The alarming rise in defaulted loans within the banking sector is a pressing concern that demands immediate attention.
An English newspaper on Wednesday reported that with the figure set to double as the Bangladesh Bank (BB) prepares to tighten loan classification rules by March next year, the implications for the economy are profound.
As of September, defaulted loans reached a staggering Tk 2,84,977 crore, a record high exacerbated by irregularities in lending to businesses affiliated with the Awami League.
The recent political upheaval following the ousting of the Sheikh Hasina-led government has only intensified the crisis, with bad loans soaring by 34.8 percent in just three months.
The BB’s decision to revise its loan classification guidelines is a necessary step towards aligning with international best practices.
Currently, loans are classified as overdue only after six months of non-payment; the new rules will reduce this period to three months.
While this change is crucial for improving accountability and transparency in the banking sector, it also raises the spectre of a significant increase in reported defaults. Industry insiders predict that if these rules are implemented, the total of defaulted loans could surpass Tk 3,00,000 crore by December.
This situation is particularly concerning given that Bangladesh already has the highest ratio of defaulted loans in South Asia, with nearly 17 per cent of total disbursed loans classified as bad.
The tightening of classification rules is likely to expose the extent of the problem, particularly among businesses that have previously benefited from lax lending practices.
The BB’s gradual deviation from international loan classification standards since 2015 has contributed to the current crisis. It is imperative that the central bank not only implements these new guidelines but also ensures robust oversight to prevent future irregularities.
The World Bank’s involvement in supporting banking sector reforms is a positive development, but it must be coupled with a commitment from local authorities to uphold financial integrity.
It is no doubt that the impending rise in defaulted loans poses a significant threat to economic stability. It is essential for the government and the BB to act decisively, ensuring that the banking system is fortified against future shocks while restoring public confidence in financial institutions.
We welcome the BB’s decision to revise its loan classification guidelines and must say the time for reform is now. Failure to act could lead Bangladesh into a deeper economic crisis.
