Highest default rates in shipbreaking, SMEs

Demolition and shipbuilding, small and medium enterprises, commerce, agriculture and clothing are the top five sectors that generated the highest level of bad debts in Bangladesh in 2020, according to official figures.

Embezzlement by borrowers, companies ‘lack of foresight in investing, and banks’ inability to do due diligence were mainly responsible for the highest amount of defaulted loans across sectors.

In December of last year, banks disbursed funds amounting to Tk 16,980 crore in the shipbuilding and wrecking industry. On volume, 18% turned into nonperforming loans (NPLs), the highest ratio of any industry, according to central bank data.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said a majority of shipbuilders lack foresight when it comes to growing their businesses.

He said shipbuilders had taken out a considerable amount of loans and increased their capacity.

“But they didn’t assess the world market before producing ships. As a result, many companies failed to sell their products on time.”

Mr Saiful Islam, chairman of Western Marine Shipyard, Bangladesh’s leading shipbuilder, said his company had successfully operated between 2001 and 2010.

Then the global and euro area financial crises hit shipbuilders in Bangladesh.

“Global demand for ships plunged after the crises,” he said.

But there is a silver lining as demand has started to rise, the entrepreneur said.

He called on the government to extend political support to the sector so that it can regain its previous position in the world market.

Companies in the shipbreaking industry have mainly embezzled funds, Rahman said.

Emranul Huq, managing director of Dhaka Bank, said there were many willful defaulters in the shipbreaking business.

Mr Abu Taher, president of the Bangladesh Ship Breakers and Recyclers Association, said that of the 160 member companies of the association, 50 were active.

Companies bought older ships at higher prices, but failed to sell escarpments due to lower demand.

“As a result, they couldn’t repay the loans. And the banks also showed their reluctance to give more loans to protect them from the debacle,” Taher said.

The CMSME sector had the second highest level of non-performing loans, which accounted for 12% of the total outstanding loans of Tk 44,790 crore in December.

High NPL ratio has been a common occurrence in the industry for years as their financial condition is low. As a result, CMSMEs fail when their business is faced with a crisis.

NPLs against commercial loans in the commercial sector amounted to Tk 24,700 crore, or 11 percent of outstanding loans.

The majority of business loans are generally provided in the form of working capital.

Huq says that the selection of clients by banks is important before disbursing commercial loans.

Many commercial loans are made on the basis of the aggregate products available in their deposits. But many borrowers failed to repay loans on time despite the sale of assets, resulting in a large volume of NPLs in the industry, Huq said.

Default loans in the agricultural sector amounted to Tk 4,465 crore, or 10 percent of loans disbursed among farmers.

Producers often face natural calamities that prevent them from making regular down payments. In addition, the supervision of agricultural loans is also weak, another major reason for the increase in bad debts in the segment.

“Many private banks do not have the capacity to effectively disburse and collect agricultural loans,” said Rahman of the Mutual Trust Bank.

The clothing industry is another sector where a considerable volume of loans has fallen into the category of defaults. The ratio of NPLs was 9 percent to the outstanding loans of Tk 130,850 crore.

Huq said some borrowers in the industry have defaulted because they have failed to sell products overseas or receive timely payments from their buyers.

Mirza Elias Uddin Ahmed, Managing Director of Jamuna Bank, says the number of good borrowers is higher than bad borrowers in all sectors.

“Lenders cannot shirk their responsibility for the higher ratio of NPL in the five sectors.”

According to him, the debt ratio is the most important indicator before any loan disbursement.

“If a bank lends more loans than the equity held by a client, the fund will slip into the risk zone. Unfortunately, some banks do, generating NPLs.

Ahmed also urged banks to check a company’s cash flow before lending.

“If banks follow the method, defaults can be contained to a large extent.”

Rahman said some banks do not regularly monitor borrowers, giving them the ability to abuse the fund.

However, the set of default loans in the banking sector declined in 2020 following a blanket forbearance on extended loan repayments due to the coronavirus pandemic.

NPLs stood at Tk 88,734 crore last year, down 5.93% year-on-year, according to BB data.

However, bad debts rose sharply in June of this year. It stood at Tk99,205 crore, up 11.80% from six months earlier and 3.21% year-on-year.

This means that NPLs could rise further in all five sectors, a central banker said.

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