The curious disconnect between industrial growth and loan default

A huge disconnect between the country's industrial output growth and the sector's non-performing loans, for the last five years, is taking many experts and stakeholders by surprise.

The industrial sector showed a robust production growth of around 10 percent from April 2018 to March 2019. 

But the growth picture does not match the non-performing loan scenario. The sector had 20 percent of non-performing loans out of the total loans disbursed in the same period. 

The total amount of non-performing loans is Tk1 lakh 12 thousand crore, according to Bangladesh Bank's latest data. The industrial sector alone accounted for more than one-third of that.

At the end of March 2019, the total loans disbursed to the industrial sector was Tk2 lakh 3793 crore. Of it, Tk39,481 crore was default, i.e. 19.37 percent of the total disbursed loans, according to Bangladesh bank data.

"The figure does not indicate any slowdown in the businesses, it shows a robust growth instead," said Zahid Hussain, former lead economist of the World Bank in Dhaka.

"If the industry has achieved such growth, then where is the problem with repaying the bank loans?" Zahid asked.

Ninety-seven percent of Bangladeshi business houses are optimistic that their business will expand next year, while 50 percent of them expect that their sales will increase by 15 percent, the highest in Asia, according to the Hongkong and Shanghi Banking Corporation's (HSBC) flagship Navigator report.

"Business people had said that they could not repay their bank loans due to a slowdown in business, but the figures show robust business growth. So we see an absolute mismatch between the growth narrative and non-performing loans," said Zahid.

"A business is shown to be vulnerable when business people are asked to repay bank loans, or when they seek any kind of policy support from the government. However, everywhere else the growth is shown to be 'robust'," he commented.

Policy Research Institute Executive Director Ahsan H Mansur said that if industrial output really achieves 'robust growth', it will be marked by low non-performing loans; increased revenue mobilisation and employment generation.

"But non-performing loans are increasing, revenue mobilisation is slow, and employment generation has stagnated," said Monsur.

He said that for achieving double-digit growth, the industrial sector needs extra credit because the existing level of investment is not enough to support the growth target. 

"But the private sector credit growth has slowed down. Then where is this 'robust growth' happening?" Monsur asked.

The central bank's data showed that in the first quarter of this year (January-March), loan disbursed to the industrial sector was Tk15, 249 crore, i.e. 10.19 percent lower than in the same period the previous year.

During the January- April quarter of 2018, Tk16, 979 crore was disbursed to the industrial sector.

Shafiul Islam Mohiuddin, former president of the Federation of Bangladesh Chambers of Commerce and Industries, doubted the Bangladesh Bank's data on industrial output growth.

Mohiuddin also questioned the HSBC's Navigator report. 

"We live inside the industry and know what is going on here. I don't see this much growth and I don't know where they got the information from," Mohiuddin argued.

"Our exports are slowing and we are losing competitiveness. So where do you find so much growth in the industrial sector?" he pointed asked.

Mohiuddin also feared that non-performing loans of the industrial sector may increase more in the future if Bangladesh cannot improve its competitiveness.