Admittedly, non-performing loan (NPL) is a long-standing problem in the banking industry. Huge discourse on NPL has been going on. The contents include different options for recovery including formation of Asset Management Company to oversee the delinquency in loan sanction, disbursement, restructuring and rescheduling, political and state intervention in loan approval, and simultaneously to ensure government commitment to contain the size of NPL. But it seems that there is no in-depth focus on the policy makers' approach to addressing the NPL problem. Choosing the right approach in view of SWOT (Strengths, Weaknesses, Threats and Opportunities) analysis and long-run effects is a first step towards finding a right solution to any big problem.
NPL is a world-wide problem. Our banking industry has been suffering from the problem of non-performing loan for long. NPL ratio is 9.32 per cent (as of end-December 2019). This is still high. It is also a utopia that a bank would enjoy 100 per cent NPL-free asset structure. Available data suggest that there is no universally accepted cut-off point. EU countries have NPL ratio of less than 3 per cent .The NPL ratios of some East Asian countries range from 1.6 per cent to 3.1 per cent. The experienced bankers of the country opine that NPL ratio should be below 5 per cent. The maximum ratio of 5 per cent may be considered to be normal in our context. However, this normal level must be maintained sustainably.
It is relevant to revisit the historical trends of NPL ratios presented in the table below to assess the possibility of reducing NPL ratio to a tolerable level:
Table 1 shows that over the period of 30 years, 1st 10 years portrayed rising trends with very high ratios, 2nd 10 years signify declining trends ,and 3rd 10-year period indicated further decline to single digit ratios (except in 2011 and 2018) with mixed trends. Significant reduction of NPL ratios are observed since 2009. NPL ratios rose to more than 41 per cent and also plummeted to 6.1 per cent. Policy makers can analyse the determinants of rapid fall in NPL ratios. Reduction trends make us believe that we can reduce if we seriously will. Table 2 unveils a very significant fact that NPL is highly concentrated in the state-run banks.
NPL problem is also like a virus which attacks different banks but the coping capacity differs from bank to bank due to varying degrees of immunity and environmental favour or disfavour.
It is seen from the Table 2 that NPL ratios of state-run banks are tremendously alarming and have raised the overall NPL ratio beyond expected level. They share about 52 per cent of total non-performing loan. However, significant fall in NPL ratios of SCBs and DFIs in 2019 as compared to those of 2018 has brought down the average NPL ratio to 9.32 per cent in 2019 from 10.30 per cent in 2018. But the ratios still lie at a very high scale relative to those of peer banks.
Table 1 and Table 2 reveal that it is possible to bring down NPL ratio. The ratios of non-performing loan of PCBs and FCBs are almost close to our expected level of maximum 5 per cent. If the government tightens monitoring and control of state-run banks, their NPL ratios would come down. As per Financial Stability Report 2019 (Bangladesh Bank), 31 banks have maintained NPL ratios below 5 per cent. Now the question is: which approach policy makers should follow? Generally, three approaches are available for a problem solving exercise - (i) Use of existing set of measures with necessary reforms and removal of faults; (ii) Looking for new set of measures in place of existing ones; and (iii) Use of an optimum combination of existing and new ones.
Faults prevail not only in policies but also in the choice of a right approach. The very approach i.e., the way one intends to find a solution to any problem determines the nature, rationale, and the strength of the solution option. Policy makers can consider the first approach cited above in dealing with the NPL problem. Without examining our prevailing capacity to resolve NPL problem, we should not seek market-based solution like formation of Asset Management Company (AMC). IMF expects that ongoing measures will address the situation effectively (IMF country report no. 19/299 September, 2019).
In quest of finding solution to the NPL problem, the higher authorities should first recognise that the existing system of banking sector governance (excluding legal measures) has been vitiated by a good number of faults. The leading ones include biased, and lenient policy framework by the central bank, lack of adequate supervision and monitoring both by the central bank, and the operating bank in loan-related activities, absence of appropriate accountability framework, lack of report with intensive analysis of NPL, and undue influence by vested interested quarters, particularly in state-owned banks (SOBs). Second, the authorities should recognise that the existing legal framework for banking cases is not suitable. Third, the authorities should pay serious attention to curing the ills of SOBs. The principal root of NPL problem lies in SOBs. One of the major policy faults is that the state-owned commercial banks carry the sign boards of Public Limited Company but in actuality, public fund has been infused into them since long to let them meet capital adequacy requirements. Reforms in the governance of SOBs are urgently required.
No other measure to minimise NPL ratio may be more effective than the government's commitment and its strict compliance. Hopefully our Finance Minister has advised the banking sector leaders to keep non-performing loan (NPL) at a tolerable level (The Financial Express 28/4/20). FM's advice unequivocally manifests the intention of the government. Now we can hope that appropriate strategies would follow.
NPL is a great problem, but not a great concern as long as the government is committed to getting it curbed. If the first approach is chosen, then the strategy is to be redesigned. Removal of the faults and reforms in the existing governance system of banking, reforming SOBs, establishing a Special Tribunal exclusively for banking cases, and a policy framework for genuinely identifying unintentional and willful defaulters may constitute the defensive strategy to combat the NPL menace. As an implementation strategy, there may be an agreement among the ministry of finance, the central bank, all the concerned banking authorities, and the professional bodies of bankers as well as the business community.
Haradhan Sarker, PhD, is ex-Financial Analyst, Sonali Bank & retired Professor of Management.