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Poor recovery from default loans new headache for banks

The recovery of non-performing loans has not been able to keep pace with the escalation of non-performing assets in Bangladesh, which has affected banks’ income and cash flow.

Between January and September, banks recovered Tk 4,195 crore of their delinquent loans, which were Tk 3,751 crore during the same period a year ago, central bank data showed.

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However, the recovery is much lower than pre-pandemic levels, making it difficult for banks to function properly as their ability to make loans has been reduced.

Banks recovered Tk 5,802 crore of their combined bad loans in 2020 compared to Tk 15,466 crore the previous year.

Although the central bank has followed lax loan classification policies since the start of the coronavirus pandemic in March last year, the move has failed to reduce bad loans.

Until September of this year, non-performing loans stood at Tk 101,150 crore, an increase of 14% compared to nine months before and 7.1% year-on-year.

Emranul Huq, managing director of Dhaka Bank, blamed the business slowdown stemming from the pandemic for the adverse impact on cash recovery.

A good number of companies are showing reluctance to repay loans despite comfortable cash flow thanks to the business revival, he said.

Not recovering enough cash from delinquent loans mainly affects banks’ income, forcing them to keep more provisions.

“Against the background, we have decided to take strict measures from January against defaulters who will not repay their loans in December.”

Dhaka Bank will make every effort, including filing criminal cases, to recover default loans as part of its efforts to improve financial health, Huq said.

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

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

“We have to keep a higher provision against bad loans. That is why banks have to set a higher loan rate to ensure profits,” Rahman said.

Also, depositors’ money is stagnating because banks failed to recoup bad loans.

“The banking sector is now in a vicious circle due to the lower recovery of funds compared to the pre-pandemic periods. It will eventually affect our revenues,” Rahman said.

The regular operations of the courts were affected during the peak of the pandemic, creating difficulties in resolving cases in the Money Loan Courts quickly, he said.

Banks are also facing difficult jobs to recoup regular loans due to the business slowdown.

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

“Lenders were unable to send staff members at the height of the pandemic to pressure defaulters to pay. This has sent the recovery of funds from bad loans to a lower level,” he said.

Six state banks (Sonali, Janata, Agrani, Rupali, BASIC and the Bangladesh Development Bank) recovered Tk 584 crore of bad loans in the first nine months of this year, an increase of 1.6% year-on-year.

Non-performing loans at banks were Tk 44,016 crore in September.

Private banks recovered Tk 2,093 crore, a decrease of 11 percent, from the combined default loans of Tk 50,743 crore.

Nine foreign banks obtained Tk 88 crore in contrast to Tk 21 crore during the period. NPLs at banks stood at Rs 2,692 crore.

Three specialized banks managed to recover Tk 1,429 crore from defaulters compared to Tk 792 crore in September last year, when they collectively took on NPL for the sum of Tk 3,699 crore.

A BB official said some defaulters had frequently obtained suspension orders from the courts to show their delinquent loans as unclassified assets.

In addition, many non-performing borrowers also have their bad loans rescheduled through a down payment, albeit for a negligible amount, with the approval of the central bank, he said.

This has made the issue more complex for banks to make bad loans, he added.

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