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Curbing bad loans: Streamlining the banking system

Soniya Akter Lima | January 17, 2018 00:00:00

Banks are central to the monetary system of a country. They play a vital role in the economy by disbursing credit to business entities, and at the same time, they collect the surplus capital from overall population through various kinds of depository incentives. But at present, our money savings framework is facing serious difficulties due to rise in non-performing loans (NPLs) and excess liquidity.

The piling up of bad loans is a warning to the economy. Bad debts has grown faster than credit over the last five years, says a report released by the Asset Management Firm, an offshoot of New York-based LR Management Investments. According to this report, growth of non-performing loans was higher in private banks than in the state-owned banks in the last five years. The constant growth of bad loans is creating a huge burden on the banking sector as well as on entire economy.

As many as 13 out of the 57 banks of the country, are presently in the list of 'banks with bad financial health'. The aggregate bad debts in Bangladesh banking sector grew by 23 per cent in 12 months - from September 2106 to September, 2017 - with financial institutions keep on struggling with default loans.

At the end of September 2016, the bad debts in the banking sector was Tk 657.31 billion, which, after a year, increased to more than Tk 803.07 billion, data released by the Bangladesh Bank show. Until September, 2017, total banking sector loan amounted to Tk 7,527.30 billion, of which Tk 803.07 billion or 10.67 per cent was bad debts. Until June 2017, the default loan stood at Tk 741.48 billion or 10.13 per cent.

The central bank data demonstrate that six state-owned banks have the largest amount of default loans. At the end of September 2017, the aggregate bad debt of Sonali, Janata, Agrani, Rupali, Basic and BDBL amounted to Tk 385.17 billion against the total disbursement of Tk 1,316.89 billion. These banks are facing capital deficiencies with the surge in bad loans. According to Bangladesh Bank report, 23.79 per cent loan dispensed by two specialised banks - Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank - turned into default loans.

Private commercial banks have amassed default loans of Tk 339.73 billion. Foreign banks working in Bangladesh had bad debts of Tk 22.98 billion or 7.89 per cent of their total loan portfolio. Though operating profits of different banks have risen by 10 to 60 per cent in 2017, on the back of credit demand from the private sector, their default loans which amounted to Tk 803 billion remained a major threat. Lack of good governance, accountability and transparency are responsible for the continuous growth of bad debts.

Operating profit of a bank does not demonstrate that its capital management and risk management are successful. Moreover, operating profit can be manipulated. A bank's net profit is computed after deducting the provisioning against bad debt and tax. Bad debts ate up 51 per cent of the operating profits of banks in the first six months - from January to June - of the last year. Data show though the banks' operating profits edged up 11 per cent, net profits drooped around 33 per cent. In the 1st half of 2017, banks registered operating profits of Tk 103.55 billion, against Tk 93.25 billion of the previous year but their net profit went down from Tk 27.41 billion to Tk 18.45 billion in the 1st half of the year 2016.

Farmers Bank, which has been hit hard by loan scam, registered a net loss of more than Tk 130 million, though their operating profit was Tk 240 million.

Now the question is, why are the bad debts growing in the banking sector at an alarming rate? One of the reasons is that banks have to keep provisions against default loan but their capital faces deficit. As per the LR Global insights, 2018: "Poor risk assessment of credit, subdued demand in the economy, rescheduling facilities to known defaulters, and mostly the culture of borrowers' unwillingness to repay loan, were the major reasons for the deterioration of the asset quality in Bangladeshi banks".

Lack of good governance, accountability and transparency are also responsible for growing bad debts. The involvement of bank directors and chairmen in political parties is undesirable. Questions have been raised about the reliability and authenticity of the data published in the annual reports of a bank when it lacks good governance.

The bad debts create negative impact on the banks, as well as on the economy at large. The occurrence of bad debts has resulted in a major spillage in the economy. The outcome is that lendable assets are tied up at the burden of planned financial specialists who are constantly determined on the chance of obtaining such store for investment purposes.

Investment as a variable has invaluable role in the assurance of the level of national income and in the wealth of a country. Thus, if the acquired assets are not compensated for refinancing, the nation would encounter macro-economic changes like stagflation, inflation and unemployment. This creates gigantic depletes on the banks' stores making capitalisation hard.

Last but not least, this kind of high and rising frequency of bad debts in commercial banks loan portfolio is unsafe for the banking sector. To ensure proper role of the banking system in economic development, necessary measures to stop the default loan culture is imperative.

The writer is a student of BBA, Accounting & Information Systems, Faculty of Business Studies,

University of Dhaka.

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