Originally posted in The Daily Star on 16 December 2022
Small loan defaulters repay more than large ones
The recovery of loans from small defaulters is higher than those owing large loans, according to the findings of a probe by a parliamentary standing committee.
The parliamentary committee on estimates also found that small defaulters put up with more collateral while securing loans compared to larger borrowers.
The findings highlighted the fact that small borrowers usually have much better repayment records than larger ones.
The parliamentary committee formed a sub-committee on January 3 last year to investigate the financial irregularities in Sonali Bank Ltd, Social Islami Bank Ltd (SIBL), the National Bank of Pakistan, National Finance Ltd, and Premium Leasing & Finance Ltd.
As part of the probe, the Bangladesh Bank studied the default loan situation of the banks and non-banks for the period between December 2020 and April 2022.
During the assessment, the loan amount below Tk 10 crore was considered small and those above Tk 10 crore were considered large defaulted loans. The committee came up with the findings recently.
In the case of Sonali Bank, the probe found, the number of large defaulters was 273 in December 2020 and they were holding Tk 11,532 crore. Their number went up to 308 and the amount surged to Tk 13,047 crore in December 2021.
In April 2022, the number of large defaulters reached 309 and the amount involved stood at Tk 12,865 crore.
The ratio of defaulters who borrowed more than Tk 10 crore was minimal, at 0.08 per cent. But they accounted for 67 per cent of the classified loans, meaning the defaulted loan was highly concentrated to a handful of defaulters.
Of the bad loans, 33 per cent belonged to small borrowers.
The probe found that the recovery rate of default loans at Sonali Bank was 7.59 per cent in the cases of small borrowers, versus 1 per cent in the case of large borrowers.
The situation of defaulted loans in Sonali Bank is very alarming although collateral and the recovery rates looked to be good apparently, according to the parliamentary standing committee.
“The recovery rate of defaulted loans was less than 1 per cent for Sonali Bank, which is not satisfactory at all,” said the BB assessment.
The collateral against the large loans was scanty at 63 per cent and this indicated that due diligence was not followed properly in the disbursement of the funds, according to the probe report.
The rate of collateral against small defaulted loans was 150 per cent.
Md Afzal Karim, managing director of Sonali Bank, said the rate of classified loans has declined to 8 per cent currently from 17 per cent in June this year because of the special drives against the defaulters.
“We are taking every measure to recover loans from the defaulters,” he told The Daily Star.
The bank is also filing cases regularly against the defaulters so that they pay back the loans. But sometimes, legal complexities may delay the recovery, he said.
SIBL TOO IN A DIFFICULT SITUATION
In the case of SIBL, the ratio of large borrowers among the defaulters was less than 5 per cent but they held 70 per cent of the classified loans. The rest 30 per cent belonged to small defaulters.
At the private commercial lender, 97 per cent of small loans were backed by collateral.
The probe showed that the number of defaulted borrowers came down to some extent during the probe period: their number was 672 in 2020 and 648 in 2021. It was 633 in April this year.
However, the amount of defaulted loans did not fall during the period. Rather, it rose from Tk 1,547 crore to Tk 1,627 crore.
The recovery of defaulted loans increased to 40.80 per cent in 2021 from 36.70 per cent in 2020.
About 97 per cent of collaterals were deposited against the defaulted loans, almost close to the total amount of the credits that went sour.
The number of large defaulted borrowers at SIBL was 31 and 27 in December 2020 and April 2022 respectively. And the amount of large defaulted loans was Tk 1,142 crore in December 2020 and Tk 1,044 crore in April 2022.
“The rate of recovery of bad loans with the private commercial bank is not satisfactory at all,” the BB assessment said, adding that Tk 0.27 crore was recovered in 2020 and Tk 5.58 crore was recouped in 2021.
The amount of collateral against the large bad loans was 77 per cent, which was poor, the BB said.
“This means the bank is unlikely to recover large defaulted loans by selling the collaterals. The large defaulted loans are a major concern for the bank.”
Zafar Alam, managing director of SIBL, claimed that the situation of defaulted loans improved a lot as the bank conducted special drives.
Waseqa Ayesha Khan, the convener of the sub-committee of the parliamentary standing committee, told The Daily Star that the committee was preparing recommendations after assessing the default loan situation at the four to five banks.
“We will send the recommendations to the Bangladesh Bank and the financial institutions division of the finance ministry soon,” the ruling party lawmaker said.
“The recommendations will mainly be related to how to improve the situation, not against any particular bank.”
The two other members of the committee are Jatiya Party Lawmaker Ahsan Adelur Rahman and Awami League Lawmaker Khadizatul Anwar.
WHAT EXPERTS SAY
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said: “There should be an exit policy as every businessperson or business will not be successful. At the same time, defaulted loans should not be spared.”
“Willful defaulters should be brought to book and measures should be taken to recover them.”
In the case of unintentional bad loans, the government should offer a certain period of time to recover them, said the former economist of the International Monetary Fund.
Fahmida Khatun, executive director of the Centre for Policy Dialogue, emphasised following good governance guidelines and due diligence to get back loans.
She thinks that collaterals are not enough to stop the classification of loans and underscores the need for assessing the trade records of borrowers so that banks don’t face any trouble in getting back funds.
“In some cases, the authorities show flexibility to defaulters because of their political links. This needs to be reviewed to speed up the recovery.”
Furthermore, the economist said, cases should be settled quickly to speed up the recovery.