Stressed loans stir up worries in BB

A load of rescheduled and restructured loans causes concern for the credit-risk management of country's banking industry, as it erodes their profitability and shifts the burden on clientele, reveals the central bank.   
"In the absence of an orderly recovery of classified loans, the banks would suffer from non-performing assets, lower profitability, and a deteriorating equity base," says the Bangladesh Bank (BB) in its Financial Stability Report (FSR) 2015, released Monday.
Besides, the FSR cautions, such a situation would  increase  the  cost  of  capital,  widen  the  mismatch  between  interest-earning  assets  and  interest-bearing  liabilities  and  upset  the  economic  value  additions (EVA) by the banks.
While unveiling the FSR 2015 at the central bank headquarters in Dhaka, Bangladesh Bank Governor Fazle Kabir suggested some ways for the banks to get out of the fix.     
"The Central Database for Large Credit (CDLC) has already been developed to establish a healthy credit culture in the country through strengthening monitoring and supervision on large corporate loans," he said.
The governor also asked the bankers to improve their internal controls and compliance for reducing non-performing loans (NLPs) that will help improving efficiency in the overall banking system.   
Currently, the  rescheduled  loans  constitute  a  significant  portion  of  the  banks'  total  loan  portfolio.  
In calendar year (CY) 2015, the rescheduled loans accounted for 4.5 per cent of banks' total outstanding loans. It was also equivalent to 5.0 per cent of total unclassified loans and 28.0 per cent of total stressed advances, compared with 3.4, 3.8 and 25.9 per cent respectively in CY14, according to the report.  
The total outstanding loans in the banking sector rose to Tk 5846.15 billion in 2015 from Tk 5178.37 billion a year before, the BB data showed.
From CY 14 to CY 15, the total amount of rescheduled loans went up by 50.1 per cent.
On the other hand, a total of Tk 164.1 billion worth of loans were restructured by the scheduled banks in the last calendar year in line with BB's large loan restructuring policy.
These credits constituted 2.8 per cent of total loans outstanding, 3.1 per cent of total unclassified loans and 17.4 per cent of total stressed advances.
Total stressed advances cover classified, rescheduled and restructured loans in the banking industry.
However, considerable stress in asset quality in the form of rescheduled and restructured loans remains a concern, said SK Sur Chowdhury, deputy governor of the BB.
"We've already established a CDLC for early identification of vulnerabilities of large non-financial corporate bodies and examining remedies in case of their defaults," the deputy governor explained.
The  CDLC  framework  considers  both  funded  and  non-funded exposures  of  banks and non-banking financial institutions (NBFIs)  to   a certain person, counterparty or group, including  investments in  bonds/debentures/commercial papers issued by those borrowers/obligors  having  an  aggregate exposure of Tk 500 million and above.
The banks and NBFIs have already been asked to manage such loans which were reported to the CDCL by banks concerned and NBFIs through forming a Joint Lenders' Forum (JLF).  
One of the highlights of 2015 is the initiation of banking sector's move towards Basel III capital and liquidity frameworks under the supervision of the central bank, according to the deputy governor.
"We believe that this transition will help strengthen the capital base and liquidity position of banks and provide adequate resilience in the face of any unexpected instability threats," Mr. Sur Chowdhury noted.
 Another important development was the decline in gross NPL ratio in the banking industry and increase in banks' profitability, he added.
The deputy governor observed one of the major challenges at present is cyber security, which requires a broad level of understanding of the threats and probable solutions thereof.
Appreciating the initiative for the formation of JLF, Allah Malik Kazemi, change management adviser of the BB, said it's a good initiative for managing such loans with coordinated joint efforts by the banks and NBFIs concerned.
The JLF is required to come up with a Corrective Action Plan (CAP) for accounts that are signalling a building up of stress and the banks and NBFIs with highest exposure would have to convene the forum, according to the report.
In 2015, though banks' operating profit decreased, net profit increased significantly due to a reduced loan-loss provision expense, the BB said.
While private commercial banks performed comparatively better in terms of asset quality, capital adequacy and profitability, state-owned ones were lagging behind the industry average, creating a sort of stability concerns to the industry and thereby necessitating stringent and prudent supervision.
Anis A Khan, chairman of the Association of Bankers, Bangladesh (ABB), advised that the banks should take effective measures to improve upon their efficiency, productivity and profitability through reducing the amount of NPLs.
Among others, Mafizuddin Sarker, chairman of Bangladesh Leasing and Finance Companies Association (BLFCA), and General Manager of the Financial Stability Department of the BB Debashish Chakrabirty also spoke on the occasion.
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