Bad loans crippling banks

Profitability of the country's banks has declined by around 17 per cent over the past 10 years, due mainly to rise in the volume of non-performing loans (NPLs), according to a Bangladesh Institute of Bank Management (BIBM) report on "Interest Rate and Expansion of Bank Credit". It mentioned that the NPL growth is affecting credit expansion and operating costs of banks have increased over the years. However, the banks themselves are not apparently able to address this problem. The percentage of bad loans increased to 10.3 in 2018 from 7.3 per cent in 2009. At the same time, the banks' return on equity came down to 9.5 per cent from 21.7 per cent. The banking sector is trapped in a gridlock of NPLs, causing growing concern for stakeholders and also the government authorities. The NPL situation was aggravated by the evil trend of embezzlement of banking money and a series of banking scams took place.

Spread or the gap between average deposit rate and lending rate, allows banks to finance their business costs and earn profit on their equity. When the size of NPL swells, the banks lose their profit and sometimes sustainability. The banks pass the cost of bad loans on to the borrowers by raising interest rates, a move which eventually reduces credit growth. This is the situation when the government is emphasising single digit interest rate. There are apprehensions that if the default loans grow further, the entire sector may face a serious liquidity crisis. There are allegations of political interference in loan disbursement and also recovery of loans. The government has the scope to address it by enforcing laws and rules properly and thus save the banking industry.

Md. Zillur Rahaman

Gandaria, Dhaka