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Expert says Large defaulted loans have distressed domestic economy

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Bangladesh Bank (BB) has meticulously compiled and released a comprehensive dataset of various categories of defaulted loans, aligning with the guidelines set by the International Monetary Fund (IMF). Esteemed economists have lauded this move, asserting that the report presents an authentic snapshot of the nation’s ailing domestic economy. The report not only offers transparency about the banking sector’s genuine state but also equips investors and depositors with essential insights for their future decisions.

The BB’s Financial Stability Report for the year 2022, unveiled recently, discloses that the banking sector grappled with a total of Tk 3.78 lakh crore in risky loans throughout the preceding year. This sum is calculated by combining non-performing loans (NPLs), outstanding rescheduled loans, and outstanding restructured written-off loans.

As of the close of 2022, the banking sector’s NPLs reached Tk 120,649 crore, outstanding rescheduled loans amounted to Tk 212,780 crore, and outstanding written-off loans accounted for Tk 44,493 crore. These loans, as defined by the International Monetary Fund, are categorized as non-performing loans. The publication of this report was necessitated by the IMF’s requirement, as it forms a condition for the approval of Bangladesh’s $4.7 billion loan.

To gain the IMF’s approval for the loan, Bangladesh must reduce its non-performing loans to a level of 10 percent. The IMF’s preference encompasses the rescheduling of loans and treating court-suspended loans as defaulted.

Professor Mustafizur Rahman, a Distinguished Fellow of the Centre for Policy Dialogue (CPD), emphasized the significant burden the substantial volume of non-performing loans exerts on the domestic economy. He emphasized that a substantial amount of money is immobilized in unproductive sectors, creating substantial strain. He noted that if banks received timely repayment of loan funds, they could invest more extensively in new entrepreneurs and small to medium-sized industries, which are currently grappling for funds.

Ahsan H. Mansoor, the Executive Director of the Policy Research Institute (PRI) and a former economist at the IMF, affirmed that rescheduled loans should indeed be considered defaulted loans, in accordance with the IMF’s stance. Should these rescheduled loans be treated as defaults, the default rate within the banking sector would elevate to 25 percent, a figure starkly contrasting the IMF’s recommended 10 percent threshold.

The report indicates that the rescheduled loans for 2022 amounted to Tk 63,719 crore, a sharp rise from Tk 26,810 crore in 2021 and Tk 19,810 crore in 2020. The bulk of rescheduled loans for the year 2022, around 71 percent, were attributed to private sector banks, with public sector banks contributing 24 percent.

Moreover, the BB’s report revealed that Tk 65,321 crore of debt had been written off from the financial report for 2022, surpassing the Tk 60,498 crore written off in 2021. Adding to the complexity, approximately Tk 1.0 lakh crore remains entangled in pending court cases, further exacerbating the prevailing economic challenges.

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Banks in Industrial Areas to Open June 14-16 for Eid Payments

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To ensure timely payment of salaries and bonuses to garment industry workers before Eid-ul-Azha, the branches of banks in key industrial areas will remain open on a limited basis on June 14, 15, and 16.

The Bangladesh Bank (BB) issued a notification stating that bank branches in Dhaka metropolitan, Ashulia, Tongi, Gazipur, Savar, Bhaluka, and Narayanganj will operate on these days to facilitate financial transactions for garment sector employees.

Typically, Friday and Saturday (June 14 and 15) are weekly holidays, and Sunday (June 16) will be closed for Eid. Despite these closures, the BB has mandated that banks in industrial regions stay open to manage the disbursement of wages and bonuses and facilitate the sale of export bills.

Additionally, bank branches in Chattogram metropolitan and industrial areas will also be open to support garment workers’ payments and the processing of export bills.

The BB has instructed banks to coordinate with local authorities to ensure adequate security at the branches during this period.

Eid-ul-Azha, one of the most significant religious festivals for Muslims, will be celebrated in Bangladesh on June 17.

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Cenbank Mandates Real-Time Reporting of Willful Defaulters

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The Bangladesh Bank (BB) has issued new instructions to banks to submit data on willful defaulters to the Credit Information Bureau (CIB) database. This directive was issued on Tuesday, requiring immediate compliance from commercial banks and non-banking financial institutions (NBFIs).

In a circular released by the CIB of the central bank, banks have been instructed to report their June data in real-time starting July 1. The circular has been sent to top executives of banks for prompt execution.

This move follows an earlier initiative by the BB, outlined in a circular on March 12, aimed at identifying willful defaulters within the banking sector. The central bank also detailed actions to be taken against such defaulters.

According to the circular, any client who takes a loan anonymously and misuses it will be classified as a willful defaulter. Banks were directed to establish a ‘willful defaulter identification unit’ by April 9 to facilitate this identification process.

The circular further stipulates penalties for non-compliance. Banks that violate these conditions will face fines ranging from Tk 50 lakhs to Tk 1 crore. Continued violations will incur additional fines of Tk 1 lakh per day.

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Cenbank Raises Dollar Price to Tk 117

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The Bangladesh Bank has adjusted the dollar price to Tk117 from Tk110 by introducing the crawling peg exchange rate mechanism.

Under this new approach, the bank will buy and sell dollars with Tk117 as the mid rate.

This decision was reached during a meeting of the monetary policy committee on Wednesday, May 8th.

Additionally, the committee has opted to discontinue the SMART lending rate mechanism, allowing banks to set their lending rates based on dollar demand and supply, according to a circular issued after the meeting.

The crawling peg system permits a currency with a fixed exchange rate to fluctuate within a specified band of rates, combining features of both fixed and floating exchange rate regimes.

On May 5th, Bangladesh Bank Governor Abdur Rouf Talukder announced the adoption of a market-based interest rate and the implementation of a crawling peg system to stabilize the foreign exchange rate.

He stated that the central bank is collaborating with prominent economists and bankers to devise a contractionary monetary policy aimed at curbing inflation and restoring macroeconomic stability.

Earlier, on April 2nd, the World Bank stressed the importance of a crawling peg mechanism aligned with market-clearing exchange rates to narrow the gap between formal and informal exchange rates, as outlined in the latest Bangladesh Development Update report.

Meanwhile, the International Monetary Fund (IMF) has advocated for a market-based dollar rate. In January 2023, the IMF attached several conditions to a $4.7 billion loan facility over a three-and-a-half-year period. Bangladesh has received two installments of the loan by fulfilling nearly all conditions, except for the reserve requirement.

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