If the banks write off bad loans from their balance sheets, their financials get a better look. But they are unwilling to do so. This is not surprising, for, the practice exacts a cost from the banks concerned. Whatever amount is written off, a bank is required to provide for an equivalent amount from its profits - a mandatory task that most banks abhor. That is why banks tend to use all possible measures to save classified loans from falling into the 'bad loan' category. On occasions, they offer a few concessions to borrowers concerned to regularise their loans, at least, temporarily.
Yet, a sizeable amount of default loans has been written off by the banks. The amount of default loans the banks wrote off between 2003 and 2017 was over Tk 481 billion. In fact, the written-off amount would be a staggering one if the banks decided to be stringent in their loan classification and faithful in the matters of meeting provision requirements. Some banks might even face severe erosion in their paid-up capital if they write off bad loans and provide for the same as per true requirements.
What, however, is the most disturbing development is that many banks, particularly, the state-owned ones, are not that serious about recovering their written-off amounts. The banks have, however, reasons to be frustrated by the long-drawn legal process involved in the default-loan recovery drive. The banks do often get verdicts in their favour from the Money Loan Courts (MLCs) but they face various hurdles while executing the same either for non-cooperation from the field-level officials or for stay orders issued by the higher courts.
Meanwhile, the Anti-Corruption Commission (ACC) recently took note of lack of seriousness on the part of the banks to recover the written-off loans and, accordingly, it sent a set of recommendations to the Bangladesh Bank (BB) to help recover the same. In response to the ACC's move, the BB is now preparing a new guideline on writing off non-performing loans (NPLs) and recovery of the same by the banks.
The details of the proposed guideline are not known, but the central bank is likely to incorporate a few measures to strengthen recovery of the written-off loans, as suggested by the ACC. If the banks lack interest in recovering the written-off NPLs, the propensity among the borrowers to default on loan repayments gets encouragement. As a matter of universal practice, the banks would have to write off bad loans from time to time. Simultaneously with this, the banks do need to continue efforts to recover the written-off money.
But the fact remains that the banks are required to spend a substantial amount of money and energy in recovering written-off NPLs through a legal process which is both cumbersome and lengthy. As a way out, it was suggested on a number of occasions in the past that the asset management companies be involved in the loan recovery work. But there has not been much progress in this matter. The use of alternative dispute resolution (ADR) could also be tried seriously to get back at least a part of the written-off loans.