NPL: A GREAT DISTRESS OF BANK
The ongoing pandemic has intensified Bangladesh's financial stability risks because of high levels of non-performing loans, weak capital buffers, poor bank governance, weak risk management, weak asset quality and lower credit growth.
Banking professionals, economists and money market specialists are fully aware that the most common and complicated problem in the banking business is a non-performing loan (NPL). A bad loan or NPL is considered an unavoidable consequence of a bank's credit risk management. The loans which may not perform to serve interest or principal and other charges are called non-performing loans (NPL) or problem loans.
The Bangladesh Bank has asked state-owned Sonali, Janata, Agrani, and Rupali banks to reduce their high amount of non-performing loans (NPLs), boost loan recovery from top defaulters, and accelerate the pace of stimulus fund disbursement. The four state-run banks jointly face a Tk 12,212.63 crore capital shortfall at present, as per data by the Bangladesh Bank. From January to December of last year, 58 banks and 30 non-bank financial institutions (NBFIs) recovered at Tk1,49,774.61 crore from the CMSME sector — up from Tk1,33,100.31 crore a year earlier. Loan recovery from the cottage, micro, small, and medium enterprises (MSMEs) rose 12.51% last year amid the Covid-19 pandemic, owing to good repayment behaviour. From January to December of last year, 58 banks and 30 non-bank financial institutions (NBFIs) recovered at Tk 1,49,774.61 crore from the CMSME sector — up from Tk1,33,100.31 crore a year earlier. The recovered amount is 87.51% of the Tk 1,71,152 crore of recoverable loans, according to the latest data by the central bank. Of the total recovered amount, the banks recovered Tk 1,45,119.66 crore and the NBFIs recovered Tk 4,654.96 crore from CMSME clients. The repayment behaviour of small and medium borrowers is much better than the large borrowers, which was one of the reasons behind the surge of loan recovery. Last year, most of the SME borrowers continued to pay loan instalments despite loan moratorium facilities offered by the Bangladesh Bank. The non-performing loans (NPLs) in the sector dropped by Tk 438.34 crore to Tk 30,849.82 crore in 2020.
The amount of NPLs fell by more than 6.0 per cent or Tk 60.49 billion to Tk 882.82 billion excluding offshore banking operations as of December 31 from Tk 943.31 billion a year ago, the latest BB data showed. The volume of defaulted loans with six state-owned commercial banks came down to Tk 422.74 billion, excluding offshore banking operations, in the final quarter of 2020 from Tk 439.94 billion a year before. On the other hand, the volume of NPLs with 42 private commercial banks fell to Tk 399.16 billion as of December 31 from Tk 4417.74 billion in the Q4 of 2019. The classified loans of nine foreign commercial banks came down to Tk 20.32 billion in Q4 of 2020 from Tk 21.04 billion a year before. However, the classified loans with two development finance institutions remained unchanged at Tk 40.62 billion as of December 31 last year.
NPL is unavoidable but manageable. Since NPL is the unavoidable consequence of a bank's lending operations, its proper treatment is the only acceptable solution as it keeps the bank's NPL at the very minimum. Unfortunately, the banking industry in the developing world does not apply proper treatment to NPL, instead resorts to some manoeuvring measures with an intent to conceal the actual NPL and our country is no exception to such manoeuvring strategy to keep the NPL low in banks' books.
One of the first steps in resolving NPLs is to take stock of the situation. The loan officer should evaluate the borrower, know the bank’s position, review documentation, evaluate the collateral situation, closely monitor any other bank accounts held by the borrower, liquidate the collateral. And lastly, an undesirable resolution of a problem loan in bankruptcy. A robust risk management culture, with a ‘well articulated’ risk management policy, can help the institutions to avoid loan default. NPL is like cancer in the banking industry that cannot be kept hidden, it must be treated properly to avoid dire consequences for the whole industry.
