Dhaka, Bangladesh (BBN)– The volume of classified loans in the banking sector of Bangladesh increased further to hit an all-time high at BDT 1.16 trillion in September despite of taking different measures by the central bank.

The volume of non-performing loans (NPLs) jumped by nearly 24 per cent to BDT 1,162.88 billion as of September 30 from BDT 939.11 billion on December 2018, according to the latest statistics of the Bangladesh Bank (BB).

The amount of NPLs increased during the July-September period of 2019 as the regulator encouraged the practice of loan default through relaxation of its policies, according to Khondkar Ibrahim Khaled, former deputy governor of the BB.

The senior banker also said the volume of default loans would decline in the event of punishment meted out to the defaulters.

On May 16 last the central bank offered a special facility to the loan defaulters—rescheduling their loans by making a down payment of 2.0 per cent for a maximum of 10 years.

However, the amount of NPLs increased by more than 3.0 per cent to BDT 1,162.88 billion in the third quarter (Q3) of the current calendar year from BDT 1,124.25 billion in the preceding quarter (Q2).

On the other hand, BB spokesperson Md. Serajul Islam said the amount of NPLs increased slightly in the Q3 compared with the preceding quarter in the current calendar year, because the central bank’s instruction on policy support for loan defaulters and their one-time exit was yet to be fully implemented.

Mr. Islam, also an executive director of the central bank, expected that the amount of classified loans would decrease in the final quarter of the year following full execution of the notification.

Echoing, M A Halim Chowdhury, managing director (MD) and chief executive officer (CEO) of Pubali Bank Limited, said: “Definitely, the amount of NPLs will reduce by the end of this calendar year.”

The share of classified loans also rose to 11.99 per cent of the total outstanding loans in September from 10.30 per cent nine months ago. It was 11.69 per cent on June 30, 2019.

The default loans include substandard, doubtful and bad/loss portions of the total outstanding credit, which stood at BDT 9,698.82 billion as of September 30, 2019, up from BDT 9,114.30 billion as of December 31, 2018. On September 2018 the figure was BDT 8686.08 billion.

Talking to the BBN, Syed Mahbubur Rahman, Chairman of Association of Bankers, Bangladesh (ABB), said large-scale rescheduling of loans is yet to take place mainly due to legal complexity.
The senior banker expected that such policy support would be implemented properly in the final quarter of the current calendar year.

“The volume of NPLs will decline in Q4 of this calendar year following strengthening of overall recovery drives along with the policy supports, offered by the BB,” Mr. Rahman noted.

During the period under review, the total amount of NPLs with six state-owned commercial banks (SoCBs) rose to BDT 549.22 billion, from BDT 486.96 billion on December 31, 2018. It was BDT 537.45 billion as of June 30 last.

On the other hand, the total amount of classified loans with 41 private commercial banks (PCBs) rose to BDT 545.74 billion in Q3, from BDT 381.40 billion in the final quarter of the last calendar year. It was BDT 519.24 billion as of June 30 last.

The NPLs of nine foreign commercial banks (FCBs) came down to BDT 20.91 billion in the July-September quarter last from BDT 22.88 billion in Q4 of 2018. It was BDT 20.58 billion three months ago

The classified loans with two specialised banks (SBs), increased to BDT 55.00 billion in September last, from BDT 47.88 billion nine months ago. It was BDT 46.99 billion as of June 30, 2019.

Actually, the high level of NPLs limits banks’ ability to engage in new lending and also restricts access to credit. It also pushes up unemployment and slowdown in overall economic activity. The NPL shocks from one country may cross into other countries through micro financial linkage.

Meanwhile, the International Monetary Fund (IMF) has already suggested the regulatory authorities adopt a comprehensive timely action plan to help maintain confidence in the banking system.

It has recommended that the BB tighten criteria for rescheduling or restructuring of loans and avoid their repeated uses.

The Washington-based lender observed that strict and prompt remedial actions should replace regulatory forbearance for banks as part of a broader plan.

“Clear criteria should also help prevent the BB’s involvement when banks grant rescheduling or restructuring for specific cases,” it noted.

Senior bankers, on the other hand, recommended the authorities concerned for taking a coordinated effort to reduce the volume of NPLs for improving the financial health of the banking system.

As part of the efforts, a separate bench of the High Court should be established to deal with only the default loan issues, in addition to setting up of multiple Money Loan Courts in Dhaka and Chittagong.

Besides, legal reforms are needed to speed up the recovery process of the classified loans.

The banks should boost their recovery drives to reduce the volume of classified loans. It should be stopped to turn fresh loans into classified ones under any circumstances.

The senior bankers expect that the amount of classified loans would decrease in the final quarter of the year following full execution of the BB’s latest notification on policy support for loan defaulters and their one-time exit.