Non-performing loans in the banking sector: concerns and solutions

The banking sector plays a vital role in the economic framework of Bangladesh. However, one of the sector’s most pressing challenges in recent times is the rising rate of non-performing loans (NPLs). According to the latest statistics from Bangladesh Bank, as of September 2024, the amount of NPLs in the banking sector has reached Tk 2.85 trillion, approximately 17 per cent of the total distributed loans. This massive volume of NPLs poses a significant threat to the country’s financial stability.
Reasons for the increase in NPLs
• The economic disruptions caused by COVID-19 and global economic uncertainties have made it difficult for many businesses to repay their loans on time.
• Several banks have disbursed loans without due diligence, resulting in difficulties in recovery.
• In some cases, loans have been issued to unqualified borrowers due to political influence.
• Despite stringent laws for loan recovery, their implementation remains inadequate.
• Factors such as inflation, devaluation of the Bangladeshi Taka against the dollar, and increased import costs have negatively impacted the financial capabilities of borrowers.
Impact of NPLs
An increase in non-performing loans (NPLs) leads to liquidity crises in banks, adversely affecting new investments. It also creates obstacles to obtaining economic assistance from international lenders. Banks are required to maintain additional provisions for NPLs, which negatively impacts their profitability.
Currently, all loans overdue for 3-6 months are categorized as “Substandard,” 6-12 months as “Doubtful,” and over 12 months as “Bad/Loss.” General provisions are set at 1 per cent for standard loans and 5 per cent for Special Mention Accounts. Specific provisions are mandatory at 20 per cent, 50 per cent, and 100 per cent for Substandard, Doubtful, and Bad/Loss loans, respectively.
According to Bangladesh Bank’s new master circular, all loans will be considered overdue if they surpass their stipulated repayment period.
Additionally, Bangladesh has fulfilled various conditions at different times to secure loans from the International Monetary Fund (IMF). As part of this process, Bangladesh Bank has now revised its loan classification policy.
Solutions for Recovery
Addressing the crisis requires well-planned and effective measures, such as:
• Banks should adopt flexible policies to facilitate easier loan repayment for borrowers.
• Ensuring rigorous monitoring of loan approvals and recoveries.
• Enhancing transparency and accountability in the banking sector.
• Introducing loan rescheduling options and support packages for struggling businesses.
• Strictly supervising the loan approval process and conducting proper due diligence before disbursing new loans.
• Promoting investment in the business sector and ensuring export growth through government initiatives.
The rising NPL rate is not only a challenge for the banking sector but also a significant obstacle to the overall economic system. Addressing this issue requires integrated efforts. Effective government policies, strict oversight by the central bank, and transparent management within banks are essential to improving the NPL situation. Failure to control NPLs could jeopardize the country’s financial stability and investment climate, ultimately leading to long-term adverse effects on the economy.

The writer is Deputy General Manager at Sonali Bank PLC.