The amount of classified loans, including written-off ones, in the country's banking sector go up because of a flawed enforcement mechanism. The amount of written-off loans of public, private and foreign banks operating in the country rose to Taka 238 billion on December 31, 2012. The amount of the classified loans is estimated at Tk. 363 billion at the end of the past calendar year. These two factors together make it too difficult for the banks to recover their disbursed amount of loans. This situation highlights the syndrome of 'default culture' in the country's banking sector. This is particularly worrying for public sector commercial and specialised banks.

About 84 per cent of the aggregate amount of classified and written-off loans are on account of the public sector commercial and specialised banks. Thus the problem of classified and written-off loans is virtually a problem of the public sector commercial and specialised banks. Though they are not larger in number than their counterparts in the private sector, yet their operational size is bigger than that of the latter. Management problems and other weaknesses of the public sector banks (PCBs) have become chronic, eating into their vitals. The practice of writing off default loans is apparently purported to giving the balance sheets of the banks concerned a respectable look, allowing them not to carry the burden of the same for year after year. Writing off a loan, however, does not permit a bank to give up its responsibility of recovering the same from the borrowers concerned. But this device is often found to be abused by a section of unscrupulous officials and borrowers of the banks. When a loan is written off, many borrowers tend to heave a sigh of relief thinking that they would not be required to repay the loan any more. Such borrowers are alleged to spend extra bucks on a section of bank officials, particularly of state-owned ones, to ensure berthing of their loans in the written-off category.

The recovery of classified loans, particularly through using legal means, has been a tortuous task on the part of banks. The constitution of money loan courts has not made the job easier. The execution of verdicts delivered by such courts encounters some serious legal and administrative hurdles. Moreover, it is alleged that law officials of the concerned banks, in collusion with the borrowers concerned, prolong the legal proceedings in many cases much to the benefit of the latter. Besides, the legal wings of most banks do not receive the due attention from the management of the banks which normally prefer to hire part-time legal consultants to somehow attend to the related issues.

In the recent past, a proposal to use the services of asset management companies by the banks to help recover their struck-up loans received a favourable response. A few banks reportedly had engaged one or two such companies. But the outcome of such efforts has not, on the whole, been much encouraging so far. The ground is thus not yet favourable for operations of this kind of institutions. In Bangladesh banking sector, the rate of loan default is high mainly because of lax monitoring by the authorities concerned to detect irregularities, window-dressing etc., that are indulged in by the management of both public and private sector banks. The situation is particularly disconcerting about public sector banks, primarily due to the institutional weaknesses of their overall governance structure. Such weaknesses merit a serious attention for taking effective remedial actions.