Cenbank sees current high NPLs as a big threat to financial sector

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The Bangladesh Bank views the existing high non-performing loans (NPLs) in the country's banking sector as a significant threat to the progress of the financial sector, leading to an increase in capital shortfalls in banks.

The current short-term challenges in the banking and financial sectors have emerged in the quarterly report on currency and exchange rates released on Thursday.

According to the report for the three months to December 2023, the increase in the NPLs has led to an increase in the provisioning requirement. This, in turn, has created a capital shortfall for banks when making provisions against that fixed amount.

As per the policy, banks are required to keep provisions ranging from 0.50% to 5% against deposits. However, there are policies stipulating provisions of up to 20%, 50%, and 100%, depending on the classifications of defaulted loans.

A senior central bank official said banks must maintain a minimum of 10% of their risk-weighted assets as capital. When the amount of bad assets increases, the ratio of risk-weighted assets also increases. Consequently, capital preservation must be undertaken from the profits of banks; otherwise, their capital deficit increases.

According to the Bangladesh Bank report, improving the capital adequacy of banks is not possible without reducing NPLs. Over the past ten years, the NPLs ratio of state-owned banks has averaged more than 20%, causing them to fail to meet the minimum capital adequacy requirement, with specialised banks being particularly undercapitalised.

The country's banking sector experienced a steep rise in default loans by Tk25,000 crore in 2023. At the end of December last year, the total default loan in the banking sector stood at Tk1.45 lakh crore, accounting for 9% of the total loans that stood at Tk16.17 lakh crore, according to Bangladesh Bank data.

In December 2022, the default loans had increased by Tk17,300 crore to Tk1.20 lakh crore, representing 8.16% of the total loans.

According to the central bank report, ensuring the proper use of the loans disbursed by banks and identifying willful defaulting borrowers, then taking appropriate punitive measures against them, will play an effective role in reducing toxic loans.

Furthermore, as of the end of September 2023, it can be observed that 14 banks had a capital deficit. Four out of six state-owned banks faced a combined capital deficit of around Tk13,128 crore.

Additionally, among the three specialised banks, the capital deficit of two banks amounts to Tk18,275 crore. In other words, most of the capital deficit in the country's banks is concentrated in state-owned and specialised banks.

The Bangladesh Bank report highlighted several crises faced by the country's banking and financial sector throughout 2023, including the dollar crisis, devaluation of the taka, liquidity crisis in the banking sector, and an increase in defaulted loans.

"With the increase in the Federal Funds Rate in the international market, the rise in import costs in the domestic economy, the decrease in the inflow of foreign direct investment, and the decline in remittances and export income, a balance of payments deficit has been observed," he stated.

As a result, the Bangladesh Bank has been selling large amounts of dollars to meet the demand from banks for additional dollars. This has led to the appreciation of the greenback against the local currency and, simultaneously, a liquidity crisis in the banking sector.

According to the report, especially to alleviate the liquidity crisis of Sharia-based banks, the excess liquidity of the statutory reserves of banks improved by the end of December 2023 as the central bank provided liquidity through the special liquidity support system. However, the excess liquidity position at the end of November 2023 was negative.

High inflation has discouraged depositors from keeping money in banks since interest rates on customer deposits are lower than inflation. The central bank fears that if these problems are not quickly resolved, overall economic activities will be disrupted in the long term.

According to the central bank's report, at the end of December 2023, the reserves stood at $21.86 billion, according to BPM6, which equates to about 4.6 months of import expenses.

However, the latest Bangladesh Bank report stated that the country's foreign currency reserves fell by $533.82 million in just a week due to a selling spree of the greenback by the central bank to commercial banks.

The reserves of foreign currencies stood at $19.45 billion as of 27 March, down from $19.98 billion on 20 March, according to Bangladesh Bank data.