Banking sector’s wounds much deeper than you knew

• BB quarterly data 2022 revealed Tk29,283 crore rescheduled loans
• Its financial stability report 2022 showed the amount Tk63,720 crore
• Similar disparities were observed in 2021
• Distressed assets in banking sector hit Tk3.78 lakh crore by the end of 2022
• The amount is three times more than the previous year's Tk1.20 lakh crore
• IMF insisted rescheduled loans be labelled as "distressed assets"

The fractures within the country's banking sector run deeper than previously acknowledged, a fact highlighted by the discrepancies in figures released by the Bangladesh Bank. As the central bank aligns its distressed asset calculations with the IMF's guidelines, the rescheduled loan amounts and distressed assets have surged, surpassing official figures from the past two years.

The Bangladesh Bank's quarterly data from 2022 revealed banks' rescheduled loans worth Tk29,283 crore. However, its financial stability report for the same year paints a different picture, reporting a staggering Tk63,720 crore – an increase of over 117%.

Similar disparities were observed in 2021, with the older calculation indicating Tk12,380 crore and the new one indicating Tk26,810 crore.

This latest financial stability report showcases the central bank's alignment with international financial reporting standards, encompassing non-performing, rescheduled, and written-off loans. When combined, these factors result in a total of nearly Tk3.78 lakh crore in distressed assets within the banking sector by the end of 2022. This amount is more than three times the previously disclosed default loan figure by the central bank – Tk1.20 lakh crore at the end of December of the previous year.

Two reports came up with varied figures of distressed assets for 2021; figures for 2021 surged to Tk1.78 lakh crore in the latest stability report, marking a significant increase from the Tk1.47 lakh crore reported in the previous edition.

The discrepancy between reported and actual figures has led analysts to question the rationales of policies that allowed banks to improve their balance sheets through window-dressing.

The 2021 financial stability report, prepared before IMF's programmes came into force, showed total loans rescheduled in 2021 were Tk1.23 lakh crore, which was lower than in the preceding year. While banks' better credit management could be partially attributed to the decrease, the central bank's policy was the key reason, it pointed out.

It read that due to the Covid-19 pandemic, the Bangladesh Bank continued its relaxed loan classification and recovery policy in 2021 which allowed banks to keep loans regular against partial payments.

The 2021 report contained a chart that showed total outstanding rescheduled loans as a percentage of total outstanding loans decreased to 13.1% in 2021 after four consecutive years of increase. Though more than 80% of total outstanding rescheduled loans remained unclassified in 2021, the share of classified rescheduled loans in total outstanding rescheduled loans increased to 19.8%.

Back in 2019, the IMF, in its Financial Sector Stability Review, hinted that officially stated default loan numbers would be considerably lower than reality, once litigation-stuck unclassified amounts and rescheduled loans were considered. The recent revelation validates this assumption, as the IMF insisted that rescheduled loans be labelled as "distressed assets" alongside default loans in the Bangladesh Bank's annual financial stability report.

This disclosure has intensified the concerns of financial analysts who have long criticised the practices of loan rescheduling and preferential treatment given to major borrowers.

Ahsan H Mansur, former chairman of Brac Bank and executive director of the Policy Research Institute (PRI), told TBS that the substantial disparity in the rescheduled loan data could be attributed to the likelihood that one or more banks did not provide accurate information last year.

"The situation has worsened as loan rescheduling has increased. The collection of the banks is decreasing. As a result, the liquidity situation in the market is not improving."

Ahsan H Mansur, Executive Director, Policy Research Institute

"This may also happen if the classification or criteria for rescheduling is changed. But, I have not heard that any change has been made in the definition of rescheduling. However, the central bank should disclose what action has been taken against any bank in case of misreporting," he said.

He further said, "The truth is that the situation has worsened as loan rescheduling has increased. The collection of the banks is decreasing. As a result, the liquidity situation in the market is not improving."

However, officials who prepared the central bank's flagship report have their own versions why figures vary.

The Financial Stability Department of the Bangladesh Bank has published the Financial Stability Report.

Director of this department Md Ala Uddin said the report was published with the provisional data of last year.

"In many cases, audits involve changes in provisional data where some number can increase or decrease. That is what happened in this case," he said.

Ala Uddin, who is a lead editor of the publication, said the latest 2022 report used the revised figures of earlier data. Due to this, changes have been seen in some indicators.

To access $4.7 billion in loans under the IMF's programmes, Bangladesh's financial authorities and regulators agreed to implement timely reforms. These reforms are intended to enhance the financial sector's strength for productive investments. Their implementation progress is reviewed periodically before each tranche of the loan package is disbursed.

According to the IMF staff report of 2023, Bangladesh Bank agreed to establish a time-bound strategy to reduce the weaknesses on bank balance sheets and report rescheduled loans alongside non-performing loans in the annual financial stability report.

Also, the central bank committed to formulating a plan for the banking sector to adopt IFRS9 by 2027. The International Financial Reporting Standards-9 (IFRS9) specifies how financial entities should categorise and evaluate their assets and liabilities.

These actions were meant to be completed by the end of the last fiscal year. For the current fiscal year, planned actions include publishing distressed asset data in line with Basel III standards and implementing MoUs signed with individual banks to decrease system-wide NPL ratios, enhance capital adequacy, and improve provisioning coverages of state-owned and private commercial banks.