Soaring NPL poses downside risk to growth momentum

Rising non-performing loans (NPLs) and tight liquidity condition on the domestic front alongside external challenges are likely to pose downside risk to growth momentum, the central bank has said.

The external challenges include global economic slowdown, uncertainties over a lingering US-China trade conflicts, tightening financial condition in the global market and a delayed Brexit deal.

"A good financial and fiscal policy measures would be required to maintain growth and price stability," the Bangladesh Bank (BB) said in its latest quarterly report for January-March.

The indicators of the banking sector showed some concerns during the third quarter (Q3) of the fiscal year (FY) 2018-19, as reflected in the NPL, capital adequacy, provision shortfall position and liquidity conditions, according to the BB report.

Overall NPL edged up during the period under review, driven mainly by the state-owned commercial banks (SoCBs) and private commercial banks (PCBs), the report noted.

The central bank's views came against the backdrop of NPLs in the banking sector that surpassed the Tk 1.0 trillion-mark for the first time in March 2019.

The volume of classified loans jumped by more than 18 per cent to Tk 1,108.73 billion in Q1 of the year from Tk 939.11 billion in the preceding quarter, the BB data showed.

Besides, the share of NPL also rose to 11.87 per cent of the total outstanding loans in the January-March period of 2019 from 10.30 per cent in the previous quarter.

The classified loans cover substandard, doubtful and bad/loss of total outstanding credits, which stood at Tk 9,337.27 billion as on March 31. It was Tk 9,114.30 billion three months before.

Senior economists and experts suggested the policy makers take "effective measures" for addressing the rising trend in NPL in the country's banking sector.

The economic growth momentum and financial stability may hamper if the rising trend in classified loans continues, they warned.

"The NPL issue should be addressed immediately," said Toufic Ahmed Choudhury, former director-general (DG) of the Bangladesh Institute of Bank Management (BIBM).

Dr. Choudhury laid stress on ensuring good governance in the country's banking sector so that the situation concerning classified loans can be improved.

"The bankers will have to comply with the existing rules and regulations properly before they sanction any loans to avoid loans becoming bad," he added.

The banking analyst also suggested selling out bad loans to asset-management companies by enacting new laws, saying the companies should be empowered legally to recover bank money from the defaulters.

"Excess liquidity in the banking system squeezed owing to slower deposit growth, a significant increase in currency outside banks, and a rise in NPL," the central bank said.

Economic activity maintained its momentum during the period under review in line with projected 8.1 per cent GDP (gross domestic product) growth in FY 19, supported by both strong domestic and external demands.

The report also said a pick-up in remittance inflows and acceleration in the government's mega project implementation helped boost domestic demand.

On the production side, growth impetus largely came from the industrial sector, favoured by substantial improvement in electricity generation.

Besides, buoyant service sector activities along with bumper agricultural production further spurred growth dynamics, the report said, adding that an uptrend in export growth has been maintained by continued external demand.

"Looking ahead, growth prospect is favourable owing to continued solid domestic demand in near future with falling inflation," the report predicted.

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