DATA recently published by the Bangladesh Bank demonstrate that our banking sector has a nagging problem of non-performing loans, which have reached a record high. According to the recent central bank data published on June 6, in the first quarter of 2024, the amount of non-performing loans was more than Tk 182,000 crore, which is the highest ever in the country. In the October鈥揇ecember 2023 quarter, the stressed loan was Tk 145,000 crore. Non-performing loans are classified loans that are classified into different categories based on the non-payment of the customers as per the loan terms and conditions.
The guidelines of the central bank, state, and scheduled banks classify loans based on the non-payments of the customers, and those loans are unlikely to be paid by the customers. When banks鈥� loans turn into sour loans, banks get neither principal nor interest from them. The NPL ratio, which was below 10 per cent earlier, has crossed over 10 per cent this time and stands at 11.10 per cent. Bangladesh鈥檚 non-performing loans ratio is higher compared to other neighbouring countries in South Asia.
According to a World Bank report, Indian non-performing loans ratio was 3.90 per cent, Pakistan, with a fragile economic condition, had a non-performing loan of 7.4 per cent and another economically distressed country outweighed Bangladesh with 10.11 per cent in 2023. Within a span of just three months, non-performing loans have soared to approximately Tk 37,000 crore, which is cause for concern and cripples the sustainability of our banking industry. Banking sector experts and economists are opining that the real scenarios of defaulted loans are much worse if we consider written-off loans, restructured loans, and loans pending in the courts. According to experts, if we take into consideration the above loans, the defaulted loan figure will surge over Tk 450,000 crore.
NPL has reached such a level at a time when the International Monetary Fund gave a prescription to the government to rein in the non-performing loans ratio below 10 per cent for the government banks and below 5 per cent for the private banks by 2026 as a part of its conditions for availing of the International Monetary Fund鈥檚 $4.7 billion loan programme extended to Bangladesh.
Every quarter, the amount of NPL has been breaking its previous quarter record. Since stressed loans have skyrocketed in the banking industry, many banks have been facing acute liquidity crises and capital shortfalls. Those cash-strapped banks are meeting the liquidity shortage through borrowing from the Bangladesh Bank. The central bank has been continuously giving liquidity support to those banks and trying to rescue them from perilous conditions.
Meanwhile, the cash-strapped banks are offering higher interest rates for attracting deposits to their banks, which are higher than those of financially strong banks, and the high interest rates are burdening the cash-strapped banks with the higher operating costs. Rising NPL has enhanced the cost of funds and deposits, as well as the cost of lending. Earlier, the central bank cautioned banks with liquidity crises and imposed penalties for failing to maintain the cash reserve ratio with the central banks.
Due to this reputational crisis and liquidity crunch, few banks are able to honour customers鈥� payments and withdrawal requests or pay depositors in phases. The state-owned banks鈥� conditions are much worse than those of the private sector banks, as government banks have an elevated NPL ratio due to a lack of corporate governance.
All government commercial and specialised banks have been experiencing capital shortfalls due to mainly rising stress loans in those banks. As a result, in the past, the government had to inject taxpayers鈥� money to salvage the ailing government banks. Consequently, people鈥檚 trust in the banking sector has diminished, and consequently, depositors have been withdrawing funds from the financial institutions.
There are many reasons associated with the recent surge of non-performing loans. Political influence is one of the key reasons why non-performing loans have piled up. Political influences have made the banking sector volatile. Good borrowers are not getting access to loans, whereas bad borrowers are somehow getting loans because of their political clout. So, they do not feel the urge or qualms to repay the debt amount. Wilful default is another reason for rising default loans and advances. It is almost a common tendency among borrowers that once they manage to have loans, they think that they do not need to repay them.听 Bank owners sometimes influence the management to give loans to their desired candidates.
Money laundering is another reason why the banking sector has been experiencing stressful situations. Big businesses are taking loans and advances from the banking sector and are involved in the capital flight of those funds abroad through export-import mechanisms such as over- and under-invoicing, etc. Through money laundering, bank loans are transferred to developed countries instead of being invested in the country.
The independence of the central bank is another important issue. The central bank should have autonomy in implementing its decisions and execution. The central bank officials have to be held accountable. On the other hand, the finance ministry鈥檚 intervention in banking affairs undermines the central bank鈥檚 role. The central bank has to be given freedom so that they can take stringent measures to curb galloping defaulted loans without fairness and favour.
The bank board should be restructured so that family influence on the board can be controlled. Through the amendment of the Bank Company Act 2023, the government made a reform that three members from a family can hold on the board of a bank as directors, and the directors鈥� tenure was extended from 9 years to 12 years, which experts say will undermine bank and corporate governance. The central bank should pave the way for the introduction of more independent directors on the bank boards and make sure that they can do their jobs independently and without interference.
Non-performing loans have been skyrocketing in our banking sector, which is a threat to our banking industry. Political commitment from the government, autonomy of the central bank, and establishment of good governance in the banking sector are crucial to protecting our banking sector from ballooning non-performing loans.
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Mohammad Zonaed Emran is a columnist.
