Developing own policy for curbing NPLs  

The regional seminar the Bangladesh Institute of Bank Management (BIBM) organised recently in Dhaka on contemporary banking practice in the neighbouring countries is a significant development. Bankers from Bangladesh, Bhutan, India, and Nepal participated in the March 04-05 seminar.

Every bank has its own training academy and Bangladesh Bank (BB) has also established its own training academy but there is no industry-wide professional training academy for the bankers except BIBM. This institution has been immensely contributing towards the development of professional bankers for the last four decades.

The regional seminar mainly focused on contemporary issues and challenges the bankers are now facing not only in the region but also across the world. However, non-performing loans (NPLs) became the main issue of discussion, followed by directors' qualification. These are two core issues in the banking sector of Bangladesh which need to be immediately addressed.

Issues related to directors' qualification have long ago been addressed in many countries, both in developed and developing. This is now the problem of some selected countries - and Bangladesh is one of them.

On the other hand, NPL has become a global issue and most of the countries, irrespective of developed and developing ones, are suffering from this serious problem. The degree and magnitude of the problem may vary from country to country but every country is struggling with this problem.

We should keep in mind that NPL is an integral part of banking business as, historically, part of the money lent out is never recovered. Bad debt, provision and writing-off are very common accounting terminologies in the banking industry.

Proper process in place, fair practice, following check & balance in approving loans, stringent monitoring system, use of technology and improving loan operation procedure enable banks to keep the percentage of NPL minimum. Banks in developed countries are following these but NPL can never be completely avoided.

While elaborating on NPL in the BIBM seminar, the discussants referred to Nepal and even recommended other countries to follow Nepal in handling NPL which has the lowest 1.71 per cent NPL.

This is apparently a good suggestion but no country should blindly follow the strategy of other countries. The economic structure, fundamentals, monetary goals and objectives of every country are unique. So replication of one country's policy in another country may backfire, instead of benefitting.

We do not know whether Nepal has followed expansionary credit policy or contractionary credit policy. The countries, which have pursued expansionary credit policy, will have higher percentage of NPL. There is a linear relationship between expansionary credit policy and NPL. When credit is loosened, part of it may go to the wrong hands who are typically called willful defaulters. With more and easy credit, incremental investments are made and part of which fail to generate revenue and finally collapse, resulting in default. All of these are cyclical and contagious impact of the credit policy. During the decade of 90s and beginning of the current century, developed countries, including USA, pursued expansionary credit policy in order to boost their economy and the result was massive NPL which eventually caused financial meltdown across the world in 2008. Europe is still maintaining expansionary credit policy and therefore, rate of NPL in many European countries is relatively very high. Historically, Chinese banks have very low rate of NPL but during the last few years, they are pursuing expansionary credit policy and their NPL is now rising. We frequently refer to the banking practice followed in India, but the recent story that revealed their bank loan scandal is very frustrating.

So, Bangladesh will not be an exception to the general practice. Besides, banking sector in our country has just developed, albeit without putting proper system and standard in place. Loan operation has not been streamlined and modernised at all. This has aggravated our overall NPL situation which should be urgently addressed.

Remedial measures followed by other countries in managing NPL may be reviewed instead of being replicated. We should develop our own policy and strategy for curbing NPLs. 

Nironjan Roy, CPA, CMA is a Toronto-based banker.

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