The issue of non-performing loans (NPLs) in the country's banking industry hits the news headlines almost at the end of every quarter of a calendar year.
The share of NPLs or toxic assets of banks in their total outstanding loans hit nearly 10 per cent as of September 30 last. The amount, as estimated by the Bangladesh Bank (BB), is Tk 1.34 trillion, representing a 7.2 per cent growth during the third quarter of 2022. The share of classified loans, shown by the BB, is viewed as a big one, if not unsustainable. However, it is suspected that the volume of NPL is bigger than what the BB shows. Factors such as failure to stick to rules by banks and regulators concerned, change in the definition of loan classification and relaxation of loan rescheduling facilities have helped the banks show their respective NPL in a reduced volume.
At the end of June 30 last, the share of NPL of state-owned banks in their outstanding loans was estimated at 23.04 per cent. The same in the case of private banks was 6.02 per cent and foreign banks at 4.77 per cent. If the rules relating to classification or loan rescheduling could be applied in their original form, the actual size of NPL would have been far bigger.
As the economy is in the midst of an uncomfortable situation because of a host factors, both alien and domestic, the NPL issue is being discussed more intensely. The news of the liquidity crunch in the banking sector and prompt denial by the central bank and advice of the International Monetary Fund (IMF) to carry out reforms in the financial sector has drawn all the attention this time.
The problem of NPL is a chronic one and all concerned are aware of it. But none cared to deal with it seriously. Rather, a few actions on the part of the government and the regulatory body have helped the problem become a full-blown one. Loan rescheduling has been the most abused facility to patronise a section of delinquent borrowers. The introduction of the 'loan restructuring' facility and its current state remains a mystery. The facility, allegedly, was made available to some influential quarters to help them strike off their names from the defaulters' list and stay afloat in the market.
The existence of a large NPL in any bank does create a host of problems for it. The liquidity shortage is one. Besides, the bank faces capital as well as provisioning shortfall very often. In sum, the problem erodes the bank's profitability and also credibility. Prospective clients tend to avoid doing business with such a bank.
What is, however, interesting is that sponsors and board members of private banks are least disturbed by the problem that has been eating into the vitals of the banks they own. This is very unusual in the case of any other business operation. The owners become very worried if the collection of revenues or profitability declines. They usually hold meetings with officials and employees to fix strategies and action programmes to improve the situation.
What the banking sector desperately needs now are reforms in ownership, loan classification and recovery of default loans, independence of the central bank and its control over the state-owned banks. The demand for the constitution of an independent banking commission has come up on several occasions in the recent past. But the finance ministry honchos are not interested.
It is the job of the central bank to do what is needed to be done to fix problems in the banking sector and decide on monetary policy. None should dictate it to fix policy rates. Interest rates and exchange rates etc., need to be left to the market. Failure to do what is right for the financial sector has given rise to some major problems the economy is facing now.
