The Present State

'Star' defaulters extracting a price

Muinul Islam

The problem of defaulted bank loans continues to be one of the most serious constraints in the path of economic development of Bangladesh, as banking remains the main intermediary vehicle of harnessing savings for productive investment in a context of continuing weakness of the country's capital market.

A politically motivated watering down of the classification of defaulted bank loans in 2000 was instrumental in significantly downsizing the actual amount of defaulted loans. But, it could not hide the fact that about 87 per cent of classified bank loans are 'bad loans', or losses with slim or no chances for repayment. After the introduction of the 'write off' system, which excluded bad loans from the banks' balance sheets, the bad loans are now in the process of being removed from the quarterly published statements of classified loans, thereby giving a false impression that the proportion of defaulted loans in the banking system has been coming down gradually.

Right at the start of the post-colonial Pakistani era, the state had taken upon itself the role of both directly establishing industrial enterprises and nurturing the entrepreneurs through lavish policy support as well as provision of highly subsidised capital. The strategy was regarded as one of the main factors behind the rapid growth of 'regional economic disparity' between the two provinces of Pakistan, which fuelled the struggle for regional autonomy in the then East Pakistan, ultimately leading to the liberation struggle of Bangladesh.

Banking was a principal mechanism of siphoning capital from the then East Pakistan to the western wing. So, after the liberation of Bangladesh, the Awami League government's decision to nationalise the banks and insurance companies operating in Bangladesh (except the foreign banks) should be considered a logical step in the light of the spirit of the liberation war. But, the Herculean task of organising the nationalised banks in the chaotic, war-ravaged and crisis-ridden post-liberation years, amidst a very rapid expansion of banking network in rural Bangladesh created some daunting problems for the banking sector. More so, because of the fact that the banking sector was asked by the state to share the burden of keeping afloat the state-owned enterprises (SOEs), which emerged in no time after nationalisation in 1972 as the most corrupt, anarchic, over-manned and mismanaged concerns mired in a sea of recurrent losses in the backdrop of the political and administrative inexperience of the post-liberation regime.

In this scenario, the banking sector was assigned the task of financing and patronising the development of a new Bangladeshi entrepreneurial class to complement the government efforts for productive investment through the state-run sector corporations.

As a result, on the one hand, the almost insatiable demand for credit from the loss-making state-owned enterprises kept the banks under constant pressure due to a chronic shortage of adequate liquidity and a general lack of investment funds in a war-ravaged economy. On the other hand, the newly emerging so-called 'briefcase-businessmen' with links to politics and politicians, top bureaucrats and top bankers, political functionaries themselves, retired military and civil bureaucrats, and the fortunate few who could establish successful patron-client relationships with a section of the rent-seeking top-brass of the bank management were constantly lobbying for access to bank credit. In the process, they were vitiating the work atmosphere in the banks by alluring a section of the bankers to indulge in corruption and malpractice. It is now widely recognised that today's millionaires of Bangladesh came mostly from the ranks of those 'briefcase-businessmen' of the post-liberation years and the groups mentioned, who could successfully establish and maintain these types of patron-client relationship with the bankers, and in the process, created a host of millionaires from amongst those bankers themselves, who had actively connived at and harvested the illicit 'margins' in exchange for the favours.

The change over of 1975 ushered in an era of political culture, wherein corruption gradually became institutionalised, and the vice of rent seeking took firm roots in the economy as well as the body-politic of Bangladesh.

This politicisation of the banking practices has seriously hampered the institutional discipline of the banks where professional expertise, integrity and ethical values have became exceptions rather than rules.

Ex-bankers emerged as financiers of the newly floated private banks, but there was no mechanism to know about the sources of their 'Aladdin's lamp'. Defaulters of loans taken from nationalised banks or state-owned development finance institutions (DFIs) swelled the rank of directors of the newly established private banks, but nobody intervened on behalf of the loan-giving banks caught in the middle with defaulted loans.

In the eighties, the rapid liberalisation of Bangladesh's import regime created the so-called 'sick-industry syndrome', which provided a potent excuse for some, and created genuine hardships regarding repayment of bank loans for others.

The BNP government of 1991-96 tried to stem the rot in the initial years of its term up to 1993. (Though, the decision to write-off small loans up to Tk. 5000/- right after assuming power was a definite blunder from the point of view of creating proper atmosphere for loan repayment). A list of top defaulters was published in the press in 1991. The Financial Sector Reforms Project (FSRP), which had been launched during the period of the Transitional Government of 1990-1991, was completed in mid-nineties. The Bank Companies Act 1991 was enacted. Financial Loan Courts were established. Some semblance of discipline was brought back in the banking sector. But, dogged by the problem of chronically stagnating investment scene, and forced by the legacy of commercialised politics and state craft, the 1991-96 BNP government of Begum Khaleda Zia repeated the blunders of its predecessors of providing lavish encouragement to bank management to ease and expedite the process of term lending, especially according to its own political exigencies at the later stages of its rule starting from 1994, which added a massive amount of fuel to the fire of the so-called 'default culture.'

The Awami League government of 1996-2001 inherited an already precarious situation in 1996, and initially fought the menace doggedly. But, the hangover of the earlier lending sprees continued to haunt the banking sector by sustaining the momentum of the build-up of the defaulted loans of the earlier two decades. The World Bank claimed that the percentage of overdue loans went up further to around 50 percent by the first quarter of 1999.

A study titled, "A Profile of Bank Loan Default in Bangladesh,” was undertaken by the Bangladesh Institute of Bank Management (BIBM) in 1998 to investigate into the problem of bank loan default by the borrowers belonging to the private sector.

After assuming power in June 23, 1996, the Awami League government launched a vigorous campaign to arrest the menacing trend of mounting bank loan default. Various legal reforms were introduced including the long-awaited Bankruptcy Court Act. Strictly disciplinarian administrative changes were tried. Conservatism took over the monetary and credit policy regimes of Bangladesh. An attempt to create an anti-default atmosphere in the banking sector was launched, where, in spite of the enormous political and financial clout of the top brass, the defaulters in general were compelled to lie low for the time being. In the series of corrective measures that followed, we came across a bold step, whereby a formal list of 2117 bank loan defaulters with Tk 10 million or more in default was provided to the members of parliament in 1997 by the Minister of Finance as a constitutional obligation. That list thus provided a formal public document, which we could legitimately use to address this vital issue through a comprehensive research project undertaken by BIBM.

We have randomly selected the 125 sample respondents from amongst the top 1000 defaulters in the list belonging to the private sector on the belief that this sample would help bring out the more important dimensions of the problem in their true colours.

The study pursued the following main hypotheses:
a) Borrowers, bankers and political patrons are the main groups responsible for bank loan default.
b) Active collusion and participation of a section of bankers are necessary ingredients for the spread of the loan default problem.
c) The gradual import liberalisation policy changes have played key roles in the spread of the 'sick industry syndrome' held responsible as a factor for the loan default problem.
d) The social and political clout of the borrowers has played key roles behind the dismal performance of banks vis-à-vis repayment.
e) Diversion of borrowed funds to smuggling and for capital flight has played key roles behind the spread of bank loan default problem.

As long as trading (and smuggling) remains the more profitable option for capitalists, this diversion of funds cannot be effectively checked, which is reflected in the oft-quoted realisation that there is a growing number of sick-industries, but there are not many 'sick industrialists'. It is claimed, therefore, that bank loan default problem in Bangladesh is caused primarily by the willful defaulters, who have been thriving from the so-called 'default culture' engineered by diversion of bank loans to legal and illegal trading and other pursuits at home and capital flight abroad.

The concept of a bureaucratic state, wherein the over-development of the post colonial state with powerful and organised military bureaucracy and civil bureaucracy stands in contrast to relative underdevelopment of the 'classes', indicates the possibility of the emergence of 'relative autonomy of the state'. In such a bureaucratic state, the state functionaries use the monopoly power of their powerful positions/posts to extract 'rent' from the comprador bourgeoisie, who are engaged in trading. In this system of rent seeking, a section of the bureaucrats and bankers get a 'cut' from the bank loans sanctioned on various pleas including industrial investment. This makes the bank loan default problem a 'systemic problem' linked with the nature of the state.

Out of 2117 big defaulters, the highest number of defaulters is in Dhaka division (65.71%) followed by Chittagong (18.09%), Khulna (7.65%), Rajshahi (5.95%), Barisal (1.28%) and Sylhet (1.08%). In the 19 greater districts, the highest position is occupied by Dhaka district (64.15%), the second highest position by Chittagong district (15.02%) followed by Khulna (4.53%), Jessore (2.36%), Comilla (1.89%), Bogra (1.70%), Pabna (1.61%), Rajshahi and Sylhet (1.09% each) districts. The lowest number of big defaulters in Jamalpur district (0.05%). The city profile of the total big default cases shows that the highest number is in Dhaka (55.50%) followed by Chittagong (14.22%), Narayanganj (4.91%), Khulna (4.16%) and Jessore (2.03%).

For the study purpose, the top 1000 defaulters from the list of 2117 have been selected as the sampling frame. Out of those defaulters, only those residing in Dhaka and Chittagong have been selected as our probable sample unit. Random sampling technique has been used. We have employed survey method, participant observation method, key-informant method and case study method.

The experience we have got in conducting one of the surveys is quite frustrating. As many as 157 enterprises could not be located. Some of them might have changed their addresses by this time or may be, some of the loan facilities were established on benami basis. One hundred and sixty-one business units did not cooperate in filling the questionnaire. This might be an attempt to hide information. However, almost all the key persons behind these enterprises have been identified. Finally, we have reached 125 business units to fill in the questionnaires out of which 103 enterprises are from Dhaka and 22 from Chittagong.

Out of the 125 sample units, 104 (83.20%), 8 (6.40%) and 13 (10.40%) were production oriented, trade oriented and service oriented respectively. Out of 125 samples, public limited company accounts for 54 (43.20%), private limited company accounts for 65 (52%), partnership 2 (1.60%) and proprietorship 4 (3.20%). Most of the defaulter business units are running under private limited company structure and hence family oriented. The diversification pattern of the secondary and sister concerns of the sample units shows that most of the enterprises have secondary business on full time basis. Only 27 units (29%) have no secondary business. Out of 125 business units, 25 (20%), 30 (24%) and 33 (26.4%) have 1-2, 3-5 and 5+ number of secondary business units, which indicates that diversion of funds may have happened.

The role played by the key person in the composition of the board of directors of the surveyed business units speaks about the dominance of the key-person in running the firm. The board of directors of 68 (54.4%) business units includes 3-5 family members of the key person, which reflects that the business is family based. Relatives and long-time friends also constitute significant numbers of the members of the board of directors. The maximum and average duration of the directors are as follows: 74 (59.2%) and 51 (40.8%) business units respectively show that the member remains in the board for 5-10 years. On the other hand, 55 (41%) business units have directorship ranging from 0-2 years. The pattern shows the tendency of remaining in the board for a long time.

We have categorised the principal occupation of the key person as businessman, industrialist, politician, and ex-bureaucrat. It may be noted that 77 (61.6%) of the key persons are originally businessmen of different types, whereas industrialists, politicians, and ex-bureaucrats were 24 (19.2%), 21 (16.8%) and 3 (2.4%) respectively.

Most of the key persons of the surveyed business units frequently changed their political party affiliations through time. Only 28% of the respondents reported that they had not changed their political affiliation. Out of 125 responding units, the key persons of 68 units (54.4%) have changed their political affiliation at least once, 14 (11.2%) changed the party twice and 8 (6.4%) changed political party thrice. Political power is traded for public services and resources. Conversely, access to state resource is translated into a political resource to enhance the power of the key person, and through him the influence of the regime. Out of 125 responding business units, 28 (30%) key persons reported of their non-affiliation with political parties.

The political affiliation status shows that 44 (35.2%) are affiliated with BNP, 25 with Awami League (19.2%) and 13 with Jatiya Party (10.4%). The scenario of past affiliation indicates that 33 (26.4%) were affiliated with BNP, followed by Jatiya Party 26 (20.8%), and Awami League 22 (17.6%). It is clear that the rate of political affiliation of the surveyed business is increasing from the period 1976-81 onwards.

A very important picture is highlighted in this information that the two highest proportions of affiliations were established in the periods 1982-90 and 1991-1996 due to the strong patronisation from the ruling party. The period 1982-90, which is basically dominated by military and civil bureaucrats, is showing a significant number of political affiliation of key-persons. Most of the bank officials were mainly approached for loan by a key person of a business unit with political clout.

Out of 125 key persons of the business units, 97 (77.6%) were directly maintaining connections with political personalities for sanctioning the bank loan. Only 28 (22.4%) key-persons did not maintain any relation with the political parties, as reported. Most of the respondent business units have mentioned that ministers had a key role in approaching banks for loans. Members of parliament and ruling party central leaders were also involved in sanctioning the loan. Moreover, a significant number of key-persons are directly or indirectly linked with the ruling party. Examining the hierarchy of the person approached for clearing loan from a bank, the minister category occupied the highest rank with 45 (46.4%) followed by member of parliament 34 (35.1%) ruling party central leader 13 (13.4%), labour leader 4 (4.1%) and others 1 (1.0%). The scenario explains that the political personalities are interfering in sanctioning process of bank loans.

The size pattern of the units as reflected through number of employees shows that there are less than 50 employees in 39 firms (31.2%), 50-100 employees in 25 firms (20%), 101-500 employees in 36 farms (28.8%) and more than 500 employees in 25 firms (20%)

About 75.47 per cent of the respondents have reported that members of their families had gone abroad at least once during the previous year for medical treatment. About 56.07 per cent of respondents have some members of their families abroad for higher education. About 85.84 per cent of respondents have 1-2 houses in Dhaka or the divisional headquarters, and 13.27 per cent have 3-4 houses in Dhaka or in the divisional headquarters. About 14.16 per cent of key-persons had relationship with bank management. About 29.63 per cent of respondent key-persons were found to be relatives of some top bureaucrat. About 19.23 per cent of respondent key-persons have been relatives of some important political leader. About 31.92 per cent of respondent key-persons have close relatives in the higher ranks of the Army. About 15.63 per cent of respondent key-persons have a close relative in the board of directors of the lending bank. An overwhelming 94.34 per cent of respondent key-persons have complained that they had to resort to bribing to get the loans approved.

Two-thirds of the respondents had to wait for 6-9 months for completing the loan process.

Among the projects with stuck-up loans, there was not a single project, which got the loan sanctioned before 1975. About 15.21 per cent of the projects got the loan sanctioned in the 1976-1981 time period, 43.48 per cent in the 1982-1990 period, 36.96 per cent in the 1991-1996 period, and only 4.35 per cent got the loans after 1996. Out of the stuck-up projects, no project was stuck-up before 1981, 20.75 per cent got stuck-up between 1982-1990, 43.40 were stuck-up during the 1991-1996 period, and 35.85 per cent got stuck-up after 1996.

Among the main causes of default, respondents from the bank management have ranked management inefficiency of banks as the topmost cause followed by reluctance of borrowers, price fluctuations in the international market, shortage of working capital, technical breakdowns, labour unrest, power failure, lack of capacity utilisation and frequent policy changes.

We have also constructed case studies of 31 'star defaulters', which vividly bring out the root causes of their default culture. The case studies complement the survey findings substantively in support of our hypotheses. Especially, the case studies document the significant fact that most of 'star defaulters' have smuggling connection either since the past or presently, which support our hypothesis that diversion of bank loans of finance smuggling has been a definite possibility in those cases. Most of these defaulters have reported 'sick industries', but they have thriving trading business. Therefore, they can be categorised as 'wilful defaulters' of bank loans.

The field-work of the study was completed during the period between 1998 and 2001. At the half way stage of the project, the preliminary findings of the study were presented in a national seminar held on 18 May 1999, which created quite a sensation throughout the country. Unfortunately, the Bangladesh Bank authorities abruptly withdrew their support to the project under political pressure as well as lobby pressure from the vested interests. Therefore, the methods of research had to be changed, and the project was delayed. Now, the final report of the project is almost complete.

Illustration: Sabyasachi Mistry

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The author is professor of Economics and Dean of Faculty of Social sciences, Chittagong University and former President, BEA.