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The high amount of non-performing loans (NPLs) in banks is a significant threat to the progress of the country’s financial sector, the Bangladesh Bank (BB) has said. It said this in the quarterly report on currency and exchange rates published on Thursday.
At the end of December 2023, NPLs in the banking sector amounted to Tk 145,600 crore. This was 9 per cent of the total amount of outstanding loans.
Experts said high NPLs are affecting the stability and profitability of banks, eroding the confidence of consumers, and also obstructing the flow of funds that could be used for economic growth.
The amount of NPLs was Tk 120,650 crore (8.23 per cent of the outstanding loans) at the end of December 2022, the central bank data shows.
The Bangladesh Bank report said the increase in NPLs had led to an increase in the provisioning requirement, creating capital shortfalls in banks.
As per the policy, banks are required to keep provisions ranging from 0.50 per cent to 5 per cent against deposits. But there are policies stipulating provisions of up to 20 per cent, 50 per cent, and even 100 per cent, depending on the classifications of default loans.
The central bank observation came at a time when the banking sector is grappling with a large amount of bad loans due mainly to lending irregularities, the presence of wilful defaulters, and the weak enforcement of rules and regulations by the banking regulator.
Bad loans in banks rose further in the first three quarters till September 2023. The amount dropped in the fourth quarter, although it remained higher compared to year-on-year.
Without a reduction in NPLs, there will be no improvement in capital adequacy in the banking system, the central bank report said.
It said state-owned banks have been failing to maintain a minimum capital adequacy ratio – at least 10 per cent of their risk weighted assets as a cushion from losses – for the last 10 years.
Specialised banks have been staying undercapitalised, it also said.
In the report, the Bangladesh Bank mentioned Islamic banks' borrowing from the banking regulator under special liquidity support, the depreciation of taka, the deficit in the country's external account, and liquidity shortages as challenges for the banking and financial sector.
At the end of September 2023, 14 banks had a capital deficit. Four out of six state-owned banks faced a combined capital shortfall of around Tk 13,128 crore.
Additionally, among the three specialised banks, the capital shortfall of two amounted to Tk 18,275 crore. In other words, most of the capital deficit in banks was concentrated in state-owned and specialised banks.
The central bank report said high inflation discourages savers from parking deposits in banks because of negative real interest rate.
"It is apprehended that overall economic activities will suffer in the long term if these problems are not resolved quickly," said the report.
Foreign currency reserves stood at $19.45 billion on March 27, down from $19.98 billion on March 20, according to the Bangladesh Bank data.
Messenger/Disha
