Why state-owned banks lag in loan recovery

A state-owned bank requires 3.5 to nearly 8 years to recover a loan of Tk100 due to various factors such as extended loan tenures and frequent rescheduling and restructuring options, according to a review by the central bank.

In contrast, a private bank typically recovers the same amount within 15 months, while a foreign bank achieves loan recovery in 6-9 months.

Bankers said state-owned and foreign bank borrowers behave differently regarding loan repayment. To solve this discrepancy, they called for better management in state-owned banks, emphasising the necessity to implement decisions by regulations.

Zaid Bakht, chairman of Agrani Bank's Board of Directors, told TBS, "State-owned banks prioritise fostering economic dynamism and government development plans over profit-making. As a result, they frequently offer term loans and occasionally assume greater risks." 

The Bangladesh Bank report, seen by TBS, shows that state-owned banks have notably low unclassified loan recovery rates of 3.19% to 7.87% quarterly. In contrast, private banks show a 20% recovery rate, with foreign banks reaching 36% to 58%.

The central bank voiced concern over the lack of improvement in the loan recovery situation, saying in 2023 many borrowers even capitalised on these facilities.

A senior Bangladesh Bank official told TBS that the unclassified loan recovery rate varies across different types of banks due to factors such as customer profiles, loan types, tenure, and recovery strategies. 

State-owned banks prioritise fostering economic dynamism and government development plans over profit-making. As a result, they frequently offer term loans and occasionally assume greater risks.

Zaid Bakht, Chairman, Agrani Bank's Board of Directors

This variability impacts the financial stability, asset quality, and profitability of the banks, with those able to expedite loan recovery exhibiting stronger performance indicators, he said.

The report, which was prepared by analysing unclassified loan collections within the banking sector spanning from June 2019 to December 2022, also mentioned that borrowers took more time to repay their loans during the pandemic and its effects continue to linger, preventing banks from returning to pre-pandemic conditions.

Breakdown of disbursed loans

According to Bangladesh Bank data, at the end of December last year, banks had disbursed loans totalling Tk16,17,688 crore. Among this amount, unclassified or performing loans totalled Tk14,72,055 crore, while defaulted loans amounted to Tk1,45,633 crore. 

As of last December, the disbursed loans by six state-owned commercial banks — Sonali, Janata, Agrani, Rupali, Basic, and Bangladesh Development Bank — amounted to Tk3,13,404 crore. Among these, Tk2,47,623 crore were unclassified, while the remaining Tk65,781 crore were defaulted.

During the same period, loans disbursed by 43 private banks totalled Tk11,96,944 crore, with Tk70,982 crore classified as defaulted loans.

In contrast, loans disbursed by nine foreign banks until last December totalled Tk66,456 crore, with only Tk3,200 crore classified as defaulted.

Ali Reza Iftekhar, the managing director of Eastern Bank Limited (EBL), told TBS that longer loan terms entail higher risks, although short-term loans can also default. With the central bank directive, banks have expedited their loan recovery efforts and established dedicated recovery teams.

He emphasised that while banks must engage in business activities, equal attention should be given to debt recovery plans. Prompt loan repayment enhances lending capacity and improves asset quality.

Standard Chartered Bank (SCB) Bangladesh CEO Nasser Ejaz Vijay told TBS, "I will not comment on other banks' management but SCB like other international banks undertakes an approach that involves rigorous evaluation process, independent decision-making authority, assessment of multiple sources of loan repayments, rigorous post-disbursement monitoring, an early alert system for managing risk positions etc. The combination of these measures helps us in maintaining a reasonable NPL ratio."

Mohammad Shasam-ul-Islam, former managing director of Agrani Bank, told TBS that the return of financed funds often takes time owing to the nature of financing in state-owned banks. 

"These banks play a vital role in the country's industrialisation, establishment of new companies, expansion of existing ones, and providing increased funding to support the SME sector's progress. However, it is time to focus on enhancing loan recovery and customer service now. To achieve this, addressing manpower shortages and enhancing skills are imperative," he added.