The size of nonperforming loans (NPL) in Bangladesh is recorded much higher than in other countries in Asia and the Pacific, says the Asian Development Bank's (ADB) report titled "Managing Nonperforming Loans in Bangladesh".
The report, which was published on Monday, shows that NPLs in Bangladesh have been rising and falling in previous decades, but they have been increasing again in recent years.
From its independence in 1971 until 1999, there was a steady rise in the share of NPLs in Bangladesh, with the gross NPL ratio to total loans in the banking system peaking at 41.1 percent in 1999.
The ratio of NPLs to total loans in Bangladesh as of 2017 was 9.3 percent, which is high compared to other countries in Asia and the Pacific.
NPLs further rebounded to 10.0 percent in 2012, and with some fluctuations, it again rose steadily, from 8.8 percent in 2015 to 10.3 percent in 2018.
The government adopted several measures to ensure better policy framework and control of NPLs in last three decades.
Despite several measures in Bangladesh, including the implementation of prudent measures in the banking system in 1990 and loan classification and provisioning with the international standards, the NPLs in the banking system is still very high.
According to Bangladesh Bank data, NPLs stood at Tk112,425 crore as of June this year. Both private commercial banks and foreign commercial banks had NPLs greater than five percent of total loans, while state-owned commercial banks had NPLs in excess of 30 percent of total loans.
The NPL ratio to total loans in 2017 was highest in India (10.0 percent), followed by Bangladesh (9.3 percent), Thailand (3.1 percent), Indonesia (2.6 percent), Vietnam (2.3 percent), Sri Lanka (2.5 percent), China (1.7 percent), and Malaysia (1.5 percent).
The report said with regard to the continuous increase in NPLs in Bangladesh, the banks' follow-up on repayments was not strong after loan disbursement, and such directed lending programmes have led to a massive build-up of poor-quality loans.
This resulted in continued heavy losses. Banks were also reluctant in writing off the long-lasting bad loans mainly due to below standard underlying collateral and fear of probable legal complications.
However, NPL recoveries witnessed significant improvements after 1999, as the NPL ratio steadily decreased to 6.1 percent in 2011 due to written-off loans, provisioning, and a sharp decline in new bad debt.
The report discusses the trends and current status of nonperforming loans (NPLs) in Bangladesh in relation to regulatory measures and policy reforms that have been implemented in the country over the years.
In reply to why nonperforming loan is increasing despite adopting various measures in the last three decades, Zahid Hussain, former lead economist of the World Bank's Dhaka office, told The Business Standard, "The Bangladesh Bank recently relaxed the loan classification standard and added an extra three months for repayment of loans that fall into substandard, doubtful and bad loans category. However, the central bank was supposed to be stricter in this regard."
He also said, "The Bangladesh Bank has to stop making new loan defaulters and at the same time, collect the previous loans from existing defaulters. The central bank should also withdraw the social status of the loan defaulters to prevent the rise of possible future loan defaulters.
The ADB report suggested that Bangladesh needs to explore the international best practices in NPL management and the resolution strategies implemented in other countries in Asia and the Pacific, and Europe.
The management of NPLs should be multipronged, for both prevention and resolution. To do so, the ADB suggested that financial institutions need to strengthen lending discipline and streamline the recovery process to ensure that NPLs do not pile up. Also, a revised bankruptcy act should set time bound procedures to expedite the resolution of cases for settlement.
Fair pricing of collaterals through competent accounting firms with international best practices can mitigate loan default risks, the ADB said.
It said the number of state-owned commercial banks can be reduced through consolidation, merger, or divestment.
Setting up a public asset management company could be considered to expedite the NPL resolution process, added the international development finance institution.