Distressed loans equal to cost of 22.5 Padma bridges

Distressed assets in the banking sector have reached a whooping Tk 6,75,030 crore, an amount bigger than the cost of building 22 bridges across the Padma or 13.5 metro rail systems in Dhaka, according to a White Paper released yesterday.

The amount is the sum total of non-performing loans (NPLs), rescheduled and restructured loans, and outstanding written-off loans. These account for 31.7 percent of the total bank loans as of June 2024.

Attributing the crisis to systemic regulatory failures, the report said a fragmented regulatory system enabled widespread malpractice, leaving banks under-provisioned and ill-prepared to withstand the current financial stress.

“It’s not the economy, stupid. Bangladesh’s financial sector distress did not emerge from economic disruptions or financial crises or even political instability. Economic factors such as trade, remittances, investments, inflation, commodity prices, exchange rates, and interest rates cannot explain the sustained drain in balance sheets and trust in market makers and regulators,” reads the White Paper.

The details reveal Tk 2,11,391 crore in recognised NPLs, Tk 2,72,856 crore in rescheduled and restructured loans, Tk 75,389 crore in written-off loans, Tk 39,209 crore in special mention accounts, and Tk 76,185 crore in loans pending under court orders.

“The distress is even larger when the bad loans of the non-bank financial institutions (NBFIs) are accounted for,” it says.

The White Paper states that the culprits within the banking system are all influential heavyweights and the concentration of non-performing loans (NPLs) closely aligns with the concentration of overall loans, revealing a deeper, systemic issue.

“The culprits within the banking system are all heavy weights. The big ones coincide with the bad ones. NPL concentration mirrors loan concentration and more.”

An organised network of business conglomerates, bureaucrats and politicians coalesced explicitly and implicitly to use the financial system to mine public money by capturing corporate and regulatory governance, it adds.

“Laws and regulations were tailored and retrofitted to serve the interests of this troika in the spot and forward markets for local and foreign currencies. De jure accountability systems were de facto deposited in a deep fridge. The web of institutions to adjudicate disputes, regulate markets, and allocate resources largely exhausted the trust of the public.”

Dominant business interests have captured regulatory safeguards, leading to operational inefficiencies that have stifled growth and excluded startups and entrepreneurs without tradable collateral from accessing credit, it says.

“Big players siphoned big money. Embezzlement of big chunks of money from different banks by a number of groups through fake companies or without proper documentation became a privilege of large borrowers.”

The regulatory framework, particularly at Bangladesh Bank, has been compromised by collusion between top officials and influential outsiders, especially during the period from 2015 to 2024.

The central bank failed to enforce prudential requirements on state-owned banks, allowing repeated violations without sanctions. Amendments to the Bank Company Act in 2018 and 2023 introduced a distinction between willful and un-wilful defaulters, with the former ambiguously defined as those who “fail to repay despite having the capacity”.

The penalties for willful defaulters, such as travel bans and restrictions on trade licenses, are described as minimal and ineffective. Additionally, board members and their relatives were permitted to borrow against collateral, further undermining governance and accountability, it adds.

The report highlights the Finance Ministry’s politically motivated licensing of private banks, which became a tool for patronage. Ownership was often granted to individuals with political affiliations, sidelining economic considerations and the concerns of external stakeholders.

“The Finance Ministry’s politically motivated overreach in licensing private banks was yet another manifestation of policy and regulatory capture.”

The White Paper stresses the urgency of reforms to prevent new oligarchs from taking over and perpetuating the cycle of exploitation.

Immediate actions under the International Monetary Fund programme and World Bank-supported budget reforms have begun addressing deviations from international norms, but these measures alone are insufficient to dismantle the entrenched culture of impunity, it observes.

Bangladesh Bank has started reconstituting bank boards following the departure of politically connected owners and directors. However, the road ahead remains challenging and demands sustained political will to transform the banking system from one ruled by vested interests to one governed by the rule of law, it recommends.

The report emphasizes the need for a robust corporate governance framework, enhanced regulatory autonomy, and the depoliticisation of bank licensing to ensure decisions are based on economic viability rather than political connections.

Strengthening oversight and increasing the number of independent directors on bank boards are also highlighted as crucial steps toward improving accountability and reducing the influence of sponsors.

It also emphasises the importance of sustained reforms and vigilance to prevent a recurrence of the current crisis and stresses the need for promoting financial inclusion by allocating credit to innovative startups and small enterprises without traditional collateral, thereby fostering growth and addressing the structural weaknesses in the banking sector.

The White Paper terms 10 crisis-hit banks, mostly Shariah-based banks, as technically bankrupt and illiquid.

A banking system can only be protected by its capital and liquidity in a distressed situation.

“We chose 10 distressed banks to dig into their solvency and liquidity. Of the 10 banks, two are state-owned banks that were mostly hit by scams in the last decade. The other eight are extremely weak shariah-based banks and conventional private commercial banks.”

However, the paper does not mention the names of these banks are not disclosed for confidentiality.

“All the 10 banks are termed “distressed” by the regulators, media and public. Combined loans and deposits of these 10 banks constitute 33 percent of the total loans and 32 percent of the total deposit of the banking sector.”

Most of these banks did not disclose the fair value of their assets in their financial reporting.

“Their combined adjusted value of the assets is 52 per cent of the reported value. As a result, net worth is negative. Liquidity measured by the ratio of liquid assets to total tangible assets indicates eight out of 10 are illiquid.”