Taming the demon of non-performing loans

From a frightening 28 per cent, the gross NPLs continued to improve well up to 2009 due partly to greater leverage enjoyed by the banks following tightening of the legal system and cleaning of the bad loans through write-offs and rescheduling of classified loans. The data may, however, provide an illusion about improvement of the NPL ratio of the government-owned banks. The improvement, in reality, did not come about through better governance or recovery of classified loans but reflects the massive cleaning operation done to write-off bad loans followed by infusion of capital from the exchequer to meet the capital adequacy requirement. 

The overall improvement of NPL ratio in 2009 and 2010 coincided with the artificial boom in the capital market, accelerated tempo in the real estate sector and growth of exports, particularly apparel exports and massive flow of migrants’ remittances. These factors helped Bangladesh to soften the impacts of worldwide financial meltdown that began towards the end of 2008. The collapse of the elusive stock market and slump in the overheated real estate sector in 2010 impacted heavily on the quality of bank assets comprising loans given to the stock market operators and real estate companies. The following table provides an overview of roller-coaster movement of NPLs of different categories of banks:

 

 

 

Source: Bangladesh Bank: Quarterly Performance Indicators

The scandal-ridden Sonali Bank leads the pack with more than one-third of its loan portfolio infected by potentially risky classified loans. Agrani Bank and Rupali Bank do not lag far behind with nearly one-fourth of their portfolio heading for the cleaners. Janata Bank, which advertise itself as the best in Bangladesh (or is it Asia?), also does not have anything to show for its efforts to keep its tottering boat afloat.

The reasons for the chronic sickness of the SCBs are well known and the remedies are routinely repeated in seminars, discussion forums and the media but these have routinely fallen in deaf ears. The entrenched interest groups are reluctant to slacken their strangleholds on these banks. They would repeatedly espouse the myths about their contribution to the rural communities to forestall any major reforms.

 Some half-hearted cosmetic measures have, of course, been taken to address their problems. Among these is their conversion into limited companies, accompanied by devolution of some authority to the Board of Directors. The government also spent a huge amount of aided money for the foreign and local consultants and high-profile Chief Executives to improve these banks.  A health check reveals that, if anything, their illness has indeed aggravated on account of poor governance that left space for cannibalisation of resources by fly by night characters.  Evidently nothing short of a major surgery, which could include denationalisation, would resuscitate these ailing institutions. Otherwise, the brunt of poor governance would continue to be borne by poor taxpayers.

The myths about the specialised banks, especially the industrial finance banks, about their contribution to the economy need also closer scrutiny. Everything, including recapitalisation, dissolution and amalgamation, has been tried in vain to keep them from receding into the abyss.

PRIVATE SECTOR BANKS: The banks in the private sector are not paragon of good governance either. They are blamed for patronising a select group of clientele and their own peer at the cost of poorer section of the people. They rely heavily on security rather than reputation, capacity and credit worthiness of the borrowers. The traditional tools of appraisal like SWOT analysis, CAMEL ratings and principles of sound lending, central bank’s prudential guidelines and credit grading are by and large missing from their culture. Instead of diversifying their loan portfolio, all the private sector banks make a beeline for a small number of corporate houses with offer to provide financial services at cutthroat prices that leave them little margin. Typically, the memorandums submitted by the executives for sanction of loans highlight the interest earnings but not the cost of funds and other potential costs like that arising from defaults. Earnings from the obligations assumed through issue of guarantee and letter of credit are wrongly thought of as windfall gains through sale of papers. I have recently come across a bank which is poised to lose a king’s ransom against a deferred payment LC without any possibility of recourse to the client.

Notwithstanding these shortcomings, the banks in the private sector have shown a reasonable degree of dynamism to edge past the state owned banks in terms of resource mobilisation, loan administration and adoption of advanced technology and client-friendly products. They have also started to move out to rural communities through rural branches and mobile-based banking.  However, the recent political turmoil coming on the heel of share market crash, slump in the real estate sector and general recessionary trend for the last two years is poised to scuttle their apple carts. Two or three of them will find the going very heavy due to their self-inflicted wounds. Urgent steps are needed to address the problems before they skittle off the precipice.

Many of the better administered banks are also faced with their quota of problems on account of the prevailing volatile situation which adversely affect their clients for service their loans. Bailout packages for the borrowers like the one provided recently to the ill-fated Standard Group and some incentive measures in favour of the banks could be a possible answer to their predicament at this critical juncture of the country. Whatever needs to be done should be done quickly to see off the bad time.

(The writer is a former central banker. [email protected])