Roadmap to banking sector's salvage

Bedevilled by systemic corruption and irregularities, a chronic culture of defaulting on loans and recurrent cases of outright fraudulence, the banking sector has long been crying out for sweeping reforms. Particularly, unchecked growth of non-performing loans (NPLs), which skyrocketed from Tk 22.5 billion in 2009 to an outrageous amount of Tk1.55 trillion in the first quarter of the current fiscal year (2023-24), has rendered the banking sector extremely fragile. Meanwhile, in March last year, the global credit rating agency Moody's downgraded its outlook for Bangladesh's banking sector from 'stable' to 'negative'. So, it needs no explaining why the crisis-ridden banking sector which has exposed the economy to great risks is in need of urgent reform.

In this context, 'a comprehensive reform roadmap' the Bangladesh Bank (BB) recently unveiled with a firm timeline (till June 30, 2026) set for the banks to comply with certainly looks positive. The reform aims at achieving a list of ambitious targets including drastically cutting down classified loans below 10 per cent in the state-owned banks and below 5.0 per cent in the private sector banks. The key objectives as outlined in the said roadmap include, among others, restructuring the regime of writing off debts, shortening the duration of bad debts (classified loans) from three to two years and the mandatory requirement of maintaining 100 per cent provision against the loans. Through this set of measures, the central bank hopes to achieve a significant reduction of nonperforming loans (NPLs) by 2.76 per cent or Tk433 billion within the stipulated timeline.

Although the fact that the banks have been empowered to shorten the period of writing off classified loans has been a welcome one, at the same time, concerns have also been raised about the availability of financial resources to meet the mandatory requirement of maintaining cent per cent provision by the banks for the purpose. The question arises because in the central bank's latest financial stability report, the combined net profit of the banking sector was stated to be at Tk142.30 billion. Given that all the banks have to write off Tk433 billion worth of bad debts within the deadline of June 30, 2026, it would take three years to achieve the target if they have to go by the mandated 100 per cent provision. That would overshoot the deadline by about six months. Worse yet, except for a few banks holding over 100 per cent provision as safeguard against potential future risks, some banks are reportedly facing provisioning shortfalls to meet the challenge of writing off their classified loans. Obviously, it is an important issue for the central bank to take into account for the success of its target of reducing NPLs below 8.0 per cent by the declared deadline as chalked out in its 11-point initiative.

Also, the BB's six-point measures to ensure corporate governance as envisaged in the roadmap with a view to ending the evil practice of lending that crosses limit or uses forged papers or even extends anonymous loans would hopefully bring expected results. Similarly, alongside the various bold moves it has taken, the one to allow under private initiative to form a so-called asset-management company (AMC) for banks to sell their classified assets and clean their balance sheets is well-taken. Hopefully, as indicated by senior central bank executives, there would be  necessary policy changes to this effect for a prospective shareholder director of a bank to go by. However, the central bank needs to be more specific, serious and even-handed in its application of the proposed actions, as spelt out in the roadmap, to see success.