Editorial
Only a whiff of perfume?
Decline in bank loan default
It is one of those positive bits of trends that hearten us not so much because they are substantive as for the fact that they are rare and had to be achieved the hard way. At long last, we hear the news of bank loan default rate decreasing -- during January to September 2005. It stood at 16.34 percent of the banks' total outstanding loans representing a slender decline by 1.29 percentage points over the benchmark. The downward trend in bad loans as proportion of total outstanding loans is welcome news in spite of its small size. But the issue is the partial nature of success, laurels the banking system cannot rest its oars on. The success is limited to only private commercial banks (PCBs) and Development Financial Institutions (DFIs) like Bangladesh Shilpa Bank and Shilpa Rin Sangstha. In the nationalised commercial banks (NCBs) and foreign commercial banks (FCBs) classified defaulted loans increased during the nine-month period in question. This mixed bag situation is reflective of contradictions on two levels: within the banking system on the one hand, and between the banks and the Bangladesh Bank on the other. Speaking of private sector banks, local private banks have accounted for a downswing in the default rate whereas foreign banks in the same sector present a different picture. It is somewhat baffling, but certainly explicable that classified loans in the NCBs show no signs of diminishing. Bangladesh Bank must be credited with a degree of watchdog success in having the local private banks contain the high default rate, practically by insisting on high provisioning against loans; but it is hard to explain why the NCBs which are more directly regulated by the central bank should have failed to reduce default! There is an explanation though, and that's where the crux of the problem lies: NCBs have floundered on the rock of the state-owned enterprises' huge accumulated defaults. Charity must begin at home. The public sector will have to set the example in financial discipline first before there can be any broader band change across the whole economy.
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