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The non-performing loans in Bangladesh's banks may cross 30 per cent of the total outstanding loans by this financial year-end, the central bank predicts in a cautious half-yearly monetary policy it has crafted.
Such predicted spurt in NPL buildup raises concerns for the banking industry that already sees the bad loans on a worrying upturn for accumulated anomalies over the years. Until September 2024, the country saw classified loans make a quantum leap to Tk 2.85 trillion, accounting for around 17 per cent of the total outstanding loans.
Releasing the latest monetary policy statement (MPS) Monday for the second half of this fiscal (FY'25), the Bangladesh Bank showed the major NPL-contributing factors such as systemic weaknesses, regulatory gaps, and exploitative practices such as money laundering and illicit capital flight.
In response, says the policy statement, the regulator has introduced comprehensive guidelines aligned with international best practices for loan classification, provisioning, and recovery.
"The Bangladesh Bank is committed to enforcing strict regulations consistent with international best practices to improve governance. Strengthening regulatory oversight and effectively implementing these reforms will be crucial for restoring stability, resilience, and public trust in the country's banking sector," it says about corrective actions to be pursued.
The management and recovery of non-performing loans are paramount priorities for the BB in its efforts to ensure the financial stability and resilience of the banking sector.
It has emphasized the necessity of solid credit-risk-management policies and tools that comply with the universally-designed Basel III requirements for banking.
Accordingly, the Expected Credit Loss (ECL) methodology-based provisioning system is scheduled for implementation in 2027, in alignment with the International Financial Reporting Standard (IFRS 9).
This ECL model incorporates historical data, current economic conditions, and future forecasts, thus enabling banks to engage in proactive credit-risk management and mitigate the accumulation of NPLs.
In the context of recovering default loans, particularly those in legal proceedings within the Artha Rin Adalat and higher courts, the regulator has issued a policy directive highlighting the essential role of commercial banks' legal departments. This directive underscores the need for these departments to expedite the resolution of such cases to enhance overall banking efficiency and effectiveness in managing credit risk.
Responding to some questions regarding the exchange rate, BB Governor Dr Ahsan H. Mansur said they have introduced a more flexible corridor of exchange rate and banks will have to move within the band.
But there are some exchange-houses trying to manipulate the forex market and these aggregators really want to take the exchange rate upwards, he told the reporters.
"They (aggregators) behave like whatever they offer will be the market rate, which is wrong. Aggregators are the manipulators. The responsibility of BB is to ensure stability on the forex market," the governor said.
He said such abettors will offer Tk 125 a dollar for today, Tk 130 tomorrow and Tk 135 few days later. "Where is the end? I asked the same question to the IMF but did not get any satisfactory response."
The central bank governor sees the exchange rate in the right direction because the country's balance of payments is becoming stronger riding on significant growth in the earnings from remittance and export.
The banking regulator itself wants to leave the exchange rate to the market but a favourable atmosphere like comfortable reserve position and a market-intervention fund involving around $2.0 billion will be required.
"I cannot go for adopting a completely market-centric approach in an unstable environment because I know there will be significantly overshooting in exchange rate and it will take the rate to a level nobody can give me any clue," the governor said on a note of caution.
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