Individual Assignment

on

Default loans now Tk80,000 crore

Financial Markets and Institutions(F403)

Submitted To:
Syeda Mahrufa Bashar
Assistant Professor
Institute of Business Administration
University of Dhaka

Submitted By:
Tasviha Taher Trishila
Roll: RH-117
Batch: BBA 23

Date of Submission:

12th February, 2018

Introduction
Building a sound financial system is an immense necessity for the economic development of a
country. The main task of the financial system is to mobilize funds from the surplus budget unit
to deficit budget unit. Financial system provides a strong mechanism for collection and
allocation of financial resources among the various alternatives. However, in a developing
country like Bangladesh it is very hard to reach to a sound financial system due to the lack of
requisite institutions, expertise and resources. (Assignment Point)

Function
One of the most important functions performed by financial System and the financial markets is
the credit function i.e. furnish credit to finance consumption and investment spending. However,
lack of proper guidelines as well as failure to comply with the existing guidelines result in
failure of succeeding in proper implementation of this function, the most glaring example of
which are default loans.

Article Discussion
In light of this, the article in The Dhaka Tribune titled "Default loans now Tk80,000 crore" by
Golam Mowla, published on November 22, 2017 can be put forward as a vivid example.

The article starts off with the by-line : "Unsurprisingly, six state-owned banks have the highest
amount of default loans". This grim situation came to be, as the state-owned banks have lent
large amount of loans to influential borrowers, who are irregular with their repayments. The
default loans are rarely penalized. Instead, loans are routinely restructured to permit further
lending to the same borrowers. Over the last four years the government dished out Tk 96.39
billion to the state-owned banks. In the current fiscal year (2017-18), Tk 20.0 billion has been set
aside for the purpose, which most observers consider too burdensome, even unaffordable for the
country at a time when development expenditure demands the utmost priority. (The Financial
Express, 2017).

The article goes on to discusses the rising debt in the country due to increased bad loans, which
stood 23% higher in September 2017 than a year ago. The figure for bad loans has drastically
risen by 10.67% to Tk80,307 crore as of September 2017, whereas just a year back the figure
was Tk65,731 crore. While the current governor of Bangladesh Bank tries to soothe ruffled
feathers by saying that proper measures are being implemented, while the former governor seems
to think bad corporate governance is the reason behind the worsening situation. Economists are
further worried by the fact that a lot of loans written off, are in fact default loans which are
deemed to have low or no chance of recovery. have faulty The ones connected to the sector
commented that the increase in bad loans may be due to the fact that loans are sometimes
approved on political consideration and also because directors' sometimes take loans from each
other's institutes. The lack of proper disbursement and provision mechanisms is the main reason
behind this shortage. The rise in bad loans has lead to banks facing capital shortages, as Sonali,
Janata, Agrani, Rupali, Basic and BDBL Banks' total debt stood at Tk38,517 crore. 23.79%
loans disbursed by specialized Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank have
turned into default loans causing the debt to further deepen. Despite instructions by Bangladesh
Banks for commercial banks to increase supervision, there seems to be an upward trend in the
occurrence of bad loans.

The other articles linked to this one, offer some more insight into the matter. "Bankers
responsible for defaulted loans" discusses hoe bankers try to portray their clients as defaulters in
order to escape culpability for their own failures. In " Bad loans cripple the banking sector"
Bangladesh's loan default scenario is discussed in detail, along with the reasons, impacts and
possible solutions. The article " No sign of relief from default loans" talks about the role of
political powers in the rise of default loans, and the lack of punishment for the defaulters which
is encouraging the others to follow in their footsteps and causing frustration for honest borrowers
who have to suffer from higher interest rates. In contrast, the rate for bad loans was 5.97% for
local private banks and 7.89% for foreign banks.

The key takeaways from the article are thus as follows:

 Significant rise in total debt(23%) as of year ended September 2017 .

 Significant rise in bad loans(10.67%) as of year ended September 2017.
 Six state-owned banks have the highest amount of default loans.
 Political consideration used as a basis to grant loans may be a reason behind rising
bad loans.
 Default loans are written off to help improve the bad loan situation.
 Rising bad loans has resulted in capital shortages for the banks. The provisions for
bad loans currently made by the banks is inadequate.
 References

Assignment Point. (n.d.). Retrieved February 11, 2018, from Department of Financial Institutions and
Markets Bangladesh Bank: http://www.assignmentpoint.com/business/banking/department-of-
financial-institutions-and-markets-bangladesh-bank.html

The Dhaka Tribune. (2017, October 6). Bad loans cripple the banking sector. Retrieved February 11,
2018, from The Dhaka Tribune: http://www.dhakatribune.com/business/banks/2017/10/06/defaulted-
loans-amount-12-gdp/

The Dhaka Tribune. (2017, August 27). Bankers responsible for defaulted loans. Retrieved February 11,
2018, from The Dhaka Tribune: http://www.dhakatribune.com/business/banks/2017/08/27/bankers-
responsible-defaulted-loans/

The Dhaka Tribune. (2017, November 22). Default loans now Tk80,000 crore. Retrieved February 11,
2018, from The Dhaka Tribune: http://www.dhakatribune.com/business/banks/2017/11/22/default-
loans-now-tk80000-crore/

The Dhaka Tribune. (2017, July 15). No sign of relief from default loans. Retrieved February 11, 2018,
from The Dhaka Tribune: http://www.dhakatribune.com/tribune-supplements/business-
tribune/2017/07/15/no-sign-relief-default-loans/

The Financial Express. (2017, September 12). State-run banks and default loans. Retrieved February 11,
2018, from The Financial Express: https://thefinancialexpress.com.bd/views/columns/state-run-banks-
and-default-loans-1505229377
 Appendix

Default loans now Tk80,000 crore

 Golam Mowla
 Published at 12:48 PM November 22, 2017
 Last updated at 11:00 AM November 25, 2017

Bad loan is crippling Bangladesh's banking sectorBigstock

Unsurprisingly, six state-owned banks have the highest amount of default loans
The total bad debt in the Bangladesh banking sector grew by 23% in the 12 months to the end of September as
the country’s financial institutions continue to struggle with default loans.

At the end of September last year, the bad debt stood at Tk65,731 crore but a year later, the figure has swollen to more
than Tk80,307 crore, data released by the Bangladesh Bank on Tuesday showed.
In the last three months alone, the amount has increased by Tk6,159 crore.
Banks in Bangladesh granted loans of Tk7,52,730 crore until September 30 this year. Of this amount, Tk80,307 crore
or 10.67% are bad loans, the data showed.
Until June this year, the defaulted loan stood at Tk74,148 crore – or 10.13% of the disbursed amount.

Also Read- Bad loans cripple the banking sector

Bangladesh Bank Deputy Governor SK Sur Chowdhury said the central bank had taken measures to rein in bad loans.
“We have strengthened monitoring on other banks and have directed them to make sure there are no new default loans,” he
said.
Former Bangladesh Bank governor Salehuddin Ahmed blamed the “absence of good governance” in the banking sector for
the rise in bad debts.
“The continuous increase in bad loans is worrying, not only for the banking sector but also for the whole economy,” he
said.
“The banks have to keep provisions against default loans. The banks’ capitals face deficit. The capabilities of the banks go
down with an increase in default loans.”
The central bank issues a report on bad debts every three months. But apart from that, there are default loans in the
banking sector that the banks write off, bringing down bad loans to some extent.

Also Read- Bankers responsible for defaulted loans

Economists, however, say the written off loans are also defaulted loans. Banks exclude some of the loans they had
disbursed from the balance sheets if there is little or no chance of recovering them.
People involved in the sector say bad debts have increased as loans are sometimes approved on political consideration
while directors of the banks take loans from each other’s institutions.
Defaulted loans stood at Tk22.644 crore at the end of 2011, which was 6.12% of the total disbursed loan until then.
Central bank data show that six state-owned banks have the highest amount of default loans.
By the end of September, the total bad debt of Sonali, Janata, Agrani, Rupali, Basic and BDBL stood at Tk38,517 crore.
These banks had disbursed loans of Tk131,689 crore and are now facing capital shortages with the rise in bad loans.
Agrani Bank Chairman Zaid Bakht said the banks were trying to bring down default loans ahead of December. He noted
that his bank’s bad debts had come down and would decrease further.

Also Read- No sign of relief from default loans

The Bangladesh Bank report shows that 23.79% loans disbursed by specialised Bangladesh Krishi Bank and Rajshahi
Krishi Unnayan Bank have turned into default loans.
Until the end of September, these banks disbursed Tk23,193 crore, of which Tk5,518 crore is bad debt.
The amount of irrecoverable loans is not coming down despite the central bank’s directives to the commercial banks to
increase supervision.
In September, local private banks had default loans of Tk33,973 crore or 5.97% of the total disbursed amount. Bad loans
have increased by Tk2,245 since June.
At the end of September, the total bad debt for foreign banks operating in Bangladesh stood at Tk2,298 crore or 7.89% of
the disbursed Tk29,116 crore.
This article was first published on Bangla Tribune