Experts said Wednesday banks ought to develop their own strategies for time-bound reduction in non-performing loans as the ballooning of the same affects the country's entire financial sector.
Such strategies should include time-bound quantitative targets supported by a corresponding and comprehensive operational plan, they said, adding that these strategies should be replicated annually to stall a recurrence of the problem.
Their views came at the latest Chief Risk Officers' forum held at the Bangladesh Institute of Bank Management (BIBM) in the capital in the wake of growing concern over the issue of NPL.
"NPL strategies should establish strategic objectives for the banks for time-bound reduction in NPLs over time-bound horizons," Senior Advisor of BIBM Sajib Azad said during the event.
"It should also lay out the bank's approach and objectives regarding the effective management and ultimate reduction in NPL stocks in a clear, credible and feasible manner for each relevant portfolio," he added.
The latest observations came at a time when the swelling of NPL is becoming a major issue for the country's banking industry and also triggering concerns and criticisms.
As per the central bank data, the volume of NPLs had jumped by more than 21 per cent to Tk 621.72 billion by the end of 2016, rising from Tk 513.71 billion a year ago.
Experts, however, usually identify internal and external credit culture, national and international market changes and bank performance as the major causes of NPL ballooning.
Currently, a number of banks in the country usually submit a five-year strategy to the central bank which often includes a subset on the topic of NPL.
The banking-management experts at the meet, however, stressed the need for developing a separate strategy on NPL reduction given the growing concern about the issue within the financial circles.
"The first step in developing such strategy should be a thorough and realistic self-assessment to determine the severity of the situation and the steps that need to be taken internally to address it," Mr Azad said.
"In doing so, banks should fully understand and examine the scale and drivers of the NPL issue as well as the outcomes of NPL actions taken in the past," he said, adding that operational capacities for the required steps such as process, tools, data quality, IT or automation, expertise, decision making and internal policies should also be considered.
When it comes to operational capacity, experts observed that banks need to highlight issues like early warning and detection of NPLs, forbearance, provisioning, collateral valuations, management of foreclosed assets as well as monitoring and reporting.
They also pointed out that understanding the present and future external operating conditions is also critical to the formation of an NPL strategy and associated reduction targets.
"A sensible framework for assessing this aspect should include macroeconomic conditions, market expectations, any NPL 'investor demand', NPL servicing, regulatory, legal and judicial framework and tax implications," Azad, who brings with him the experience of working for the Bank of England, Moody's and KPMG, told the participants.
Highlighting the issue of capital implications, he said banks should be able to model the capital implications of different elements to their NPL strategy under different economic scenarios.
These implications should also be considered in conjunction with the Risk Appetite Framework as well as the Internal Capital Adequacy Assessment Process (ICAAP), he added.
Experts at the forum also emphasised increased role of the Chief Risk Officers in the decision making process for tackling the rising NPL burden.
"Given the critical role of the CROs in the risk-management process of the banks, they should have an important voice in the decision-making process of tackling NPLs," Supernumerary Professor of BIBM Helal Ahmed Chowdhury said during the event.
"Political commitment is a major prerequisite for addressing the problem of soaring NPL," said Dr Toufic Ahmed Chowdhury, Director General of BIBM.
"Instead of focusing solely on what the government and the regulator should do, banks need to highlight what they themselves can do within their own organisational and operational modes for addressing the NPL issue," Sajib Azad said.
Experts informed that a range of NPL strategy implication options are available, which include hold or forbearance strategy, active portfolio reductions, change of exposure type and legal options.
"Banks need to ensure that their NPL strategy includes a combination of these strategies or options to best achieve their objectives over a short, medium and long term," Mr Azad said.
They also need to explore which options are advantageous for different portfolios or segments under different conditions.
He also noted that the NPL strategy needs to be there at every level of processes within an organisation, including strategic, tactical and operational levels.
