Banks lack remedial strategy while NPL rises worryingly

Some of Bangladesh's banks don't have 'in-depth' look into the problem of spiraling non-performing loans (NPL) while many others try to frame remedial strategies perfunctorily.

Such observations came out from studies on banking as well as financial sector at large as the NPL surge worries many quarters.

One finding shows that around 11 per cent of the country's banks did not have an 'in-depth' look into the issue of NPLs in the past year, despite a growing concern over the problem in the financial arena.

The recent industry-wide survey also revealed that around 3.0 per cent of the country's banks had not assessed their past NPL-reduction strategies at all while 36 per cent did so only on an ad-hoc basis.

The findings came out from the survey of the Chief Risk Officers at the banks on issues concerning NPL strategy in their institutions. Leading banking research and training institution Bangladesh Institute of Bank Management (BIBM) conducted the study.

The research findings come at a time when the ballooning NPLs is becoming a major issue with the country's banking industry and also triggering concerns and criticisms.

As per the central bank data, the volume of NPLs had increased by more than 21 per cent to Tk 621.72 billion by the end of 2016, swelling from Tk 513.71 billion a year before.

"The findings are genuinely surprising as we are struggling to find a bank for which NPL is not an issue in some capacity," said Sazib Azad, Senior Advisor of BIBM, who led the research initiative.

"Furthermore, if the bank itself is immune to the impact of NPL, even then they need to consider whether they are immune from structural or market-level impacts as well," he told the FE.

However, relevant survey results show the potential lack of such considerations as only 1.0 per cent of bank CROs taking part in the survey said that their banks are addressing potential dependence on "market assessment and strategy".

What is more surprising is that the NPL strategies of around 62 per cent of the banks are not signed off by the boards, the survey found.

"This is quite striking because given the severity of the non-performing-loan issue, the NPL strategy should be signed off by the boards," Mr Azad said, adding: "Boards are not only accountable for the health of the banks but are also in position to release resources to get to grips with the issue."

In addition, the survey result also revealed 31 per cent of the banks not communicating their NPL strategy across the bank.

"NPL, as an issue, needs to be addressed from ground up. But the results show that this is not happening at our banks," said an expert who was involved with research.

Meanwhile, 25 per cent of the CROs said they were not tracking the implementation and effectiveness of NPL strategy in their banks- something which, according to experts, is a 'cause of concern'.

"Given how critical an issue NPL exposure is, we would expect every CRO to track how the NPL strategy is being implemented, its effectiveness and how to improve matters to the Board Risk Committee and the Board," the banking experts said.

Meanwhile, the survey results also found that although 94 per cent of the banks had stress-tested their balance sheet in terms of NPL drag, this figure drops to 56 per cent while considering the impact to and from the wider economy, market and structural aspects.

It seems that 33 per cent of the banks do not formally consider this aspect, with a further 11 per cent not looking at this dimension at all, the researchers said.

Experts also noted that with Basel 3 farther putting capital under pressure, sensible banks should dynamically model the impact of key risks to their capital.

However, the survey results show 17 per cent of the banks are not doing so while 31 per cent doing it in a limited manner.

Asked whether their banks' risk-appetite-statement metrics reflected their NPL strategy, 36 per cent of the respondents said they do so in a limited capacity while a further 8.0 per cent are not doing that at all.

It was also found that 25 per cent of the C-Suites have specific NPL-strategy-related targets while 31 per cent of the CROs have the same.

Meanwhile, when asked whether they consider their NPL strategy to be embedded, just over half of them or 52 per cent of the survey participants said 'Yes'. This, according to experts, is clearly not fit for purpose given the severity of the NPL issue facing the banking sector.

"The first step in looking into the NPL issue is to assess internal capabilities to effectively manage NPLs. Next, external conditions or operating environment needs to be considered. Finally, the capital implications of the NPL strategy need to be analyzed," said Sajib Azad.

The findings of the survey will be shared with the stakeholders during the next CRO forum of BIBM expected to take place next month where the issue of 'Risk Culture' will also figure high.

"The biggest reason for the swelling of NPL in our banking sector is a lack of good governance. To check the ballooning of NPL, the internal governance of the banks has to be strengthened above all," Director-General of BIBM Toufic Ahmad Choudhury said.

Meanwhile, the survey also found banks tending to consider time-horizon, portfolio/ segment and exposure-level-based targets to be broadly equally important to their NPL strategy.

In terms of options preferred for reducing NPL, banks consider "change of exposure type" to be most effective (36 per cent), followed by active portfolio reductions (33 per cent) and hold/ forbearance (31 pe rcent).

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