How to curb “willful defaulters” and eradicate the curse of non-performing loans
My readers must now be sick of hearing about the big defaulters in Bangladesh and the scandals involving Farmer’s Bank (now Padma Bank), BASIC Bank, Sonali / Hallmark, Janata, Prime, and a host of other shady characters, including some major industrialists in the country.
However, the wounds created by Nonperforming Loans (NPLs) are escalating – they not only affect the health of the economy, but also have a crippling effect on legitimate loan seekers. Now is the time for all stakeholders to tackle credit defaulters in a serious way and stop extending a lifeline to them for the umpteenth time and neutralizing the spread of this economic cancer on our bodies.
The Bangladesh Bank (BB) has over time flipped on non-performing loans and recently announced a moratorium on loan repayments until September 30, 2020, implying that these borrowers would not default. . Now that we are in October, it is believed that this moratorium will be extended.
“This is a temporary relief – the negative situation will come back in a very terrible way,” said Ahsan H Mansur, executive director of the Policy Research Institute. As a long-term solution, a number of policy measures are required. First, corporate governance must be strengthened and rigorous due diligence followed in lending decisions by banks. Second, in accordance with the Chapter 11 protocol followed in the United States, the current Bankruptcy Act, 1997 of Bangladesh, a legal framework to deal with NPLs should be applied. Third, there must be a rigorous application of current banking rules and regulations, including the stipulation of guaranteed guarantees to mitigate the risks associated with loans. Finally, the authorities could also consider setting up a national asset management company (AMC) such as KAMCO in the Republic of Korea or Danaharta in Malaysia to take over NPLs from troubled banks.
Study after study conducted around the world with multi-country data shows that the administration of NPLs is a policy gone awry and creates and promotes a situation known as “moral hazard”. In economics, moral hazard occurs when an entity is encouraged to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a business knows that its loans will be canceled or that defaulting will not result in any consequences, it may take a higher risk or decide not to repay the loans if it knows the government or others will pay the costs. associated costs. . In economic parlance, the cost-benefit ratio of compliance (i.e. loan repayment) is greater than the cost-benefit ratio of non-compliance.
All of the business owners and decision-makers I have spoken with on this subject are unanimous about the environment created by “loan forgiveness”. Let us say that the problem of “willful defaulters” is not limited to Bangladesh but is a widespread phenomenon in many countries. Unfortunately, in Bangladesh there is no specific law for legal actions against willful defaulters.
I researched the protocols followed in other countries to characterize or classify the failures. Since India accommodates a high NPL ratio comparable to that of Bangladesh, I have reviewed the approach taken by the Reserve Bank of India (RBI) for reporting “willful defaults”. They are: the ability to pay, misallocation, embezzlement and the sale of collateral.
Interestingly, all four criteria apply to defaulters in Bangladesh. In many other countries, including the United States, some of the above actions of a borrower would be considered “money laundering,” which is a criminal offense. In the case of Bangladesh, borrowers are known to transfer the borrowed money to overseas accounts.
For comparison, in the United States, over the past two decades, the average value of non-performing loans as a percentage of all bank loans was 2.56 percent with a low of 0.91 percent in 2018 and a maximum of 4.96 percent in 2009. The latest value from 2018 is 0.91 percent. In Bangladesh, on the other hand, from 2011 to 2019, the volume of non-performing loans increased steadily and, according to the latest estimate, classified loans had crossed the trillion mark in March 2019 and hovered around 10%. .
We have recently seen some positive developments. As of December 2019, loans disbursed by banks amounted to more than Tk 10.11 trillion, and the default loan amount was Tk 943.31 billion, or 9.32% of total credit, compared to Tk 10.11. , 30 compared to the previous year. However, the 41 private banks together had loans in default amounting to Tk 44,174 crore, up 16% from the previous year.
The World Bank monitors governance at the country level using scales of corruption, quality of regulators, government effectiveness and rule of law. Recently collected data on non-performing loans (NPLs) in more than 190 countries over a 27-year period clearly supports the proposition that increasing deliberate defaults are significantly affected by poor governance at the country level.
Willful defaulters are a unique breed that borrows and forgets to return the article. Economists are increasingly focusing on defaulters to identify their characteristics using sophisticated tools, including econometric modeling and publicly available data. Studies in the United States, Italy and India reveal that this willful default is the deliberate exploitation by a borrower of the weak governance structure that prevails in the country.
Given the generous political support given to defaulting borrowers in the past, many good borrowers are tempted to default, said Khondkar Ibrahim Khaled, former deputy governor of the central bank. He urged the BB to crack down hard on the usual defaulters, and added: “If these companies are allowed to have a rescheduling facility again, it will be ‘illegal’.”
In an innovative study in Italy, researchers analyzed the empirical frequency with which borrowers delay repayments to their lenders. It reveals that companies choose to delay payment to certain banks based on the health of the latter. This selective delay occurs more when legal enforcement of collateral collection is slow. “Poor application encourages borrowers not to pay when the value of their banking relationship is in doubt. Selective delays occur even by companies capable of paying all lenders. Credit losses in Italy were therefore compounded by the combination of weak banks and weak law enforcement. “
Japan faced a very similar situation to that of Bangladesh, and a survey of the widespread practice of banks lending to otherwise insolvent firms documents the prevalence of “forbearance and shows its distorting effects on healthy firms. which were in competition with companies in difficulty ”.
The impact of the culture of default, rescheduling and forbearance is crippling for economic growth and sound practices. According to an earlier World Bank study, bribes collected by bank officials for project loans were sometimes linked to project officials at the local level. In the case of commercial loans, bankers not only received bribes amounting to “1.0% to 5.0%” of the loan amount, but also occasionally received gifts, hospitality. or customer entertainment, which is still quite common in state-controlled banks. The working capital loans involved a payment of 1.0 percent to 5.0 percent of the credit to bank managers, employees and union leaders. A study by Transparency International in Bangladesh indicates that 73.5% of households surveyed agreed that it was almost impossible to get credit from banks without a bribe or influence.
What are the options for Bangladesh? You don’t have to look too far, but consider the recommendations made by a six-member committee formed in early 2019 including the Ministry of Finance and BB, which include the formation of an AMC in the private sector, the creation of a secondary market. for NPLs, the establishment of a separate data warehouse for NPLs as part of BB’s existing Credit Information Bureau facilities, and a tax repayment facility for merchants of outstanding loans that remain outstanding. ‘study.
Dr Abdullah Shibli is an economist and currently works in information technology. He is also a senior researcher at the International Institute for Sustainable Development (ISDI), a think tank in Boston, United States.