Defaulted loans have started to rise from the pandemic lows as banks began ending moratorium packages by classifying loans amid normalisation of the financial condition of borrowers.
Default loans in the banking sector increased by Tk14,539 crore in the past year after loan moratoriums were partially lifted.
Although resumption of business activities increased money flow last year, many borrowers were yet to meet payments, forcing banks to classify a number of loans causing a rise in defaults, industry insiders said.
The banking sector experienced a 16.38% growth in default loans after many banks did not extend the moratorium facility in 2021.
The payment deferral that the central bank offered for January to December in 2020 helped banks reduce default loans amounting to Tk5,600cr throughout the year.
Default loans came down to Tk88,734cr in December 2020, which was 7.66% of total loans, the lowest in recent years.
The payment deferral facility, however, was partially lifted from the beginning of last year causing a sharp rise in default loans, which crossed Tk1 lakh crore in September.
At the end of the year, the total default loans stood at Tk1,03,273cr, 7.93% of total loans, according to the central bank data.
Emranul Haque, managing director (MD) of Dhaka Bank Limited, told The Business Standard that the loans which were rescheduled before Covid-19, i.e. in 2016-17, got the moratorium facility during the first wave of Covid-19. During the second wave, however, the benefit was not extended, which resulted in an increase in the amount of defaulted loans.
While many banks had given the facility to various customers, many borrowers defaulted again after failing to repay the loans in the last two years.
He further said that in one year, the increase in defaults had been by Tk14,000cr, which is a huge amount.
While there are hopes that payments will be made in the case of large loans, there were some doubts regarding small loans.
The MD said the moratorium needs to be extended for small loans, as it will take time for the cash flow to get better.
"If not for everyone, the moratorium facility can be increased for medium-sized loans as SMEs [small and medium enterprises] depend on the domestic market and they have not been able to do business during various festivals, including the Eid-ul-Fitr, in the last two years. I think they should be given a 25-30% repayment facility on their loans," Emranul said.
Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank, said, "Last year, the central bank had directed to repay 25% of the loan, though at the end of the year it had reduced it to 15%. But some institutions suffered so much during Covid-19 that they did not have any ability to repay the loans. Those customers eventually defaulted on their loans."
He further said that in order to reduce the amount of defaulted loans, it was necessary to increase the loan moratorium facility.
"Now the customers have to repay the current loan, while they also have the pressure of the previous unpaid loans. If these institutions do not get the benefit, loan defaults will increase," he said.
Earlier in December last year, the central bank issued a circular that said borrowers under the loan moratorium facility will not be considered defaulters if they paid 25% of the payable amount for the year.
Later, business associations demanded a further relaxation of the loan moratorium facility.
Following their demand, the central bank revised down the payment ceiling to 15% for small borrowers.
The payment deferral helped banks to show good profit as the facility required less provisioning.
However, rising default loans may hit bank's profit this year, raising provisioning requirements, said industry insiders.
Raising concern about the health of the banking sector, Fitch, the global rating agency, in November last year said the reported default loans are likely understated because of an extensive loan moratorium during the pandemic.
The rating agency feared that default loans would increase significantly after the ongoing loan moratorium facility was lifted, putting the banking industry under stress.
Though borrowers are not paying, rising credit demand shows that business activities have resumed at full scale.
Private sector credit growth in Bangladesh surged to 11.07% in January compared to the corresponding period last year, the highest in 29 months as a supercharged demand pushed up both import and export, shaking off the Covid-19 funk.
Small-scale industries, identified by the Bangladesh Bank as the third hardest Covid-hit sector, have rebounded strongly, with production growth surpassing pre-pandemic levels following the reboot of economic activities.
Their manufacturing growth even seems to be going faster than that of large-scale industries.
The SME sector saw its production grow by 26.29% year-on-year in July-October last year, while its growth stood at 10% in pre-Covid times.
On the other hand, production of large industries rose by 18% year-on-year in the same period, according to the Bangladesh Bank data.
In April-June of 2020, after the pandemic had hit the country, small businesses suffered a 15% drop in manufacturing of goods, whereas the big ones met with a slowdown but still maintained a 7% production growth.
The SMEs had started to turn around since July last year and reached a stable position in the last half of FY21 onward, according to central bank data.