Loan default is spreading like viruses in developing countries and the vaccine of it must be implemented.
When a country’s economy flourishes and jumps forward by 'frog leap', it unveils thousands of affairs to be researched on especially for economists and sociologists. Economists have braced themselves for China, India, Bangladesh, Brazil, Vietnam, Turkey, Malaysia and couple of other country’s economic boom which enabled those economies to successfully enlist themselves as emerging economies for next generation economic leaders.The recent economic upheaval of Bangladesh led by the country’s dedicated export oriented ready-made garments industry has emerged Bangladesh as South Asia's economic powerhouse despite facing a number of unavoidable hurdles. Loan default is one of those hurdles generated by country’s fragile and corrupted administrative infrastructure with a pretty hopeful economic growth.
A loan default occurs when a borrower fails to make timely installments of his or her loan including interest or principle at the time it is due or stops making payments. It is a common and a dominating phenomena in most of the economies around the globe especially in developing countries and Bangladesh is not out of the list .
Bangladesh was on the top of the list of loan default in South Asia according to World Bank's 2019 report. At that time the country’s defaulted loan ratio was 9.3 per cent of total outstanding loans which came down to 7.7 per cent in 2020 according to the country’s central bank, Bangladesh Bank(BB). Worst nightmares for Bangladesh's financial sector are waiting at our backyard even though default rate abated since loan moratorium facility provided by Bangladesh Bank which has expired in the meantime. This facility was one of the effective strategy of central bank to defend the financial sector from the devastating consequences of COVID-19 pandemic. Now when Bangladesh's economy is recovering fast, BB doesn’t feel the need to extend the deadline of loan moratorium.
On February 05 this year The Business Standard reported a statistics released by Bangladesh Bank showing that default loan increased at 4 banks in spite of central bank's facilities to tackle down defaults in 2020. As of June 2020 the whole amount of defaulted loan was 96,117 crore Bangladeshi Taka as central bank's data shows. In 2017, defaulted loan was 12% of the country’s GDP.
Loan default can paralyse the economic backbone of a country like Bangladesh because 12 per cent of GDP is quite a bulky number. Defaulted loans affects banks efficiency since default dries liquidity of banks. And liquidity crisis of a particular bank or several banks makes them inefficient in competitive banking market as their ability on loan advancement shrinks at an alarming rate.
When most of the banks are walking like sick man in loan advancement, it will have phenomenal impact on local entrepreneurship. In this regard a Bangladeshi-American professor of economics at Utah Valley University, Dr.Abdus Samad wrote in his recently published paper on IJEFI, " Central banks’ inefficiency increases the cost of intermediation and harms the allocation of funds and the profitability of banks leading to bank failure. The increased efficiency in banks’ deposit mobilization and loan advancement are key to successful entrepreneurs for enhancing the economic growth of a country."
Professor Samad's writing isn’t a rocket science. Efficient banks ensure soft conditions for loans to entrepreneurs and their start-up’s create more jobs, keeps the job market healthy, increases productivity as well as GDP growth. Unversedly, a country's GDP growth is the prime victim in the end.
Loan default flings banks and common people into long term dilemma due to its instant result, liquidity crisis. A wall of incredulity builds up against depositors and the borrowers fear to put their foot on bank doorsteps for hard conditions on loans. Dr. Samad further adds," In a competitive market environment, bank depositors and borrowers are certainly interested to know the efficiency status of individual banks before they deposit their hard-earned savings. The borrowers of bank move to the banks which are more efficient in advancing loans."
Conventionally a felonious objective works inside a large number politically backed loan defaulters in Bangladesh which enables them to borrow money from banks and get away with them. Recent case of Mohammad Morshed, a factory owner from Chattogram has defaulted and fled from Bangladeshi jurisdiction with nearly 3 billion BDT loans from different banks but those particular banks were as well as are unable to take action due to his strong influence in a renowned industrial group. There are tons of cases like this, some are way bigger than we can think of. In Bangladesh, defaulters have declared war against our financial sector and administration.
Banks are the artery of an economy and money is the blood while the heart is financial sector. Then loan default at an enormous level should be considered as stroke or heart failure which causes death of an whole body, an economy.
The Bangladesh Bank have successfully failed a highly effective vaccine that would stop this loan defaulting virus of Bangladesh. This is why central bank should be more vigilant to play its best role in preventing loan default trend while financial intelligence agencies must be more proactive and effective to take steps against defaulters in due season as well in Bangladesh. Saving the present and solving the past would lay the foundation of our shiny future.
The author MD. Mahmud Hasan is a student at Department Of Criminology, University Of Dhaka.
He can be reached at mahmud101810@gmail.com