The heart of a bank is divided into two segments - deposits and loans. The principal objectives of a bank are to collect deposit from surplus portion (i.e. from the depositors) and supply the collected fund to the deficit portion (i.e. to the loanee).
Loan or investment is the lifeblood of a bank. But this lifeblood of bank gets frequently polluted by a germ which is popularly known as non-performing loan (NPL).
NPL is that portion of loan, which has already become default or close to be default. When a bank fails to collect the interest payments or the principal amount of loan, then that is considered as NPL.
Bangladesh Bank (BB) has defined eight stages of a loan in terms of classification which includes Superior, Good, Acceptable, Marginal/Watchlist, Special Mentioned Account (SMA), Sub Standard (SS), Doubtful (DF) and Band & Loss (BL). As per BB's classification guideline, SS, DF and BL are considered as NPL.
In Bangladesh's banking sector, NPL has been one of the burning problems for the last two decades. The international standard of NPL is 2.0 per cent or below, but in our country it is much higher.
The percentage of NPLs in Bangladesh is five to six times higher than the international standard. This is alarming for the banking sector. The NPL data is updated and reviewed quarterly by the BB.
According to BB data, NPL ratio stood 9.31 per cent in December 2017, 10.67 per cent in September 2017, 10.13 per cent in June 2017 and 10.53 per cent in March 2017. In 2016, the NPL ratio was 9.23 per cent in December, 10.34 per cent in September, 10.06 per cent in June and 9.92 per cent in March.
The yearend NPL ratio was 8.79 per cent in 2015. It is observed that the NPL ratio is growing up with the passage of time.
The most important reason behind NPL is choosing wrong client during the period of loan sanctioning. Banks in most cases fail to identify the right client and take wrong decision in selecting client. And this is the opportunity taken most of the time by intending defaulters.
They take loans from banks having malafide intention not to adjust or repay the loan. Such type of clients diverts fund from their business to use it outside their regular business. The diverted fund is mostly used for fixed investment, which cannot generate income for the interest payment of loan.
The small clients, however, become defaulters without having any bad intention with regard to paying back the loan. They do not even have adequate financial literacy for taking and servicing of loan and interest payment thereof.
Some project loans turn out to be bad loans due to lack of knowledge about the project or business. It is often seen that the clients start new business on receiving loans from banks, although they do not have any idea or knowledge about the new business.
If the project does not run smoothly or the business is not properly managed, the loan recipient becomes defaulter. It is one of the root causes of NPL.
Increase in business volume notwithstanding, banks enhance excess loan facilities to the existing clients or sanction excess limit to new clients due to unhealthy competition in the market. The clients thereafter invest the excess amount outside that business.
Since the volume of business does not get increased, the client cannot bear or service the interest burden of the enhanced amount. In that case, the excess interest burden may push the client to the line of loan default. This phenomenon has become common in the banking industry nowadays.
Aggressive, unscrupulous and target-oriented banking indirectly gives rise to NPL. It happens as the bankers cannot scrutinise and fine-tune the loan file due to impending pressure of achieving target.
Such unhealthy competition and bad practices are exercised between the banks and the bankers. Sometimes, political pressure plays its part in loan sanctioning among those even not eligible for credit facility.
Another scenario in our country is that wilful defaulters here often keep their loan unclassified although those apparently seem to be classified. They do it at will by way of filing writ petition with the High Court.
This practice is widespread and randomly exercised by the habitual defaulters. By taking advantage of such judicial loopholes, they try to take fresh loan from another bank. It has also been observed that the fresh loan also turns out to be default loan in course of time.
In fact, NPLs exert adverse effect on bank's day-to-day operations and profitability. Banks have to keep excess provision against default loans, which directly affects net profit.
As per BB guidelines, banks have to keep 20 per cent provision on SS loan, 50 per cent provision on DF loan and 100 per cent provision on BL loan. Therefore, the higher the NPL, the lower the net profit and vice versa.
A bank becomes weak and highly non-profitable due to excessive NPL portfolio. Huge NPL portfolio erodes the capacity of banks to make profit. NPL also affects overall economic growth.
Rise in NPL is a feature of financial crisis in a country. Excess NPL also hampers the circulation of money in the market, which, in turn, adversely affects the whole sector.
The NPL amount of a bank remains blocked until recovery of the loan. Earning of interest income from NPL is also ceased that results in reducing income generation.
Since the fund remains blocked and there is no interest income, bank neither can reinvest the loan amount, nor can earn any money from that fund. Hence, NPL also hampers a bank's overall position with regard to cash flow.
Smooth, efficient and safe investment is a prerequisite for the development of economic fronts of a country. Our banking sector at present is heavily burdened with high percentage of NPL.
Banks should develop corporate governance and portfolio governance for keeping NPL at a tolerable level. As a regulatory authority, BB should introduce common valuation database for collateral securities and strictly handle loan takeover policy, loan enhancement policy and other related credit policies to prevent the rising cases of NPLs.
Mir Mahmudul Haque Chowdhury is a banker and researcher. [email protected]
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