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Bangladesh Bank has been identifying non-performing loans as a major challenge to obtain its monetary policy objectives in its monetary policy statements.
No Respite in NPL Growth
But there is no respite in high growth of bad loans which undermined the key BB policy aiming at infusing dynamisms in the country’s economy. The NPL in the country’s banking sector increased by Tk 17,383 crore in 2022 to Tk 1,20,656 crore from Tk 1,03,273 crore in 2021, according to Bangladesh Bank latest disclosure. The amount of NPL was Tk 89,340 crore in June 2018 and Tk 22,710 crore in 2010 despite repeated promises from the government and the central bank to reduce those.
BB Policy Stance
“NPL remains one of the key challenges of the monetary transmission channels, making interest rates downward sticky and less sensitive to the monetary policy actions,” according to the BB monetary statement for the January–June 2019 period. In the latest monetary policy for the January–June 2023 period, the BB said that the high NPL ratio and the issue of governance in banks and non-bank financial institutions were also matters of concern for financial stability of the economy.
Loan Scams
However, the BB such policy statement contradicts its actions to check the NPL hamstrung the banking sector known as the nerve of the economy. So it is quite natural that BB has been facing criticisms for its failure to rein in the defaulted loan and for not playing its regulatory role in addressing the massive irregularities in the sector. From the Hallmark loan scam in Sonali Bank to the fictitious loans approved by BASIC Bank’s board of directors with Sheikh Abdul Hye Bacchu in the chair and the loan scam in Janata Bank staged by the little-known Anon Tex remain unaddressed. Moreover, lifting a staggering volume of more than Tk 30,000 crore recently by Chattogram-based S Alam Group from Islamic Bank Bangladesh Limited in violation of the banking rules indicates that the NPL size will grow further in the days to come.
Capital Flight
Experts have expressed concern over the alarming and unstoppable surge in defaulted loans, warning that it will have a devastating impact on both the banking sector and the economy. They said that most of these default loans were taken by wilful defaulters, backed by the political, financial, and lobbying power of the borrowers. Ahsan H Mansur, executive director of the Policy Research Institute, suspected that a large portion of the defaulted loans had been laundered abroad because they were taken under anonymous names, making recovery impossible. There is nothing positive about the NPL. The high NPL destroys the trust of depositors, which is resulting in reduced deposit growth in the banking sector. Moreover, it has reduced the capacity of banks to provide loans to good borrowers.
Monetary Policy Targets Off-track
The BB has been failing to fulfil its targets to disburse credit to the private sector, the main driving force of the country’s economy, because banks cannot perform their responsibilities. The central bank in its latest monetary statement said the private sector credit growth increased by 12.76 per cent in the first half of FY23 compared with the same period of the previous year, though the target was 14.1 per cent. It also failed to achieve the targeted private sector credit growth on most occasions between FY14 and FY 21 as the actual disbursement was lower than the targets, according to an analysis by the Centre for Policy Dialogue in 2021. The private sector credit growth was 8.40 per cent, compared to the target of 14.80 per cent, in FY21 when the low private sector investment did little in generating employment.
Doing Business
Former World Bank Dhaka office chief economist Zahid Hussain noted that private sector investment not only depended on BB targets but also on other issues, including favourable investment climate and access to credit for entrepreneurs. “The investment environment is not conducive for private businesses,” he pointed out. The country made a negligible progress in the 2022 Bangladesh Business Climate Index due to the lack of a comprehensive national reform programme on access to land, availability of regulatory information, infrastructure, labour regulation, dispute resolution, trade facilitation, paying taxes, technology adoption and access to finance. This was reflected in the index released on January 27, 2023 jointly by the Metropolitan Chamber of Commerce and Industry, Dhaka and the Policy Exchange, Bangladesh. The country scored 61.95 on a 0–100 scale in the 2022 index. The score was 61.01 in 2021.
Proper Action Needed
According to former BB governor Salehuddin Ahmed, the central bank should come up with specific targets on arresting and cutting the NPL volume and on defaulted loans and written off loans. Otherwise, the monetary policy statements will remain less than effective, he said. “You can’t expect a good crop after ploughing the land with sick cows,” said former BB chief economist MK Mujeri while indicating to financial condition of banks on which the BB heavily relied in order to maintain money flow to different sectors of the economy. BB policy failure has pushed the inflation close to a double-digit figure recently for the first time in the past one decade, causing the majority households to undergo price pressure for food, education and treatment, among other needs. Though the BB has been blaming the war in Ukraine and the price hike on energy items and fertiliser on the international market for the high inflation in the country, economists said weakness in the banking sector and in the financial sector should also be blamed.
IMF Reform
The country’s forex reserve fell below $33 billion in January from $48 billion about a year ago due to high import payments. The nation is now facing problems in importing necessary goods, which would aggravate the supply situation in the coming months. Economists said a massive reform plan agreed by the government under the $4.7 billion loan from the International Monetary Fund shows some promises to make the banking sector disciplined. The IMF has already asked the BB to show banks’ rescheduled loans alongside the non-performing loans in the annual financial stability report by next November. The international lending agency also wanted the implementation of the memorandums of understanding to reduce NPL, increase capital adequacy and provision coverages of the state-owned commercial banks and private commercial banks.
Irony for BB
IMF suggestions can be seen as irony for BB since such steps are always vital to check the NPL. BB also knows but failed to enforce those.
