Higher NPLs widen interest spread

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Siddique Islam | Published: September 26, 2016 00:00:00 | Updated: February 01, 2018 00:00:00

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Non-performing loans (NPLs) net of provisions to capital in Bangladesh's banking sector is higher than in India and Sri Lanka, which is also responsible for higher interest rate spread, experts and academics said.
Among the three countries, the banking sector of Bangladesh scored higher NPL net of provisions to capital during the last five years, according to a Bangladesh Bank (BB) study, prepared by Ala Uddin and Shamima Sharmin.
Among the three countries, the banking sector of Bangladesh scored higher NPL net of provisions to capital during the last five years, according to a study prepared by Ala Uddin and Shamima Sharmin of Bangladesh Bank (BB).
"This could be treated as a concern for the banking sector of Bangladesh," the researchers say in the study report.
The research paper, styled 'Banking Sector Soundness and Financial Stability: The Cases of Bangladesh, India and Sri Lanka', was presented in a plenary session on banking at the two-day International Conference for Bankers and Academics (ICBA).
Higher credit-portfolio loss serves as a stain in smooth financial intermediation process, according to the findings.
"Banking system of Sri Lanka demonstrated a relatively lower NPL ratio compared to that in Bangladesh and India during the last five years," it noted.  
Higher NPL ratio might serve as hindrances to reducing financial- intermediation cost in Bangladesh, the researchers explained.
Banking sectors of both India and Sri Lanka are in a much better position in terms of capital adequacy, asset quality, and liquidity compared to those in the Bangladesh banking system, according to the paper.
"Interestingly, all these three countries have mostly implemented international standards regarding capital adequacy and liquidity," it noted.  
Three more papers, including Determinants of Bank Interest Spread in Bangladesh, were presented in the session with SK Sur Chowdhury, deputy governor of the BB, in the chair.
While Bangladesh has been successful in introducing Basel-III capital and liquidity frameworks like India and Sri Lanka, it has been lagging behind its peers in introducing advanced tools to assess its financial stability and resilience, according to the findings laid down in the paper.
"The overall banking-sector risk of Bangladesh is moderate," the deputy governor said while explaining the latest situation with the country's banking system.
He also said the government has allocated funds to meet capital shortfall of the state-owned banks in line with the Basel-III framework.
The allocation for state-owned banks' recapitalisation was slashed by 60 per cent for the fiscal year (FY) 2016-17 compared to the original budget for the outgoing fiscal.
The allocation for the SoBs came down to Tk 20 billion in the FY 17 from Tk 50 billion for the FY 16, according to the budget documents.
Three state-owned commercial banks (SoCBs) out of six, three private commercial banks (PCBs) and two specialised banks (SBs) were on the list of those facing the capital shortfall during the first quarter Q1) of the current calendar year.
Talking to the FE, a BB senior official said the eight banks out of 56 faced a shortfall of capital mainly due to higher volumes of their classified loans.
Higher NPLs have led to a rise in provisioning requirements, which ultimately prompted their capital shortfall, the central banker explained.
Bangladesh started implementing Basel-III for calculation of capital-to-risk weighted assets ratio (CRAR) of all banks from the first quarter of 2015 for consolidating the stability in the banking sector.
"We've already developed Central Database for Large Credit (CDLC) to establish a healthy credit culture in the country through strengthening monitoring and supervision on large corporate loans," another BB official said.
He also said the central bank had already asked the commercial banks to improve their internal controls and compliance for reducing NLPs that will help in improving efficiency in the overall banking system.   
Such rising trend in NPLs had continued until June 30 last despite close monitoring by the central bank.
The amount of classified loans increased by more than 23 per cent or Tk 120 billion to Tk 633.65 billion as of June 30 last from Tk 513.71 billion as of December 2015, the BB data showed.
On the other hand, Bangladesh's banks are not able to reduce their interest rate spread (IRS) mainly due to an upturn in classified loans, according to academics and researchers.
They also said the higher IRS is hindering growth prospect of the Bangladesh economy.
The spread or margin between lending and deposit interest rates plays a vital role in the financial development of a country.
Positive and significant relationship between market and share of deposits and spread indicates that large banks charge higher interest rates on their deposits while accept a narrower margin, according to the paper.
"….the mindset of bank management has always been an important determinant of interest rate spread," Mr. Sur Chowdhury explained.
Among others, Dr. M. Sadiqul Islam, Professor at the Department of Finance, the University of Dhaka, and Md. Habibur Rahman, Managing Director of the Al-Arafah Islami Bank Limited, also spoke in the occasion.
siddique.islam@gmail.com