Cutting SOB NPLs to 10%, a futile endeavour?

The Bangladesh government – back in February – had promised the International Monetary Fund (IMF) that it will cut down non-performing loans (NPLs) of state-run banks to 10 per cent, and private commercial banks to 5 per cent by 2026.

This promise helped Bangladesh secure $4.7 billion in loans from the IMF, but experts are now questioning exactly how the government will slash the NPL rate in state-owned banks, as the existing figure is over 20 per cent.

Industry insiders and officials concerned say the finance ministry is going to sign a memorandum of understanding (MoU) with banks that have a high amount of NPLs, so that their financial health can be improved.

Besides, the central bank is reviewing the current situation of the banking industry, and thinking of ways to successfully implement the IMF target regarding NPLs.

The banking regulator recently held an internal meeting headed by its chief economist Md Habibur Rahman to review the IMF target before the spring meetings of World Bank Group (WBG) and International Monetary Fund (IMF), set to be held from April 10, sources say.

What’s the NPL situation?

Non-performing loans (NPLs) in the country’s banking sector hit record Tk 1,20,656 crore at the end of December last year mainly due to the partial withdrawal of the relaxed loans repayment facility.

The bad loans rose by Tk 17,383 crore in last year, with NPLs standing at Tk 1,03,273.78 crore, at the end of December of 2021, show latest data from the Bangladesh Bank.

At the end of December last year, Agrani Bank’s non-performing loans (NPLs) stood at Tk 14,810 crore, whichis 22.31 per cent of its disbursed loans. Bangladesh Development Bank Ltd’s (BDBL) bad loans stood at Tk 1023.77 crore, which is 48.29 per cent of its loans.

BASIC Bank’s NPLs stood at Tk 7604.08 crore, 57.55 per cent of its disbursed loans, which is Tk 14,386.78 crore or 18.24 per cent for Janata Bank, Tk 6,630.52 crore or 16.56 per cent for Rupali Bank and Tk 12,005.27 crore or 15.43 per cent for Sonali Bank, central bank data show.

Discussing the matter, Policy Research Institute of Bangladesh Director Ahsan H Mansur said, “It is possible to bring down the high NPLs of state-run banks if the government really wants to bring it down. “The bad loans of state-run banks will have to be written-off, but it will be a very costly solution. If those bad loans are written-off, the state-run banks will face a further deficit of capital and then the government will have to inject capital to those lenders.”

He added, “When a bank writes off bad loans, it needs to keep 100 per cent provision for those loans, which in turn will trigger a capital deficit. There is no chance to recover loans from defaulters.

“The government will not be able to bring down the NPLs with just the recovered loans from defaulters.”

Bangladesh Institute of Bank Management’s (BIBM) former director general Toufik Ahmed Chowdhury said, “Only political goodwill can reduce the amount of NPLs in state-run banks.

“Though regulator data shows that state-run banks’ NPLs are around 20 per cent, the actual amount is even higher. Just bringing the amount of bad loans down to 10 per cent will not be enough. The government will have to show its goodwill in reducing NPLs.”

He added that the IMF wants to see the Bangladesh government’s goodwill in this regard as well.

Addressing the idea of writing off bad loans, he said such a move, if implemented, will not bring any positive development. “If this happens, then the IMF will raise questions about the write-off of loans,” he added.

In the case of private commercial banks, only a few banks are navigating troubled waters due to severe irregularities and high amounts of bad loans, but the total amount of defaulted loans is only around 5.13 per cent in those banks.