NPL, another big foe to fight

Like in the previous monetary policy, the Bangladesh Bank in its new policy has acknowledged that high non-performing loans (NPLs) are a big burden for the country's financial sector.

Analysts, bankers, and economists were waiting to see what measures the central bank takes to address the growing menace, which is eating up banks' profits and hampering the stability of the financial sector.

The monetary policy statement for the first half of FY24, announced on Sunday, stated that the Bangladesh Bank has intensified its oversight of banks and large borrowers in its efforts to mitigate the high NPL ratio. 

Additionally, the central bank has taken a proactive role in amending the existing Bank Company Act of 1991 to tackle the challenges associated with the high NPL problem.

Since the announcement of the current monetary policy this January, the banking sector has witnessed a Tk10,000 crore increase in NPLs within three months. 

According to data from the Bangladesh Bank, the total NPLs rose from Tk1.21 lakh crore in December 2022 to Tk1.31 lakh crore in March this year.

The central bank also acknowledges that the slower growth of deposits in banks, coupled with the persistent burden of NPLs, has contributed to the tightening liquidity situation. 

While the monetary policy statement emphasises the importance of reducing NPLs and enhancing corporate governance through improved supervision and monitoring, critics argue that more decisive steps are necessary.

Dr Salehuddin Ahmed, former governor of the Bangladesh Bank, expressed disappointment with the measures outlined in the monetary policy statement, citing the need for stronger actions to address NPLs. He proposed denying repo or foreign currency facilities to banks unable to recover NPLs.

The new monetary policy says reducing NPLs and assuring good corporate governance in the banking industry through strengthening supervision and monitoring guidelines are crucial for a stable financial system. The central bank and the government have formed a committee to review the existing Bank Company Act 1991, where effective resolutions on NPL have been proposed, it says.

The committee's recommendations have been sent to the Financial Institutions Division of the Finance Ministry. Following the due processes, the Cabinet Division has already approved the draft Bank Company (Amendment) Act 2023, which is under the process of approval in the parliament. 

This Bank Company (Amendment) Act 2023 will be useful to identify and take appropriate punitive actions against willful loan defaulters and reduce families' influences on bank boards. Work on updating the Finance Company Act is also in progress. Besides, BB has drafted Bankruptcy Act, Money Loan Court Act, and Negotiable Instrument Act, and respective ministries are examining them. The introduction of such legislative guidelines and its proper enactment would strengthen banking sector discipline and corporate governance.

To further strengthen supervision and monitoring, the BB introduced a new monitoring mechanism at the beginning of FY23. Under a Memorandum of Understanding (MoU), state-owned commercial banks and domestic private commercial banks have been assessed to address NPL and performance-related issues while improving governance.

The central bank said it is also taking steps to improve transparency by including rescheduled loans alongside NPLs in the annual financial stability report as this will provide a more accurate depiction of the distressed asset situation. 

Furthermore, the adoption of the Risk-Based Supervision framework is underway to enhance supervisory capabilities and align with international best practices. The BB aims to implement RBS throughout the country's banking sector by 2025.