Bank-Insurance
Expert says Large defaulted loans have distressed domestic economy
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.
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.
On Sunday (May 5), the Bangladesh Bank (BB) once again dissolved the board of directors of the National Bank.
In a letter addressed to the managing director of the National Bank, the central bank announced the cancellation of the existing board of directors.
Furthermore, the banking regulator established a new board of directors and appointed Khalilur Rahman, the bank’s sponsor director, as the new chairman, according to the BB’s communication.
Mezbaul Haque, spokesperson for the Bangladesh Bank, commented on the development, stating that the action was taken to bolster the bank’s board of directors.
This move comes after a similar action in 2023 when the central bank ordered the dissolution of the National Bank’s board and formed a new one.
Prime Bank PLC has recently received Bancassurance Business commencement approval from Bangladesh Bank.
Mohammad Shahriar Siddiqui, director, BRPD, Bangladesh Bank handed over the approval letter to Nazeem A Choudhury, deputy managing director – consumer banking of Prime Bank PLC, at a ceremony held at Bangladesh Bank recently.
Mohammad Ashfaqur Rahman, additional director, BRPD, Bangladesh Bank, Ashraful Alam, joint director, BRPD, Bangladesh Bank, Miah Mohammad Rabiul Hasan, chief bancassurance officer, Prime Bank PLC were also present at the ceremony.
Bancassurance is a partnership between a bank and insurance company that will allow a Bank to sell insurance products of the insurance company through its distribution channels.
To offer a wide range of products to its customers and ensure best in class service, Prime Bank has partnered with leading insurance companies National Life Insurance Company Ltd. and Reliance Insurance Ltd.
Being one of the leading banks of the country, Prime Bank hopes to cater to the needs of insurance requirements of its customers through Bancassurance, in Bangladesh market.
