Bad collection of delinquent loans, new headache for banks

The recovery in delinquent loans has not kept pace with the escalation of delinquent assets in Bangladesh, affecting banks’ income and cash flow.

Between January and September, banks recouped 4,195 Tk crore from their non-performing loans, which was 3,751 Tk crore in the same period a year ago, according to central bank data.

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The recovery is, however, well below pre-pandemic levels, hampering the smooth functioning of banks as their lending capacity has been reduced.

Banks recovered Tk 5,802 crore of their combined NPLs in 2020, up from Tk 15,466 crore the year before.

Although the central bank has followed relaxed loan classification policies since the start of the coronavirus pandemic in March of last year, the move has failed to bring down bad debts.

As of September of this year, NPLs stood at Tk 101,150 crore, an increase of 14% from nine months earlier and 7.1% year-on-year.

Emranul Huq, managing director of Dhaka Bank, blamed the downturn in business resulting from the pandemic on the negative impact on cash collection.

Many companies are reluctant to repay their loans despite having comfortable cash flow thanks to the business recovery, he said.

Not collecting enough cash on defaulted loans primarily affects banks’ income, forcing them to keep more provisions.

“In this context, we have decided to take strict measures from January against defaulters who will not repay their loans by December.”

Dhaka Bank will do everything, including filing criminal investigations, to recover defaulted loans as part of its efforts to improve financial health, Huq said.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the slowing recovery has forced banks to raise lending rates and reduced their ability to reinvest.

In such a situation, the cost of funds usually increases to a great extent, which ultimately puts pressure on good borrowers.

“We need to keep a higher allowance against bad debts. That’s why banks need to set a higher lending rate in order to secure profits,” Rahman said.

In addition, depositors’ money remains blocked due to the inability of banks to collect bad debts.

“The banking industry is now in a vicious cycle due to less recovery of funds compared to pre-pandemic times. This will ultimately affect our income,” Rahman said.

The regular functioning of the courts was affected during the peak of the pandemic, creating difficulties in quickly settling cases in money lending courts, he said.

Banks are also facing difficult tasks to collect regular loans due to the downturn in business.

Abul Kashem Md Shirin, managing director of Dutch-Bangla Bank Ltd, said banks are now paying more attention to collecting unclassified loans than classified loans.

“Lenders have not been able to send staff at the height of the pandemic to push defaulters to repay. This has lowered the recovery of PNP funds,” he said.

Six state-owned banks – Sonali, Janata, Agrani, Rupali, BASIC and the Bangladesh Development Bank – collected Tk 584 crore in non-performing loans in the first nine months of this year, up 1.6% year-on-year .

Bank defaulted loans stood at Tk 44,016 crore in September.

Private banks recovered Tk 2,093 crore, down 11%, from a combined default loan of Tk 50,743 crore.

Nine foreign banks made Tk 88 crore versus Tk 21 crore during the period. NPLs in banks amounted to Tk 2,692 crore.

Three specialist banks managed to recover Tk 1,429 crore from defaulters, up from Tk 792 crore in September last year, when they collectively faced NPLs to the tune of Tk 3,699 crore.

A BB official said some defaulters have frequently obtained court stay orders to show their defaulted loans as unclassified assets.

In addition, many defaulting borrowers also have their NPLs rescheduled by making a down payment, albeit an insignificant amount, with central bank approval, he said.

These made the issue more complex for banks to realize bad debts, he added.

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