After the end of the one-year moratorium facility, banks started to feel the default loan wave as toxic debts increased by around Tk5,000 crore in the second quarter of the current year, raising alarm for the banking sector.
Default loans stood at Tk99,205 crore at the end of June this year, which was Tk94,265 crore in March, according to Bangladesh Bank data released yesterday.
However, the default loan rate declined to 8.14% in June from 8.48% in March owing to higher loan disbursements.
Despite having a relaxed loan repayment facility for borrowers, default loans increased by Tk10,471 crore in the first two quarters of the current year.
After the end of the one-year loan moratorium, the relaxed payment facility that was extended based on the bank-client relationship gave a rise to default loans, said Syed Mahbubur Rahman, managing director of Mutual Trust bank.
As a result, banks started to classify loans that were not regular even before the pandemic, he also said.
Moreover, the repayment period of stimulus loans started, but many customers could not pay back, he added.
Only some big exporters are repaying regularly as small businesses are still in hardships, Mahbubur said.
He feared that default loans will rise further in the coming days.
The payment deferral that the central bank offered for January to December last year considering the pandemic helped banks reduce default loans amounting to Tk5,600 crore throughout the year.
Default loans came down to Tk88,734 crore in December last year, which was 7.66% of total loans, the lowest in recent years.
The Centre for Policy Dialogue (CPD) in its recent reaction on monetary policy for the current fiscal year warned that default loans, which remained invisible currently owing to policy relaxation, will rise significantly once loans are classified without any special consideration.
"It is not clear what the real situation of NPL [non-performing loan] in the banking sector is at present, and it is uncertain as to how large NPL may actually turn out to be in the future when the moratorium is lifted."
The severity of high NPLs is currently invisible because of the measures taken to ease loan classification. However, once loans are classified without any special considerations, the volume of NPLs may rise significantly, the CPD assumed.
"Banks may attempt to offset their losses from holding excess liquidity by giving out risky loans, which may lead to higher volume of NPLs, higher inflation and the creation of asset bubbles."
The private think-tank apprehended that some loans provided as part of the Covid-19 liquidity packages may become bad, increasing the volume of NPLs further; since loan defaulters would be able to access the Covid-19 liquidity support packages, they might take undue advantage of the new measures.
The Bangladesh Bank in its financial stability report forecasted that default loans would increase further in the industry as an expected sluggish business condition owing to the coronavirus outbreak could severely affect the debt-servicing capacity of the borrowers.
Although default loans of the banking sector declined substantially during the latter part of last year, thanks to massive loan restructuring, the proper monitoring of rescheduled loans amid the Covid-19 pandemic will be a critical challenge for the industry, the report said.