Non-bank financial institutions (NBFIs) have continued to face a rising trend in non-performing loans and loan loss provisioning due to poor governance and major irregularities.
Bad loans influenced the sector's performance to the point that it was in its worst condition in a decade last year, according to the financial stability report of the Bangladesh Bank.
The Covid pandemic has made the 34 government and non-government NBFIs more susceptible to the problem, the BB said.
Loan scams and money laundering by Prasanta Kumar Halder and his associates were the main reasons why Peoples Leasing, International Leasing, FAS Finance and Bangladesh Industrial Finance Company Limited plunged into a distressed situation.
Of them, Peoples Leasing was in the process of liquidation and that created chaos in the entire financial sector.
Moreover, bad loans rose in First Finance and Fareast Finance, worsening the overall financial health of the sector.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said Bangladesh Bank officials' involvement in scams by PK Halder was concerning.
"We have too many non-bank financial institutions to have to compete with banks and their cost of fund is high. However, these organisations are not as strictly regulated as banks and people take advantage of this for corrupt means."
The central bank will unearth more scams and irregularities if it carries out more investigations, Mansur said, blaming board directors as well for the present state of the sector.
BB officials also say the sector is in trouble because of corruption by managing directors of the organisations and so the central bank has strengthened its monitoring of the industry.
Of the 34 NBFIs, only five organisations made it to the Sustainability Rating 2020.
As per the stress testing report of the central bank, as many as 13 NBFIs were in the red or risky zone by the end of 2020, up from 10 a year ago.
A stress test on the financial institutions is conducted to assess the resilience on a standalone as well as a system-wide basis with different shock scenarios for credit risk, interest rate risk, equity price risk and liquidity risk.
The central bank report said asset quality of the NBFIs had weakened in 2020 as the total non-performing loans and leases rose by 64% compared to the previous year to Tk10,050 crore, the highest ever.
The ratio of bad loans to total loans jumped from 9.5% in 2019 to 15% in 2020. Such a marked rise has largely been resulted from regulatory reviews and adjustments on some of the companies' loan portfolios.
Bangladesh Bank data showed that 9 companies had their classified loan ratio higher than 15%; 12 companies over 10% while 15 companies could limit their bad loans to below 5%.
Last year, the loan loss provisions amounted to Tk4,440crore against a requirement of Tk5,180 crore representing a coverage ratio of 44.12% of total bad loans. The coverage was 7.6 percentage points higher than in the previous year.
Six companies could not maintain the required provision, causing a provision shortfall of Tk740 crore for the industry.
The total profit of the entire NBFI sector declined by 61% to Tk356 crore in 2020 as default loans rose alarmingly because of corruption by directors.
Consequently, the key profitability parameters, such as return on assets (ROA) and return on equity (ROE) plummeted. The ROA and the ROE were 0.4% and 3.9% respectively in the end of 2020, down from 1.9% and 10% a decade ago.
A Bangladesh Bank's official said that as the ratio of bad loans had increased, the loan-loss provisioning had also increased substantially, influencing the profitability. It may seem to be a matter of concern from the stability point of view, they added.
Amid the chaos, however, organisations, such as IDLC, Delta Brac Housing and IPDC performed well.
Officials from these companies say transparency of the owners and skilled management helped them stand out.
Formation of new boards
The High Court has restructured the boards of People's Leasing and International Leasing by removing corrupt directors to protect depositors and investors.
Bangladesh Securities and Exchange Commission (BSEC), the regulator of the stock market, restructured the board of FAS Finance and Fareast Finance in the interest of the investors. But the board directors of First Finance, who had been removed, filed a writ petition with the HC to stay the BSEC's decision to restructure the board.
Meanwhile, the BB replaced the managing director of First Finance.
It also made it mandatory for managing directors of NBFIs to get approval of the central bank before leaving the country.