Huge defaulted loans an acute risk for Bangladesh’s banking sector: IMF

The International Monetary Fund (IMF) has asked for information about the initiatives undertaken by the Financial Institutions Division and the Bangladesh Bank to recover defaulted loans, saying a large sum of non-performing loans poses an acute risk for the country's banking sector.

Additionally, the global lender has recommended quickly amending various laws to establish good governance in the banking sector as well as to ensure financial sector reform and full autonomy of the central bank.

A visiting IMF mission expressed its concern over defaulted loans in meetings with Financial Institutions Division Secretary Sheikh Mohammad Salim Ullah and officials of several departments of the central bank on Sunday as part of a process to grant a $4.5 billion loan Bangladesh has sought to address its foreign exchange reserve crisis, officials concerned said.

In a separate meeting with the National Board of Revenue (NBR), the IMF officials asked to know the reasons for so much tax exemption in Bangladesh.

t also said the country's tariff rate is much higher than that of its peers and asked for information about the NBR's plan to bring it down.

In the meetings with the central bank officials and the Financial Institutions Division, the Washington-based lender also asked for information on losses caused by loans given by state-owned banks to the Bangladesh Petroleum Corporation and about Bangladesh's plans to rehabilitate ailing industries.

The Financial Institutions Division secretary declined to comment on the discussion with the IMF.

However, some officials at the Financial Institutions Division who were present at the meeting, said the IMF termed the state-owned lenders' massive defaulted loans a major risk for the banking sector.

Since the Financial Institutions Division is involved in the management of state-owned banks, the IMF wants to know what steps the government is taking to recover the defaulted loans. The multilateral lender has asked for taking strict action to recover the defaulted loans fast.

The Financial Institutions Division, through a presentation, told the IMF that Covid-19 has created a vulnerable situation among state-owned banks since March 2020. Banks have played a key role in normalising the economy during the pandemic situation.

Moreover, state-own commercial banks contribute a lot to moving forward government initiatives especially by providing loans to the priority sectors at reduced interest rates and involving in different social safety net activities without imposing any charge.  

According to data from the Bangladesh Bank, at the end of last June, the total amount of defaulted loans in the banking sector stood at Tk1.25 lakh crore. Among them, the amount of defaulted loans of state-owned Sonali, Janata, Agrani, Rupali, Basic and Bangladesh development banks is more than Tk55,000 crore.

Expressing surprise at the high amount of defaulted loans despite extending the loan moratorium period and giving an opportunity to reschedule defaulted loans, the IMF said, the failure of banks to recover defaulted loans is creating an acute risk for the sector.

Among the state-owned banks, one-fourth of Janata Bank's total outstanding has defaulted. The default rate of Sonali, Agrani and Rupali banks is about one-fifth of their total outstanding.

BASIC Bank, which collapsed due to loan scams, accounted for more than half of its total outstanding and BDBL's non-performing loans accounted for 36% of its outstanding.

The state-owned banks make separate agreements with the Financial Institutions Division every year to recover defaulted loans, but they are not able to show success in recovering defaulted loans as per the target. This year is no exception.

Not only defaulted loans, but the failure of banks to collect written-off loans has also come up in the discussion with the IMF. Although five state-owned banks target to recover Tk1,670 crore of written-off loans this year, only Tk201 crore has been collected at the end of last June.

Among the state-owned banks, Janata, Agrani, Rupali and Basic banks are facing a major capital crunch due to high non-performing loans. The capital deficit of the four banks is more than Tk11,000 crore. Foreign banks do not want to accept letters of credit (LCs) from these banks due to a lack of capital. Banks have to pay extra commission for this.

Officials of the Financial Institutions Division said although the IMF on various occasions had earlier given importance to the full autonomy of the Bangladesh Bank, this time the global lender is giving additional importance to it. Because, since 2018, important decisions in the banking sector, including fixing the interest rate of loans and deposits, loan moratorium, restructuring and rescheduling of defaulted loans, have been imposed by the finance ministry.

The IMF mission also held separate meetings on Sunday with Bangladesh Bank's Banking Regulation Policy Department, Department of Off-Site Supervision, Statistics Department and the Chief Economist Unit.

In this regard, central bank spokesperson GM Abul Kalam Azad said, there have been discussions with the IMF with several departments where it expressed concern about the excess defaulted loans of state-owned banks in particular.

"At the meetings, the central bank said it is regularly signing annual memorandums of understanding with banks to reduce non-performing loans. Besides, there will be a meeting with the central bank's top officials on 9 November, where they will highlight the steps taken by the Bangladesh Bank to bring the defaulted loans to normal levels," he added.

Azad, also an executive director of the central bank, said the IMF has also asked about the floating exchange rate.

"It has been said from our side that a single market rate will be established in the next two to three months," he added.

When the IMF asked about loan rescheduling and keeping provisions, he said, the central bank replied that recently a circular has been issued to hand the rescheduling facility over to banks' boards to play a more appropriate role in loan recovery. The IMF has said that it will look at the circular later.

Why so much tax exemption: IMF   

At the meeting with senior NBR officials, the IMF delegation also wanted to know the revenue board's plans for increasing revenue collection.

The NBR highlighted the rationale of tax exemption and the ongoing activities to reduce it. In addition, the plan to reduce the tariff rate was also informed, meeting sources said.

Seeking anonymity, a senior NBR official told TBS, "It is true that Bangladesh's tariff rate is high. The protection tariff rate in Bangladesh is still 28-29%. We have the commitment to reduce it. We have conveyed that to the delegation."

Besides, some tax exemptions have to be given for the economic reality of the country.

NBR members Masud Sadiq, Zakia Sultana and Shams Uddin Ahmed from Customs, VAT and Income Tax Departments lead the meeting on behalf of the revenue board.

After the meeting, the delegation held a closed-door meeting with NBR Chairman Abu Hena Md Rahmatul Muneem.

The chairman could not be reached for comments about the content of the discussion.