Deputy Governor of Bangladesh Bank (BB) Khondker Ibrahim  Khaled is of the view that bulk of the loans given during the last few years would not be repaid. Chairmen and managing directors of some banks have allegedly combined and indulged in corruption. The role of the central bank is not up to the mark, according to him.
The gross amount of default loan exceeded Tk one trillion (one lakh crore) which includes current default loan and written-off loans. So far Tk 412.37 billion were written off as there was no prospect of repayment of such loans. Loan default of state-owned Agrani, Janata, Rupali, Basic and Bangladesh Development Bank is Tk 272.89 billion. On the other hand, loan default of 39 private banks is Tk 253.31 billion. Foreign banks have default loans of Tk 18.22 billion. Two agricultural credit banks have a default loan of Tk 130 billion.
The total number of loan defaulters is 2,13,532. They are from 47 state-owned  and private banks.
The agricultural credit banks were set up for the development of the farm sector. But these banks made little impact on the rural economy. Taking advantage of their inefficiency and corruption, the NGOs have occupied a prominent position in the rural areas. The role of banks and financial institutions is shirking in the rural areas.
Default loan is also increasing in Grameen Bank while profit is declining. In 2015, loan default amounted to Tk18.62 billion. In the previous year it was TK15.77 billion. There is no regular managing director in this bank for six years. The chairman has submitted resignation three years back.
Bangladesh Bank Governor Fazle Kabir recently expressed concern over the high default rate in the banking sector. He blamed the state-owned banks for this.
The impact of loan default and writing off of loans falls on the depositors. Deficit of the banks is protected by the funds of the depositors. Banks can not reduce interest rate because of loan default. Currently the average rate of interest of SME loans is 14 per cent. This rate is not helpful in generating employment. Small agricultural farms are not developing due to high interest rate. Loan default in banking sector needs to be stopped in order to gather momentum in economic activities.
Meanwhile, capital deficit in state-owned banks is increasing. Sonali, Janata, Agrani, Rupali, Basic, Bangladesh Agricultural Bank and Rajshahi Agricultural Development Bank combinedly have capital shortfall of Tk 146.70 billion.
According to international banking rules, banks are required to keep adequate capital. During the current year there is a budget provision of Tk20 billion for capital refinancing.
The writer is an economist and columnist.
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