Reasons are known, banks now need to stop NPL from growing further

Default loans in Bangladesh's banking sector came down to Tk88,734cr in December 2020, which was 7.66% of total loans, the lowest in recent years.

That did not happen because of a sudden improvement in banks' efficiency, or generous repayment of borrowers. The payment deferral facility offered by the central bank to give businesses a breathing space during Covid-19 shocks helped banks to go for some sort of window-dressing and make its loan portfolio look good.

As the facility started phasing out after several extensions, the real picture has emerged. Default loans marked a sharp rise, crossing Tk1 lakh crore in September last year. It advanced further to Tk1.25 lakh crore to June and again to Tk1.34 lakh crore, as July and September added Tk9,000 crore to it. Till September, commercial banks have 9.36% of their total disbursed loans defaulted, Bangladesh Bank data shows. It means for every Tk100 loan, about Tk10 is defaulted.

As the economy grows and loan portfolio expands, so grows the default loan amount. Non-performing loans in Bangladesh's banking sector grew by 1.7 percentage points in two years. It happened when businesses started to recover from covid shocks helped by low-cost stimulus loans and favourable rescheduling schemes, and banks started to expect to get back the previous instalments.  

Though businesses almost returned to normal activities after the pandemic, another blow came from the Russia-Ukraine war. It disrupted supply chains, caused price hikes of everything leading to worldwide inflation and made fuels almost unreachable.

Businesses are hard-pressed by the gas crisis, while costly and hard to find dollars raised their input costs and cut profit margins.

As the war still looks unstoppable, its adverse impacts may continue to be felt for an unforeseeable period across businesses and countries.

Mutual Trust Bank MD Syed Mahbubur Rahman said when businesses started to recover from pandemic-triggered losses, the Russia-Ukraine war dealt another blow to borrowers.

Moreover, large industries recovered fast but small and medium enterprises failed to make a full recovery and are now turning into defaulters, he noted, giving his views to The Business Standard on the rising trend in non-performing loans.

But what Mohammad Shams-Ul Islam, managing director at the state-owned Agrani Bank, said has different connotations. Some customers make payments to private banks regularly, but they do not want to do so in the case of the state-owned banks, he noted.

Out of the total defaulted loans, state-owned banks shared 45% or Tk 60,502 crores. Some of them are among the top 10 banks with the highest percentage of NPL.

Why does defaulting loans from state-owned banks seem guilt free for some borrowers? Why are top state-lenders behind the last decade's largest loan scams like that of Hallmark? How once a well-performing bank with a new concept like BASIC Bank was almost emptied by loan scammers? 

And private banks are also becoming no less safe haven for a section of borrowers as figures are now coming to light. 

Default loans in non-bank financial institutions have also soared. At the end of September, their default loans reached Tk17,372 crore, which was almost 25% of their total disbursed loans. The amount is higher by about Tk4,000 crore since December last year.

In recent years, NBFIs have emerged as another easy prey to loan scammers, who predominantly are the board members of the NBFIs that were bilked out of several thousand crores in the last few years. The findings of the central bank's own investigation were horrifying; the lack of supervision, even involvement of some of its own people were revealed in aiding and abetting the scammers.

If it happens so at regulators, not much of a confidence is left for the financial sector. But an economy cannot afford to allow its banks and other financial institutions to implode.

Though NPL sharing 6% of total loan is considered a safe threshold, there are many banks worldwide with the ratio much higher than that in Bangladesh. Independent data showed Ukraine had the highest NPL rate even before the war, followed by many countries in the Eastern Europe and Africa.

That does not come as a consolation for banks and NBFIs in Bangladesh, given the state of the affairs like supervision, internal risk management of the institutions, efficiency of the staff and their integrity and accountability.

Giving loans is the core business of banks and non-banks, and the efficiency of their people comes first while giving loans. Selecting a good borrower is the first step to safeguard the bank's assets. Here lies the importance of skills and professionalism.

Banks and non-banks have grown in astonishing numbers, but do they have enough skills to run efficiently?

Former Bangladesh Bank governor Salehuddin Ahmed said since the birth of these institutions, NBFIs in particular, enough skilled manpower has not been appointed.

In many cases, approvals of new banks and financial institutions have been political, which contributed to loan irregularities, he told TBS, feeling that proper monitoring could have reduced such ill practices and saved people's money ending up in wrong pockets.

What happens if banks and NBFIs are overburdened with NPLs?

It reduces funding scopes for small businesses. As the default loan amount is so big, bankers have now lost confidence in giving small loans even to small and micro enterprises, said Syed Mahbubur Rahman, who was the chairman of the Association of Bankers Bangladesh. Large companies take loans but do not pay in time, while small ones are denied small amounts, he said, showing the contrast.

Such simplification will not however show the way out of the chronic ailment of the country's financial sector. Global CFOs (chief financial officers) are working to find an answer to this, as NPL is not a problem for any specific country, it is a global scourge.

They show how having a strong surveillance in force makes the difference. Banks could bring down high levels of NPL ratio in Cyprus, Greece, Portugal, Ireland, Italy and some Central and Eastern European countries whose NPLs peaked to 8% of their total loans in 2013, World Bank data shows.

During its recent visit, an IMF mission raised its concern about the rising NPL in Bangladesh's banks and enquired about the central bank's plan to reduce it.

While the regulator's proper supervision is a must, banks need to develop their internal credit risk assessment models that analyse the financial and other data of loan applicants. The proper credit risk management in banks has a very important impact on the quantity of non-performing loans, says The CFO, a global platform of financial sector analysts and professionals.

While going for aggressive lending to earn more profit, bankers need to learn to identify the irresponsible borrowing behaviour of some applicants who also dream of big profits with little idea of how. Slumps in people's income, decreasing market value of assets in times of an economic slowdown, like the one at present, may cause business loss and make borrowers unable to pay back, and bankers should be aware of such genuine circumstances.

Bankers also need to learn to identify borrowers' behaviour from their past track records as prevention is better than cure in dealing with NPL.

One cannot abolish NPLs fully, but can reduce it greatly by good underwriting, sound lending policies and rigorous qualitative and quantitative standards to lend money to good borrowers.

If the banks fail in the steps before lending and now face NPL, they need to start with a new approach and evaluate both opportunities and risks for each of the loans case by case, and find ways to recover those. Because they are the custodians of the depositors' money and the key source of funds for the economy to move ahead and create more jobs, they must learn to prevent their loans from being defaulted in any way—willfully or by circumstances.