Banks swept under the rug Tk 12,140 crore in defaulted loans in the nine months to September last year by rescheduling and writing those off.
Had such instruments not been used, the banking industry’s defaulted loans would have shown up to be much higher.
Non-performing loans (NPLs) stood at Tk 88,734 crore as of December, down 5.93 per cent year-on-year, showed data from Bangladesh Bank.
The central bank unveiled a moratorium facility for 2020 to insulate borrowers from the economic hardship caused by the coronavirus pandemic, in a move that reined in the escalation of defaulted loans and brought them down.
The central bank is yet to prepare the statement of rescheduled and written-off loans for the last quarter of 2020.
Some banks were also forced to classify a large amount of delinquent loans between January and September as per instructions of the central bank.
The central bank asked lenders to classify the loans after carrying out routine and special inspections, pushing the defaulted loans up, said some central bank officials.
Some banks hid defaulted loans by showing them as unclassified in violation of banking norms.
Banks have classified some loans as defaulted assets on their own as the recovery has been feeble for years, said three managing directors, wishing not to be named given the sensitivity of the matter.
This indicates that the asset quality of banks weakened in a true sense last year despite the moratorium, they said.
The amount of rescheduled loans stood at Tk 9,063 crore in the nine months to September, down 68 per cent year-on-year.
The figure of written-off loans surged 140 per cent year-on-year to Tk 3,077 crore during the same period.
Writing off allows banks to clean their balance sheet of toxic assets. Lenders have to keep 100 per cent provisioning against the delinquent loans.
As there is no realistic prospect of recovering them, these loans are shifted to off-balance sheet records. A majority of loans are held by the habitual defaulters.
Writing off loans has become a better tool than rescheduling as some defaulters frequently regularise NPLs by taking advantage of the relaxed facility, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
“Defaulted loans may escalate this year after the central bank lifted the loan moratorium. This will fuel both rescheduled and written-off loans,” he said.
The banking industry has been struggling to rein in the defaulted loans for a couple of years because of poor corporate governance.
Defaulted loans surged to Tk 116,288 crore in September 2019, prompting the central bank to come up with the relaxed rescheduling policy as per government instruction.
Under the policy, defaulters can reschedule classified loans by making a down payment of 2 per cent instead of the existing 10 per cent to 50 per cent.
A maximum 9 per cent interest rate was charged on the rescheduled loans in 2019 instead of 12 per cent to 16 per cent, the rate banks levied at the time.
Besides, the repayment tenure was set at 10 years with a one-year grace period.
As a result, a record Tk 50,186 crore of defaulted loans were rescheduled in 2019, halting the rise of the toxic assets for the time being.
The moratorium has also curbed the upward trend of defaulted loans.
Both the relaxed rescheduling facility and the loan moratorium will create tremendous pressure for the banking industry in the days ahead as they will find it difficult to keep assets of a strong quality.
Ensuring corporate governance will highly be important in tackling the pressure stemming from defaulted loans, according to analysts.
Salehuddin Ahmed, a former governor of the central bank, said habitual defaulters should be barred from rescheduling delinquent loans.
“Wilful defaulters frequently misuse the facility to take fresh loans,” he said.