The issue of non-performing loans has gained increasing attention in recent times because of its rising trend over the past two years. Policymakers, businessmen, and others have been very vocal expressing their concern over the persistence of high nonperforming loans in the banking sector of the country. And, as we have an underdeveloped capital market, the financial sector of the country is significantly dominated by the banking sector. So, continuous rise in NPLs with its associated remedies exacerbate the quality of our banking sector. Therefore, the role of banks as agents of economic growth and progress is hindered and at the same time, the necessity of developing an effective capital market arises.
Banks being the financial intermediary, a part of their operation is to accept deposits and grant loans. Albeit the borrowers are bound to repay the loan in time, some of them fail to repay, which as a result, counted as a nonperforming loan. Thus, the loan on which the borrower is not making interest payments or repaying any principal considered as an NPL. Surprisingly, Bangladesh has one of the highest NPL ratios in the world. Referring to a study conducted by BIBM last year, on average NPLs were 12.79 per ent of the total loans in Bangladesh, whereas, the internationally tolerable limit is 2-3 per cent.
However, over the years the Bangladesh Bank took several germane policies to curb NPLs. Some of them are; increasing the capital adequacy of banks, streamlining guidelines for rescheduling of various types of loans, tightening provisions for non-performing loans. Even though these reforms have helped banks to ameliorate the quality of the overall banking sector, yet banks are still struggling to show efficiency in their performance in recent times.
NPL can create complications for banks by not allowing them to operate in their systematic manner. Considering Bangladesh, at present, NPL is creating various problems for banks against the background of Bangladesh Bank heist which compromised its image. First, increasing NPL is decreasing the cost to income ratio of a significant number of banks. As a result, banks need to spend more money (cost) to generate the income tantamount to the income generated earlier. Second, as lending rates have been higher for a while, banks are flooded with liquidity. This is despite the fact that recently private sector credit growth has picked up to 15.01per cent (November'16). Still, there is less demand for loans and consequently, banks are earning less than before. And, one of the biggest problems associated with NPL is that it galvanizes lending rates of the banks by curbing their profit margin, Banks tend to charge more for their lending to accomplish their profit goals followed by a certain higher interest spread.
Further, in view of the of banks' rates, weighted average deposit rate of scheduled banks stood 5.29 per cent in November'16 . And the inflation for the month of November'16 was 5.38 per cent, according to BB Statistics. So, axiomatically, considering the real interest rate, people are earning less by keeping their money in banks, as real interest rate turns out to be negative. If someone keeps Tk 100 in a bank, s/he loses Tk 0.09 every month (considering November'16 Statistics).
Thus, it would be irrational to expect that the banking industry operate without non-performing loans. But the harm it causes rather has devastating effects on the banking industry as a whole. Therefore, it is time for the bankers to follow proper guidelines and strategies to overcome this conundrum to ensure growth of the sector as well as the economy of the country without undermining their places.
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