Ballooning defaulted loans have exposed Bangladesh’s financial sector to greater risks, says the International Monetary Fund (IMF) in its draft “Financial Sector Stability Review 2020”.

Banks in Bangladesh conceal their defaulted loans, the report says, adding that the actual size of defaulted loans in the country’s banking system is much higher than the figure released by the Bangladesh Bank.

The IMF has suggested the banks to refrain from providing repeated loan restructuring facilities to large borrowers. It also mentioned that loan defaulters are taking undue advantage by obtaining stay orders from higher courts.

Economists and experts in Bangladesh largely agreed with the IMF while the finance ministry and the central bank disagreed with parts of the report.

The Ministry of Finance and the Bangladesh Bank held a virtual meeting last week to let the IMF know Bangladesh’s stance and comment over the report after reviewing the observations of the global body.

Md Asadul Islam, senior secretary to the Financial Institutions Division, chaired the meeting.

At the meeting, officials from the finance ministry and the central bank spoke in favour of adopting reform measures to address some of the risks identified in the IMF report.

Bangladesh, however, does not agree with most of the IMF observations, according to meeting sources.

Speaking to a few officials who were present at the meeting, it has been learned that Senior Secretary Asadul Islam told the meeting that steps should be taken to eliminate the identified risks.

“There is no point in sweeping the dirt under the carpet. The crisis will escalate if the banking sector does not move forward keeping pace with the country’s march forward,” Asadul was quoted as saying in the meeting.

Abdur Rouf Talukder, senior secretary to the Finance Division, told the meeting, “The IMF has identified a number of weaknesses in our financial sector.” “Initiatives should be taken to eliminate these. This requires institutional reforms,” he added

The central bank will send its reply to the IMF within a day or two.

IMF observations

The IMF thinks there is a deficit in the autonomous capacity and supervisory action of the central bank, according to officials present at the meeting of the finance ministry and the Bangladesh Bank.

Criticising the finance ministry’s control over state-owned banks, the IMF has called for separation of ownership and supervision of these banks. In addition, the organisation has also asked for dividing the state-owned banks into two categories – commercial and development.

To ensure good governance in the financial sector, The IMF has also called for increasing the number of independent directors in banks, implementing the Bangladesh Bank’s refinancing schemes through a separate development or fiscal agency, forming a Financial Stability Council and setting up a National Real Estate Taskforce to regularly review the mortgage situation in the real estate sector.

The organisation has raised questions about faults in licensing processing of banks and financial institutions, not giving agricultural loans without land mortgage and the data quality of banks.

According to the IMF’s September 2019 Financial Sector Stability Review report, Bangladesh’s actual defaulted loans or problem assets was Tk240,167 crore as of June that year. According to the Bangladesh Bank, the amount was Tk112,425 crore.

The IMF prepares the amount of the problem asset by combining rescheduled loans, defaulted loans that have been stayed by a court order and loans in special mention accounts with the published information on defaulted loans.

Bangladesh’s response

The meeting of the  Ministry of Finance and the Bangladesh Bank was told that the IMF’s allegation of concealing defaulted loans was not correct.

The Bangladesh Bank will tell the IMF that a debt rescheduling facility is provided to large borrowers to keep their businesses afloat in times of crises, which creates opportunities for retention of employment and repayment of loans.

The central bank will inform the IMF of the progress made in forming a Financial Stability Council.

There is no rationale behind raising questions about the data quality of banks and not lending to the agriculture sector without land collateral, according to sources at the Ministry of Finance and the Bangladesh Bank.

It was said at the meeting that the Bangladesh Bank will identify the risks in the financial sector on its own initiative and highlight the various steps taken to address them. It will inform the IMF that the central bank is always keeping a watchful eye on the important banks.

The IMF will also be informed of the steps taken to review the balance sheets of large customers and identify regular risks.

The IMF has recommended the formation of a National Real Estate Taskforce to assess the investment situation of banks and financial institutions in the real estate sector of Bangladesh and its potential impact, highlighting the past context of the global financial crisis from the mortgage market.

The central bank officials told the meeting that there is no need to form a task force, adding that no such risk is there in the country’s real estate sector.

The IMF has offered to provide technical assistance in 28 areas to address the financial sector risks. The meeting was told that the Bangladesh Bank could take assistance in five areas.

Asadul Islam of the FID told the meeting, “We are working on amending 13 laws to reduce risk and bring good governance in the financial sector. Once the laws are amended, there will be a big positive change in the banking sector.”

‘Asset quality biggest risk’

Asked about the risks of the financial sector in Bangladesh, Zahid Hussain, former lead economist at the Dhaka Office of the World Bank, said the biggest risk in this sector is asset quality.

A true picture of the banks’ defaulted loans can be assessed by adding reported non-performing loans and distressed assets, he added.

He said the main reason behind the creation of distressed assets is that state-owned banks go beyond the commercial perspective and disburse and collect loans on political considerations.

This has been going on for years due to the lack of prudential corporate practice in the banks and a lack of supervision by the Bangladesh Bank, he observed.

Zahid Hussain said no one is going to be declared defaulters even if they do not pay the loan installments till December, thanks to the rescheduling facility and the coronavirus situation.

“The condition of many businesses has deteriorated during the pandemic. Therefore, the number of unintentional defaulters will increase alongside willful defaulters.

“The actual information of the defaulted loans is not available now due the moratorium period. But when the moratorium expires, the accumulated size of the defaulted debts will be much larger.”

Dr Salehuddin Ahmed, former governor of the Bangladesh Bank, said, “Over the years, banks had a tendency to improve their performance. But, this is no longer the case.

“There is a lack of good governance in the banking sector, bad loans are also increasing. Political and bureaucratic influences and a lack of monitoring and supervision by the central bank are responsible for this.”

Asked about concealing defaulted loans, he said most banks send fabricated information of defaulted loans to the Bangladesh Bank.

It is not right for the central bank to rely entirely on banks for information on defaulted loans, he asserted, urging the central bank to verify the information provided by the banks.

Ahsan H Mansur, executive director of the Policy Research Institute, told TBS that the problems the IMF is talking about were already identified and all of those are logical. But necessary reform initiatives have not been taken to resolve these problems, he regretted.

The stability of the financial sector depends on how seriously the government takes initiatives to resolve the existing problems, he observed.

“Defaulted loans are being concealed by rescheduling. According to the IMF, distressed assets and defaulted loans stuck in cases pending with courts are added to rescheduled loans.

Before the Covid-19 outbreak, the volume of distressed loans was 23-25% of the total outstanding loans in the banking sector loans, he said, adding that due to the rescheduling facility and moratoriums, the exact picture of loan defaults is not available now.

Asked about the potential risks posed by real estate and the formation of a task force, Dr Zahid Hussain said, “We have to think more about NBFIs than the real estate sector. Only 3-4 NBFIs are in good shape at present, while the rest are in very bad condition.

He observed that investing more in the real estate sector may be one of the reasons behind this, but it is not the only reason.

“A meaningful task force can be formed to identify and address the problems of NBFIs, whose recommendations will be implemented by the government,” he suggested.

He pointed out that there is no loan product in Bangladesh for the housing market.

Ahsan H Mansur said, “NBFIs are giving loans for a period of 15-20 years taking deposits for 2-3 years’ tenure. There should be 20 to 30-year bonds for the housing sector. This can be done by forming a task force.”

In the United States, one can buy a home or apartment with a 10% down payment and borrow the remaining 90% with a loan with a 20 to 30-year term, he noted, adding, “Because of this facility, one can own a house or flat in that country as soon as one gets a job or starts a business. But those who are lucky in Bangladesh can buy a flat at the final stage of their life.”