Non-Performing Loans (NPL) is the most complicated and long-standing problem of our country's banking industry. Chronic NPL problem is not only ruining our banking sector but also adversely affecting the country's monetary system and the economy as a whole. It may be mentioned here that this problem has accumulated over the last fifty years and appropriate measure has never been taken to effectively address the issue. Multiple factors are found to have led to the enormous volume of NPL in our banking sector. Different stakeholders are involved with this issue. So, this long-standing problem cannot be resolved without undertaking comprehensive action programme with active participation and cooperation of all stakeholders. Bangladesh Bank should thoroughly discuss with all stakeholders including business community, bankers and country's think tanks to reach consensus on designing a comprehensive action programme for effectively addressing country's NPL problem.
CATEGORISING NPL: The present situation of NPL has accumulated over decades across all types of loans ranging from farmers' small loans to industrial loans. Loans fraudulently taken, fund diversion and genuine business losses have led to huge amount of loans become nonperforming. There are different categories of NPLs and measures for addressing each category of loans must be different. If each category of NPL cannot be ascertained, appropriate measure cannot be developed. Moreover, in our country NPL is determined based on reported CL (Classification of Loans) which is technically a matrix prepared on the basis of some predetermined parameters. There is no analytical scope in the CL report and therefore, this old-fashioned loan classification tool may not portray the true picture of the country's NPL. Since classification of loans is done based on CL matrix, there may be some real NPL not captured under CL while there is a possibility of capturing good loan under CL report. It is inevitably required for the banks to thoroughly analyse each and every NPL account in order to categorise them. In general, there may be three different situations for each type of NPL. These are: (I) NPL beyond recoverable state, (II) NPL at partially recoverable state, and (III) NPL at fully recoverable state. Since this exercise has not be done prior to the issuance of the BB Circular, now, as part of follow-up action, Bangladesh Bank may instruct all commercial banks to complete this exercise for their impaired loan portfolio.
ACTION PLAN FOR EACH CATEGORY OF NPL: The way BB Circular related to treating impaired loan has been issued, cannot be flatly applied to all categories of NPL, and if indiscriminately applied, the rescheduling measures will not produce any desired result. We have to keep in mind that each category of NPL calls for different action programme. If the loan is identified as beyond recoverable state, rescheduling of this type of loan will be futile. Usually, loans fraudulently taken or fund diverted or complete loss of business without any trace of the borrower are categorised as belonging to the beyond recoverable state. Writing off is the only option. If bank does not retain adequate provision against this type of NPL, the writing off may be allowed from future provisioning. So, the Circular issued by BB cannot be applied to this category of NPL.
If NPL is identified as partially recoverable, the part recoverable and the part non-recoverable must be ascertained. There is no other alternative but to write off the portion of non-recoverable NPL, while rescheduling option may be applied to the recoverable portion. The third category of NPL i.e., recoverable NPL should be handled with care, because bank's cooperation and helping attitude will not only recover the NPL but also keep the health of loan in good condition in bank's account. For recoverable NPL, the percentage of down payment should not be an issue, rather the term and instalment size are the most important factors. If the loan is found recoverable and the borrower is willing to repay, then the repayment structure must be made within the borrower's means and down payment amount should be considered immaterial. Instalment size for this loan must be mutually determined so that the borrower can comfortably keep paying off without fail. If instalment is regularly paid, there should be no problem to continue this asset in the bank's book for a long time. So, instalment size based on borrower's cash-flow generation and his willingness of repayment are two important factors other than down payment amount. In a nutshell, as long as the borrower continues to pay off the loan, there is no harm in retaining the asset in bank's book. BB should actively consider these factors when they review the outcome of the measures taken under the new Circular and issue follow-up circular and action programme.
UTILISATION OF DOWN PAYMENT & INTEREST IN SUSPENSE AMOUNT: The BB Circular should be made very specific with regard to utilisation of down payment amount and treatment of interest retained in the suspense account. We have experienced that these two common tools for treating impaired loans have been abused in the name of recovery of NPL. As soon as impaired loan is rescheduled with minimum down payment, the loan itself is taken out of NPL and treated as good loan and interest retained in suspense account is immediately taken as bank's income. This practice has not produced any fruitful result in reducing country's NPL. So, this practice must be stopped and BB Circular should conspicuously mention that any down payment and all subsequent instalments must be utilised towards adjustment of principal amount. At the same time, interest retained in the suspense account cannot be taken into bank's account until and unless the entire NPL is fully adjusted. Once the principal amount is fully adjusted, the residual amount, if realised, can be taken as bank's income. Under any circumstances, unrealised interest should not be allowed to be taken as bank's income. It may be mentioned here that this is the standard practice as per accounting principle as well as international banking standards. We have to keep in mind that bankers, business community and policymakers are equally responsible for the alarming NPL situation, so everybody will have to be sincere in addressing it. All parties must come forward and help each other to address the NPL problem.
The BB Circular is definitely a proactive move because this proves that the BB has realised the gravity of the situation. Since, the Circular has already been issued, it should not be reversed from regulatory point of view. After a certain period, BB should review the outcome of their measures and then revisit their policy with a view to coming up with more detailed, comprehensive and stringent action plan for resolving the country's long standing NPL problem.
Nironjan Roy is a Banker based in Toronto, Canada. [email protected]
