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Fresh pledge to curb NPL  

Shahiduzzaman Khan     | Published: January 12, 2019 22:16:13


Finance Minister AHM Mustafa Kamal said last week that the government would prepare a guideline to verify all classified loans in the banking sector and take necessary steps for curbing default loans. 

The Bangladesh Association of Banks (BAB) will, according to reports, provide the Ministry of Finance with a list of loan defaulters, their borrowing and interest amounts. The ministry is expected to verify the list in line with the data of the central bank and the Financial Institutions Division. Afterwards, the ministry will prepare the guideline and go for action.

The rising non-performing loans (NPLs) has become a major concern for the country's banking sector. Besides, the number of large loans is also on the rise while the amount of credit received by small and medium enterprises has declined.

The finance minister said one of his priorities would be to straighten out the problems of the country's banking sector as early as possible. Some banking sector-related laws are found flawed and those need to be amended. The volume of NPLs could have come down drastically had the government implemented the existing laws properly.

In the context of Bangladesh, the borrowers usually go to the court to have a shield after defaulting on repayment of bank loans. It makes loan recovery a lengthy process. Such a bad practice clearly shows that the public money here goes to the wrong hands.

 In this regard, the minister said his goal is clear: whoever takes money either from a public or a private bank, he or she has to repay in time, along with interest. All written-off loans, since the inception of the country, will also be rechecked. A committee will be formed to locate the people who helped accumulation of classified and written-off loans.

It may be mentioned that the country did never default on external debt servicing. Its external debt-GDP ratio is only 13.2 per cent while its risk-free limit is 40 per cent.

However, handling a chaotic and vulnerable banking sector along with a huge amount of bad loans is the biggest challenge for the government. At the same time, stimulating the private sector investment and reforming the tax system will also remain among the major tasks for it.

Fundamental structural reforms need to be done in the banking sector. The banks are in trouble because they have happily doled out loans to the big names without proper judgment and monitoring. Now these institutions are being compelled to reschedule the loans. Also, there is a huge lack of supervision in the banking system. Unless there is political will, it would be very difficult to solve these problems.

According to the International Chamber of Commerce-Bangladesh (ICCB), growing NPL is a curse for sustainable growth. The chamber called upon the government to do more to combat the menace. Only limited action was taken to penalise defaulters, curtail risks and strengthen bank management, it said.

Since the country is on course to become a developing country, all efforts should be made to strengthen the banking sector, the backbone of the economy. The best way to meet the requirements and challenges of a developing country is to strengthen the capital and liquidity ratio of banks.

There is no denying that the NPL is an issue that is impacting the capital adequacy of the sector. Six state-owned commercial banks account for about a quarter of the total banking sector assets. They are supplemented by two state-owned specialised banks, 40 private commercial banks and nine foreign banks.

According to a Bangladesh Bank study covering 2012 to 2016, the average ratio of NPLs to total loans was about 27.10 per cent. It was 4.9 per cent for private commercial banks, 6.5 per cent for foreign banks and 22.56 per cent for state owned banks.

The percentage of the classified loan to the total outstanding loan stood at 10.1 per cent in June 2016, with private commercial banks accounting for 5.4 per cent, state owned banks 25.7 per cent and foreign banks 8.3 per cent. Until September 2017, the total banking sector's loan amounted to Tk 7527.30 billion, of which Tk 803.07 billion, or 10.67 per cent, was bad loan.

If the restructured loans were included, the NPL goes up to 17 per cent of the outstanding loans. At the end of September last year, the state owned banks had a combined bad debt of Tk 385.17 billion, private banks Tk 339.billon, and foreign banks Tk 22.98 billion.

 Naturally, high NPLs had affected the profitability and the overall capital to risk-weighted assets ratio. The bad loans are routinely restructured allegedly to permit further lending to the same borrowers.

There are apprehensions that the upward trend in the disbursement of industrial loans might continue in the coming months as the central bank is encouraging the banks and non-banking financial institutions (NBFIs) to expedite their credit flow to productive sectors. Recovery of the industrial loans has increased by nearly 42 per cent.

A recent study has found that the banking sector in Bangladesh has a significant flaw in loan recovery procedures as the ratio of NPL is much higher than the international average. It said that 'bad' category of classified loans, which is not recoverable, constitutes about 70 per cent of the total NPL.

Too much dependence on court for recovering loans is one of the reasons behind the remarkable rise in NPL as court procedures are usually lengthy, expensive and cumbersome. More than 80 per cent cases related to NPL, according to analysts, could be settled out of court.

Since recovery of default loans is a time-consuming process, the option of alternative dispute resolution (ADR) can help address the problem of default loans. The people would love to share the finance minister's hope that when the guideline to be prepared for curbing the default loans is translated into action, there will be no NPL in the banking sector.                     

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