Bangladesh Bank Headquarters

Dhaka, Bangladesh (BBN)– Non-bank depository corporations’ (NBDCs) household debt accounts for half of the total loan portfolio, which might make them vulnerable to any major shock in the sector, though it is unlikely due to highly populated land demanding country, an official report has said.

The NBDCs refer to deposit taking non-banking financial institutions (NBFIs), Ansar-VDP Unnayan Bank, and Karma Sangsthan Bank provided the loans between 2014 and 2017, according to the Bangladesh Bank (BB)’s latest study report released on Sunday.

During the period under review, it accounted for only about 13 per cent of total loan portfolio of the country’s commercial banks, it added.

The study revealed the banking sector has been the major source of household debt, accounting for around 70 per cent of such loans. The remaining 30 per cent has been provided by the NBDCs.

It also said this is because at low household debt-to-GDP level, the magnitude of disruption in the financial system from any negative shock in the household sector is likely to be minimal.

After some initial rise, household debt as a percentage of (nominal) GDP has remained almost stable since 2015 and stood at 7.6 per cent in 2017, according to the Quarterly Financial Stability Assessment Report (QFSAR) for July-September 2018

Compared with neighbouring countries as well as some other Southeast Asian economies, the central bank said that household debt to GDP ratio in Bangladesh had been the lowest in the last few years.

The ratio was lower than that of India (11 per cent) and Sri Lanka (7.9 per cent) and much lower than the countries, which faced financial crisis of 2007-08.

“The low and stable household debt-to-GDP (gross domestic product) ratio in Bangladesh indicates low possibility of systemic risk origination from the household sector,” the QFSAR noted.

Product-wise analysis of household loans disbursed by the banks at end-June 2018 revealed that mortgage loan covering housing construction, flat and land purchase shared 45 per cent of household debt; loans for consumer goods contributed 17 per cent, followed by 15 per cent share of personal loan against different deposit schemes.

Credit cards and auto loans shared only 5.0 per cent and 3.0 per cent respectively of total household debt, according to the report.

“Though mortgage loans constituted the largest portion of household debt in banks, the risk of property price volatility spreading across the financial system is low as mortgage loans are not yet securitised in Bangladesh,” it noted.

The study found that the classified loans ratio of banks’ household loans is considerably lower than the overall non-performing loans (NPLs) ratio of the banks.

Moreover, the gradual fall in household NPLs ratio over the last few years is another positive sign.

This suggests that the debt servicing capacity of the borrowers and monitoring of the banks in the household sector is better than the overall industry, the report added.

“….low level of household indebtedness along with low and falling NPLs ratio in household sector and low possibility of spreading out of risks from property price volatility, in general, do not appear to pose any major stability threat in the near-term,” the central bank noted.

Experience from the global financial crisis of 2007-08 has revealed that excessive accumulation of household debt, disbursement of household debt to subprime borrowers and underlying weaknesses in securitisation of household mortgage debt were the key reasons behind the origination and spread out of the meltdown.