In recent years, Bangladesh's economy has witnessed a vitriolic phenomenon in handling its non-performing loans. According to the Bangladesh Bank, at the end of Sep 2023, the total gross non-performing loans ratio of the banking sector of Bangladesh stood at 9.93 per cent. Bangladesh's gross non-performing loan (NPL) ratio has gone up from 8.18 per cent to Tk 9.93 per cent from June 2021 to Sep 2023. The net NPL ratio has gone up from negative (0.47 per cent) to 1.22 per cent from June 2021 to Sep 2023. The total classified loans in December 2022 were Tk 1206 billion; in September 2023, they stood at Tk 1553 billion. The primary contributor to this NPL build up is the private commercial banks. Their NPL volume increased approximately by Tk 347 billion or 28 per cent, and the same in the case of state-owned commercial banks went up by Tk 93 billion or 16 per cent during the period between December, 2022 and September 2023. Another aspect of the NPL history of Bangladesh is the trend of written-off bad loans and provision shortfall in the banking sector. Compared with the other countries in South Asia and Europe, Bangladesh is in a critical position as far as handling of the rising non-performing loans is concerned.
Despite the shortfall in credit growth in the private sector, the rise in gross NPL is an alarming sign for the banking industry in Bangladesh. The credit growth shortfall originated from lower investment demand due to declining imports of capital goods and industrial raw materials on the one hand and depressed consumer demand on the other.
Recognizing the imperative for early intervention in potential bank issues, the Bangladesh Bank has, albeit delayed, implemented the Prompt Corrective Action (PCA) Framework, originally established in India in 2002. The PCA Framework employs net NPL as a crucial indicator for categorizing banks. However, its introduction in Bangladesh is scheduled to take effect on 31 March 2025, contingent on the 2024 year-end financials. Given the widespread use of net NPLs as a primary indicator in various regulatory spheres, including bancassurance (with a 5 per cent NPL limit), it is vital for Bangladesh Bank to proactively address the escalating NPL situation through initiatives like PCA, potentially adjusting them further based on ongoing working group recommendations. In the current context of the mounting non-performing loans in Bangladesh, the country needs to gain control over this challenge.
Broadly speaking, Bangladesh has too many banks compared to its size and too little scope for the population to utilize any funds at all. One solution could be merging smaller banks to form larger banks rather than occupying the banking sector ineffectively. The intended profitability has not been achieved, which has caused the banks to be in a loophole of lower liquidity. Bangladesh Bank's recent data showed that the aggregate ROA (Return on Asset) has declined from 0.53 per cent to 0.43 per cent and ROE (Return on Equity) from 9.48 to 7.88 per cent from Sep 2022 to June 2023. This indicates that the income of the banks has gone down. Therefore, the necessity of reducing the number of banks has become more pressing than ever. Although the nuance of merging banks in Bangladesh is a relatively new concept, it is not entirely out of the blue.
Another measure to tackle the rising NPLs in Bangladesh is to implement a centralized banking system. Due to Bangladesh's current bad loan culture, it has become a widespread necessity for the banking sector to adopt this concept. Currently, most of the banks have no centralized credit administration, foreign trade, and credit risk management divisions to make loan approvals and documentation solely managed by the bank's head office. The documentation required for the loans also resides with the individual branch. In the centralized banking system, the branch must get approval from the head office for loan sanctions and other related issues, and the documentation must be kept with the head office as well. This requirement of the banks is mainly due to the circumstances of Bangladesh rather than a universal solution. From Bangladesh's point of view, a decentralized banking system generates inefficiency because of the lack of coordination and liability, which ultimately opens the doors to corruption. Properly implementing this technique could make the rising trend of the NPLs in Bangladesh more controllable for the greater stability of the financial sector.
In the case of wilful defaulters and political influences for taking loans, a distinct database should be maintained. In this regard, the central bank should take the initiative to develop specific tools and techniques to differentiate the wilful defaulters from the genuine ones. For this, the central bank should give out criteria to be used by every bank with which they can identify the wilful defaulters and report to the CIB (Credit Information Bureau) database. Bank officials must be strict enough to deflect wilful defaulters and any political influence for the settlement of standard credit assessment.
In many cases, it has been seen that the borrowers were involved in other activities with their borrowed funds, and the process funds were diverted. Bank officials should properly evaluate the customers' credit proposals and credit risk profiles to prevent loan loss. This will ensure that the funds which were borrowed for their agreed-upon purpose were properly utilized.
In recent years, banks around the world have started to use the blessings of technological development. The widespread use of technology has made it possible to access information from far beyond the globe, and the banks in Bangladesh must take advantage of this dissemination in order to make their business more effective and accountable. Although private banks are catching up with the use of technology in Bangladesh, public banks are far behind in the use of information systems and technology for their advantage. The banks must employ a centralized information system for quick access to services and information so that customers and officials get access to the necessary information for their respective purposes.
Ultimately, this all comes down to the fact that preventive measures for bad debts, which in fact predominantly lie in the primary screening of the borrowers' ability to repay and the borrowers' skills to run the business or project. In Bangladesh, the intricacy of this particular situation is unlikely to cease if the necessary measures are not considered.
Dr. Md. Ariful Islam is a banker and economic researcher
Dr. Syed Md. Aminul Karim is a former Member, NBR
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