Curbing NPL through modernisation of loan operation

Nironjan Roy from Toronto, Canada | Published: December 06, 2019 21:14:12 | Updated: December 12, 2019 21:24:27

The recently published Bangladesh Bank's (BB) quarterly report reveals that country's NPL (Non-Performing Loan) has increased by TK 39 billion or 3.0 per cent over the previous quarter i.e., total NPL has increased from TK 1124 billion in June 2019 quarter to TK 1163 billion in September 2019 quarter. Data shows that the rise of NPL has become a regular phenomenon in our financial sector as NPL has risen every quarter since Mar 2108 except December 2018 quarter when NPL declined by TK 55 billion or 6.0 per cent from previous September 2018 quarter. There is an obvious reason of declining NPL in the December quarter.

IMPROVING NPL IN DECEMBER QUARTER BEARS BAD IMPLICATION: In our country, all banks and financial institutions follow January to December as their fiscal year, so their accounts are required to be finalised on December 31. Bank's performance of any particular year is evaluated based on balances/figures recorded as of December 31. So, bank's profit, dividend, bonus everything is determined on the December quarter-end balance. Therefore, all banks and financial institutions undertake some extensive measures to maximise profit during the last quarter of the year. Many banks and financial institutions are found to undergo some manoeuering techniques in their loan portfolios. They try to apply some strategic measures, including loan rescheduling methods, to change the status of loans from bad to good. As per present practice, when loan is taken out of its classification status by means of loan rescheduling or some other techniques, interest accumulated thereon in suspense account is immediately taken into income that eventually raises bank's annual profit volume.

This temporary manoeuvring of NPL simultaneously serves multiple purposes, including temporary improvement in country's NPL situation, reflection of bank's better performance by achieving profit target, increasing government revenue by paying taxes on higher profit, payment of dividend to the shareholders and disbursement of bonuses to the employees. However, after the end of bank's year-end impact, the situation reverses and even deteriorates further because the loan which is taken out of classification status as a part of year-end maneuvering measures, turns NPL again. In addition, some new loan also turns NPL in course of bank's regular business. So, the percentage rise of NPL in March quarter is always very high which got reflected in 18 per cent rise in country's NPL in March 2019 quarter whereas NPL rise in other quarter-ends is found to remain within 10 per cent, even below 5.0 per cent except September 2018 quarter-end.        

NO STANDARD METHOD OF ASSESSING NPL: In the March 2018 quarter, country's NPL was TK 886 billion which reached TK 1163 billion in September 2019 registering a rise by TK 277 billion i.e., 31 per cent rise during one-year period which is very alarming. Moreover, there are some quasi-NPLs which are currently considered as good but actually not so. These are not included in the published reports, so if these categories of NPL are taken into consideration, country's actual NPL should be much higher than what is reported. So far, country's banking sector has not been able to introduce any standardised scoring/grading system for borrowers. 

CL IS THE ONLY PARAMETER OF ASSESSING NPL: So far, CL (Classification of Loans) report is the only tool used in our banking sector to assess loan portfolio. This is basically a matrix where entire loan portfolio is categorised into four groups viz., UC (Unclassified), SS (Sub-standard), DF (Doubtful) and BL (Bad and Loss) based on some predetermined criteria. All loans bracketed under UC are considered good loans while loans categorised under other three groups are considered NPL. Since CL is typically a matrix based on borrower's account activity, it does not indicate the authentic state of NPL.

There is a loophole in CL, whereby a good loan can be shown as bad loan or vice versa. This situation can further be clarified with one example. Say, ABC Company has been struggling hard to survive and continuously incurring losses with little hope to continue to service debt. However, the company owner has some borrowing or funding source at his personal level from where he is utilising minimum amount to deposit in his account in a very calculative manner so that CL matrix is barely met. As per CL reporting, this loan will, of course, fall under UC and as such will be considered good loan whereas this type of loan, if standardised scoring system is applied, will drop below investment grade and as such will be treated as NPL no matter what his account statement shows. In the second scenario, XYZ company owner is very meticulous in servicing his debt. However, some unforeseen business situation, non-financial in nature, has arisen adversely affecting his cash-flow stream. Although he has taken some measures to overcome the situation, it might take about a year during when his debt-servicing would be adversely affected. According to CL, this loan will most likely be reported as SS which categorises it as NPL whereas this situation can easily be avoided through intermediate review, loan restructuring measures and applying standardised scoring system.

Incidentally, loan restructuring method as part of the ongoing process to keep the loan portfolio in all time good condition, has become a very popular and common practice not only in the developed world but also in many developing countries where loan operation has been updated and modernised. 

HOW TO REDUCE NPL: In Bangladesh, government, the Central Bank, commercial bankers, policymakers, think-tanks and professionals -- all corroborate in the same tone expressing concern about NPL. However, the reality is that NPL condition will not improve if appropriate measures are not taken. We have to keep in mind that some action plans comprising both short-term and long-term programmes with active participation, commitment and cooperation from all stakeholders including government, bank directors, commercial bankers and business community can pragmatically contribute to resolving this national problem. In order to improve a bank's overall NPL condition, it must have to follow two-way measures of which one is prevention of any new NPL, while the other is improvement of existing NPL. The former measure can be carried out through modernising loan operation system and the latter can be done through applying some standard techniques and procedures.

In our society there is a fear that any change, if brought in the banks' loan operation, may deprive the business community from bank borrowing and weaken the authority of bank owners. This is not true at all. Modernisation of loan operation with the use of technology will put proper system in place whereby all stakeholders will be benefited -- in a systematic way. If debt servicing technique can be modernised in a way that allows the borrower to draw and pay off as his cash-flow is generated, borrower's business will last long alongside his debt servicing that eventually keeps the loan in good condition. At the same time, writing off impaired loan either from existing provision or from future provision assisted by third party, preferably government's direct help in the name of bailout package, is the most accepted means of addressing NPL problem.

India, which has been facing NPL problem, has recently undergone a very bitter experience. It resorted to short-cut measures with the help of shadow banking, which has backfired. The country is now in a serious trouble with its NPL problem. So, our policymaker should take the NPL problem seriously without further delay because we are already too late and by this time our total NPL has reached about 12 per cent (11.9 per cent) which is really an alarming situation.

Nironjan Roy is a banker based in Toronto, Canada.


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