Default Culture of the Nationalised Commercial Banks and the Private Commercial Banks during Last Two Decades: A Comparative Study

Abstract

In the context of Bangladesh, presently the magnitude of loan default is quite enormous. It has been riddled with high default rates leading to increasing default culture and deteriorating customer service standards, low income rate, corruption, political interference and lack of productive utilization of available resources. The achievements of the banking system arc being overshadowed by staggering the volume of default loans and even threatening the existence of the banking system at this moment. As the 'default Culture' is a sensitive issue there are very limited writings on it. As a result, this field has attracted the attention of the researcher and academicians in recent years. The present chapter attempts to review some of the important literature relevant to the present study. 2.1. Review of Literature A study on debt default in Bangladesh has been carried out by a team led by Sobhan (1991) titled "Debt Default to the Development Finance Institution: The crisis of State Sponsored Entrepreneurship in Bangladesh': The study has, however, limited its scope to Development Finance Institutions (DFI). In an attempt to look at the social background of the borrowers from DFI, the study used the data available from application forms and did not supplement it by an in-depth interview of a structured random sample of entrepreneurs. The conclusion of the study is that the borrowers are relatively new first generation, enter in the business world after the liberation of the country without useful experience of running a modern enterprise for any significant length of time. According to them, the borrower groups could be broadly classified as industrialist-cum-traders, traders, civil or military bureaucrats and professionals and service holders. These borrowers groups accounted for 34.2%, 34.3%, 16.44% and 12.12° 10 respectively. The large scale lending to private entrepreneurs started in the second half of the 1970s and the 1980s. Not only that these new class of entrepreneurs lacked experience, the credit-worthiness measured in terms of loan-asset ratio indicated high degree of pervasive dependence on DFI loanable fund which is ultimately guaranteed by tax payers through the government. In this context, it was noticed that in nearly two-thirds of these (entrepreneurs) family controlled or their friends controlled business, the age of the managing directors was around forty or less and nearly two thirds of the entrepreneurs had five years or less working experience. The authors found that as of end of 1980-81, only about 6% of firms paid their debt liabilities to the two DFis fully, 27.5% firm paid less 10% of what was due and 78.6% firms had substantial overdue loan. The study further concluded that no sector stood out as having a noticeably good or bad record of debt repayments. After 1981-82 and till 1984-85, the general repayment performance fell and repayment by private sector was markedly worse. By 1985, it was found that concentration of overdue loan in these two DFis was with 45 top defaulting projects i.e., few influential business house. By 1987 loan recovery situation did not improve. One conclusion that emerged from the study was that the economic factors did not meaningfully explain the default phenomenon…………………………………………….