THE Bangladesh Bank coming to ask non-bank financial institutions to identify wilful loan defaulters and take action against them is welcome. The central bank has also asked the institutions to form units by April 30 to identify wilful loan defaulters. The list will later be sent to different government agencies to impose restrictions on services to the defaulters. The central bank on March 12 asked all banks to identify wilful loan defaulters. According to a circular that the central bank issued on April 3, the institutions must identify wilful defaulters as per definition and once a customer defaults on loan, the institution must identify whether the client was a wilful loan defaulter in 30 days. The initiative, if properly implemented, can help the institutions to regain people鈥檚 confidence and salvage themselves from the sorry state they have fallen into. A proper identification of wilful loan defaulters and appropriate measures against them can help to maintain the overall loan portfolio quality, including reducing classified loans, and enhance financial discipline and efficiency. This will, as the central bank says, also have a positive impact on capital, income, profit, liquidity and stability, making overall economic activities more dynamic.
The institutions have for long been crippled by a huge amount of defaulted loans, poor governance and widespread irregularities. Defaulted loans with NBFIs increased, as the Bangladesh Bank says, to Tk 19,951 crore by June 2023. With the total outstanding loan amount for NBFIs in June 2023 having been Tk 72,150 crore, an alarming 27.65 per cent of the total outstanding loans was found defaulted. The situation is bleaker than it is with the banks, where defaulted loans stand at about 10 per cent. As a Bangladesh Bank report says, many of the 35 non-bank financial institutions are in a crisis, with some having more than 90 per cent of the outstanding loans defaulted. Among them, People鈥檚 Leasing and Financial Services is burdened with 99.62 per cent defaulted loans, followed by Bangladesh Finance and Investment Company with 96.90 per cent, Fareast Finance with 94.25 per cent, International Leasing and Finance with 90.93 per cent and First Finance with 89.63 per cent. With such levels of defaulted loans, these institutions are suffering from a liquidity crisis and a consumer trust deficit. Resultantly, the institutions now suffer from a deposit contraction although they offer deposit interest rates higher than banks鈥�. The high level of defaulted loans in NBFIs is believed to have been caused by massive irregularities where non-deserving and, at times, shell companies managed to receive large loans.
When such institutions continue to remain at the forefront of driving investments, contributing to the economy by diversifying investments in neighbouring countries, poor governance and widespread scams have turned the country鈥檚 NBFI sector precarious and unable to contribute to the economy. The NBFI sector must, therefore, comply with the instructions of the central bank and attend to issues such as internal governance and risk management to revive the sector.