First News
Volume:7, Number:47
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Business & Finance 1
THIS WEEK

Bad Business or Bad Loans?

Bangladesh Bank study shows, in 2015 the rate of loan default by the owners of garment industries was 16.71 percent, amounting to BDT174.61 billion in total

| Afsana Khan |

As many as 3,000 garment factories have gone bust after defaulting on a staggering amount of loans. Several hundred entrepreneurs who allegedly took loans from banks through illegal means have vanished into thin air after shutting down their factories. In total, they owe BDT170 billion to the banks.

Of the total amount, there is almost no chance of recovering BDT160 billion, which is why the banks have already written off BDT 70 billion, and apparently, will have to head in the same direction regarding the rest of the amount. Almost all the banks are bearing the brunt of the bad loans in the garment sector, but 35 banks are the worst affected. And yet, bank officials who granted the loans in the first place under dubious deals were let off the hook. Similarly, hardly any action has been taken against the loan defaulters. An investigation by First News reveals that most of the defaulters did not even invest 10 percent of their loans in the projects for which they had originally borrowed from the banks. They either invested the money in other ventures created under different names, or moved to live abroad. Their brazen effort to avoid repaying bank loan is not only hurting the banking sector but also bringing much infamy to the entire garment sector.

Observers are of the view that the country’s garment industry is merely playing the role of ‘tailor,’ given that 80 to 90 percent of the sector’s raw goods are imported. They blamed wrong government policies for this apparent distress of the RMG sector. On top of that, if dishonest garment owners play with bank loans, it will certainly aggravate the situation. To offset losses from the growing amount of bad debt, banks are increasing interest rates on loans, let alone making the loans more investment-friendly by reducing interest rates. No doubt the high interest rate on bank loans is a drag on the garment industry and also the economy as a whole. According to an estimate of the Association of Bankers Bangladesh (ABB), on average banks invest 15 percent of their total loans in the garment sector. At the end of 2016, the banks had BDT1.02 trillion in outstanding loans in the garment sector. On the other hand a Bangladesh Bank study shows, in 2015 the rate of loan default by the owners of garment industries was 16.71 percent, amounting to BDT174.61 billion in total. Of this, there is no possibility of retrieving BDT157.14 billion, prompting banks to write off BDT70.72 billion; and the rest of the amount – BDT103.89 billion – is also likely to be written off in the near future.

According to the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Bad Business or Bad Loans? Bangladesh Bank study shows, in 2015 the rate of loan default by the owners of garment industries was 16.71 percent, amounting to BDT174.61 billion in total there were 5,608 garment factories in the country in 2008. But the latest figures show their number currently stands at 3,110; which means a total of 2,498 factories went out of business between 2008 and 2017. Meanwhile, Bangladesh Knitwear Manufacturers and Exporters’ Association (BKMEA) says 220 knitwear factories were closed down in 2015. In the previous years, 250 more factories were shut off for various reasons. Taken together, around 3,000 factories have been closed so far. In this regard the state minister for finance, MA Mannan, said, “Things did not come to this difficult pass overnight. The socioeconomic condition of the country, politics, and the controversial role of policymakers at different times are responsible for it. It resulted in the piling up of a huge amount of bad loans in banks and at some point, the banks are being forced to cancel the debt.”

“However, it is not only happening in Bangladesh. It is a global phenomenon,” he said, adding that the dominance of the capitalist economy is also partly responsible for it.” When asked about this issue, Dr. Mirza Azizul Islam, former finance adviser to the caretaker government, said: “Going bankrupt has become a culture these days. The banks’ tendency of giving out loans without proper scrutiny is paving the way for this practice. Many also took out huge loans and subsequently defaulted on it by exerting political influence. It is really an alarming situation for the banking sector.” Sushasoner Jonno Nagorik (Sujan) secretary, Dr Badiul Alam Majumder, said, those who resorted to corruption or misused their power in giving out the loans should be identified and brought to book. They should be given exemplary punishment. Otherwise, it will not be possible to tackle the widespread fraud and financial crimes.

the garment sector have turned into bad loans. The banks have restructured the loans and offered easier installment facilities to borrowers, but everything has gone in vain. At one stage it appeared that there was no option left except writing off the loans. Then it is shown as loss or capital shortfall. The state-owned banks meet the capital shortfall by taking money from the government exchequer, which is funded by taxpayer money. On the other hand, private banks meet the shortfall by imposing various hidden charges on account holders and by cutting the interest rates of deposit schemes. So, at the end of the day, it is taxpayers or the common people who have to bear the burden of bank losses due to bad loans. The banks give loans to entrepreneurs in the RMG sector for various purposes, including setting up of factories, expansion of business, and import and export. But when entrepreneurs go out of business they hardly ever pay off their bank loans. It may be mentioned that some factory owners went out of business by failing to stand the competition, while others initiated the business with the sole intention of getting away with bank loans. Bank officials can be held at fault, either for giving the loan without proper scrutiny or for a fat commission. By the time companies cease to exist, the banks find that the properties they mortgaged against the loans were either fake or too insufficient to recover the loans.

BGMEA president Md. Siddiqur Rahman said he did not know how much money the closed factories owed to the banks, but he claimed that every day about two to three garment factories were going out of busi-ness due to escalating competition. Many genuine garment factories failed to sustain their businesses due to shortage of utility services, high VAT and taxes, increased production costs due to frequent increase in transport and labor costs, and buyers’ unwillingness to pay a higher price for garment products. Moreover, in the wake of the worldwide clamor for worker safety in Bangladesh’s garment factories following the Rana Plaza tragedy, teams from two international platforms – Alliance and Accord – started strict inspection of these factories. A large number of factories have been shut down for failing to comply with safety standards, many of which also defaulted on their bank loans.

A Bangladesh Bank report observed that when the amount of bad loans in the garment sector goes above 3 percent, banks suffer a capital shortfall. But now it is more than 16 percent, from which one can easily guess the gravity of the crisis. Former senior vice president of BKMEA Mohammad Hatem said, “There are almost no default loans in the factories that are currently in operation. Around 90 percent of all bad loans belong to closed factories.” It has been learnt that some banks gave loans to hundreds of bogus companies including Hallmark, Bismillah, Madaripur Spinning, Bentex, Fair Group, and Ranka Shoel Composite Textile, without proper scrutiny on the strength of a nominal mortgage. As a result, 35 out of the 57 commercial banks in the country are now in a vulnerable condition. According to the Central Bank’s Financial Stability Report 2016, staterun banks have the highest bad loans in the RMG sector. Overall, 62 percent of the 84 percent defaulted loans of the state-owned banks have turned into bad loans or non-performing assets, which amounts to BDT253.50 billion. Of that amount, BDT42.36 billion is in the RMG sector. On the other hand, specialized banks have BDT7.92 billion, private banks have BDT36.74 billion and foreign banks have BDT3.50 billion as bad loans in the RMG sector. In summary, banks have already written off a total of BDT70.72 billion in bad loans to the RMG sector.

Bangladesh Bank’s deputy governor, Mohammad Moniruzzaman, said that absence of good governance, political influence in granting loans, lethargy in loan recovery, and a tradition of not following due process in loan disbursements have landed state-run banks in this sordid mess. So the banks’ callous disregard of managing risk is directly responsible for this situation.” Kazi Masihur Rahman, managing director of Mercantile Bank, said, “The country’s political atmosphere is responsible for the rise in bad bank loans, not the bankers. A banker cannot give loans randomly to anyone he/she wants; they are accountable to the banks. At the same time, when a branch gives out a loan, it has to ensure the recovery of the loan.” Rupali Bank’s managing director, Mohammad Ataur Rahman Prodhan said, “Considering the high volume of loans provided by state-owned banks, a certain portion of it may get defaulted. We must also remember that in business, everyone does not become successful.” Echoing the same opinion, managing director of Pubali Bank, Md Abdul Halim Chowdhury, said, “Loan recovery depends on whether the recipient exists in the business. If he does not or cannot exist, whom will a bank hold responsible except itself?

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