A look at how Bangladesh can address its non-performing loans problem to achieve financial recovery.
Bangladesh’s banking sector has long grappled with the problem of non-performing loans (NPLs), posing a significant threat to the country’s financial stability. In recent years, the volume of NPLs has risen to alarming levels, with defaulted loans increasing significantly. Despite various efforts to address this issue, a sustainable solution has remained elusive.
UNDERSTANDING THE NON-PERFORMING LOAN CRISIS
Before diving deep into the folds of this extremely nuanced and multifaceted issue, let us understand how the situation has come to such dire straits. By 2023, the total amount of NPLs in Bangladesh reached an unprecedented BDT 145,633 crore, marking a 20.7% increase from the previous year. The problem is particularly acute in state-owned banks, where the NPL ratio exceeds 20%, compared to 7% in private banks. This glaring disparity underscores the inefficiencies plaguing state-run institutions, exacerbated by weak governance, political interference, and insufficient regulatory oversight. Despite efforts to curb these defaults, weak enforcement and a lack of accountability within the banking sector have made the situation much worse.
Unsurprisingly, a considerable portion of NPLs is concentrated among a few large borrowers, with several state-owned banks exceeding the single-borrower exposure limit. The malpractice has persisted despite existing regulations, leading to the accumulation of insurmountable bad debts.
KEY FACTORS BEHIND THE NPL SURGE
The surge in NPLs can be attributed to several interconnected factors but the underlying reason, as posited by economists, analysts, policy researchers and journalists, is the former government intentionally turning a blind eye to politically-connected people taking out large loans from state-owned commercial banks and defaulting them for personal gains.
Weak Governance
Governance issues have long plagued Bangladesh’s banking sector, with powerful business groups influencing lending decisions. Loans are often disbursed without proper due diligence, resulting in high default rates.
Legal Framework Deficiencies
There is a pressing need for a favourable legal framework to expedite the recovery of bad loans. Current legal procedures are slow and ineffective, delaying loan recovery efforts. The Association of Bankers, Bangladesh (ABB), has called for collaboration between the Central Bank, legal experts, and the judiciary to establish a more vigorous framework.
Inadequate Capital and Provisions
Many banks in Bangladesh are undercapitalised, making it difficult to write off bad loans. Although Bangladesh Bank (BB) has relaxed the loan write-off policy to allow banks to write off loans after two years, most banks lack the necessary provisions to do so. This leads to an overstatement of their financial health while the underlying problem remains.
Political Influence
Political interference has played a big role in the accumulation of bad loans in Bangladesh. In many cases, loans have been disbursed to influential borrowers without proper assessments, and efforts to recover these loans have been thwarted by political pressure.
THE RECOVERY ROADMAP
In February of this year, BB outlined a 17-point recovery plan aimed at reducing NPLs to below 8% by June 2026. However, with the sector being so heavily scam-hit, concerns about the plan’s efficacy were voiced in various commentaries. Following the fall of the previous government that facilitated the wrongdoings that damaged the sector so heavily, BB’s new governor, Dr. Ahsan H. Mansur, appointed under special circumstances has the opportunity to work the plan as intended on paper.
Enhancing Governance
The plan includes measures to strengthen governance in the banking sector through stricter rules for appointing directors and improving loan disbursements oversights. The central bank also plans to restructure the boards of weak banks and enforce the single-borrower exposure limit more rigorously.
Promoting Mergers
The strategy encourages the merger of weak banks with financially sound ones to consolidate the sector and reduce the burden of bad loans on individual institutions. When the mergers were proposed in early 2024, policy researchers were highly sceptical of its long-term effectiveness and whether the solution would address the root concern of bad loans. Experts continue to warn that these mergers should be preceded by comprehensive audits and restructuring to ensure effectiveness and efficiency.
Asset Management Companies (AMCs)
Another key component of the recovery plan is the establishment of private-sector AMCs to manage and recover bad loans. AMCs have been successfully employed in other countries to clean up banking sectors burdened by bad debts, and their introduction in Bangladesh could provide similar benefits through a structured loan-recovery mechanism.
Legal Reforms
The BB has emphasised the need for legal reforms that would make it easier for banks to recover bad loans. This includes faster court processes for loan recovery cases and better training for officials handling these cases.
Incentivising Recovery
To encourage loan recovery, BB has introduced incentives, allowing banks to retain a portion of recovered funds as profits. This is intended to motivate banks to pursue defaulters more aggressively and prioritise recovery efforts.
CHALLENGES AHEAD
While the roadmap offers a comprehensive plan to address the NPL crisis, its success hinges on effective implementation. Bangladesh’s banking sector has a history of failed initiatives, and there are concerns that the current plan may face similar challenges if old practices do not change. The central bank’s ability to enforce its directives, especially in the face of political pressure and resistance from influential borrowers, remains a critical issue.
The broader economic environment in Bangladesh presents further challenges. High inflation, currency depreciation, and a slowdown in economic growth could make it harder for borrowers to repay loans, leading to further increases in NPLs. Although Dr. Mansur has stated that the immediate objectives of BB will be to curb inflation, the central bank’s efforts to stabilise the financial system must be complemented by broader economic reforms to ensure long-term financial stability. To that extent, Dr. Mansur has also stated that the bank will work to urgently bring discipline back into the banking sector, reduce pressure on external accounts and boost the country’s forex reserve.
The non-performing loan crisis in Bangladesh is a multifaceted problem that requires a comprehensive and coordinated solution. While the roadmap provides a solid foundation for addressing the issue, its success depends on the commitment of all stakeholders, including banks, regulators, and the current government.
