In an interview, Professor Dr Mohammed Farashuddin, former governor of Bangladesh Bank and chief advisor of East West University, explained the context and nuances of banks writing-off loans and NPLs to The Business Standard

When people or business entities borrow money from banks, they have to pay interest to the banks at regular intervals. And after a certain period of time, the borrower needs to pay back the principal of the loan too.

When a borrower does not make interest payments or does not pay back the principal over a specified period of time, they default and their loans become non-performing loans (NPLs). If an NPL sits on a bank’s balance sheet for years and is deemed unrecoverable, it turns into a bad debt.

The bigger the defaulter, the more benefit h/she gets’

Banks generate profits by taking the money people deposit and lending it to other people or companies who need money. In this process, banks charge interest with the principal and a part of the collected interest is given to depositors as incentive to deposit more or reel in new depositors.

But if a bank has too many bad debts, it will not be able to provide depositors with their cut of the interest rate. In some special cases, the bank will not even be able to return the original deposit to its depositors, which is why the loan portfolio is considered a prime asset of a bank.

Primarily, banks write off the bad debts as an expense rather than an asset. That helps them pay lower taxes and maintain the integrity of their loan portfolio.

Writing off loans was first permitted in Bangladesh in 2003. In only the first quarter of 2021, banks had written off loans worth Tk crore, while only Tk crore were recovered.

The situation is actually worse compared to that of 2020, when banks wrote off Tk crore and were able to recover Tk crore.

The Business Standard had a conversation with Professor Dr Mohammed Farashuddin, former governor of Bangladesh Bank and chief advisor of East West University, to learn about the context and nuances of this problem.

Normally, writing-off loans can give banks the opportunity to break away from the problems surrounding non-performing loans. But we have seen that a huge amount of loans get written-off. From 2003 to , loans worth Tk57,975 crore were written-off, which amounts to percent of the total amount of defaulted loans. Is it normal to write-off such a large portion of debt?

I do not know how you will react to my answer but the figure you have provided is not acceptable to me. You have said that loans get written-off as a normal process, which is absolutely not true. Writing-off economic loans are not common at all. Nobody wants to write loans-off, not even kings.

But if the borrower is a day labourer or someone who is extremely poor, someone who absolutely has no means to return the loan, then their debt may get written-off as a desperate measure.

But the defaulters in Bangladesh https://worldpaydayloans.com/payday-loans-nv/ do not belong to that socio-economic class either. They are not the landless poor who need to be rescued by writing their loans off; they do not need to be helped in that way.

Secondly, writing-off is a temporary relief. The liability from the debt will remain even if it is written-off. This interim solution is achieved by writing-off the interest, not the principal. Writing-off principals is an extremely rare occurrence.

I will be surprised if the write-off you are talking about is principal. As far as I know, until 2020, loans were worth Tk49,000 crore, mainly consisting of interest rate defaults. The total amount of defaulted loans, on the other hand, was approximately Tk100,000 crore.