Tuesday, May 21, 2019

Non Performing Loans

Mir Mahmudul Haque Chowdhury :
Non-Performing Loan (NPL) is that portion of loan which has already become default or close to be defaulted. When a bank fails to collect the interest payments or the principal amount of loan then that loan is considered as NPL.
Bangladesh Bank has been defined eight stages of loan in terms of classification which includes Superior, Good, Acceptable, Marginal/Watchlist, Special Mentioned Account (SMA), Sub Standard (SS), Doubtful (DF) and Bad and Loss (BL). As per classification guideline of BB, Sub Standard (SS), Doubtful (DF) and Bad and Loss (BL) are considered as Non-Performing Loan (NPL).
Recently, BB has relaxed loan classification policy by extending time for repayment. This amendment is made with a view to bringing down the huge amount of defaulted loans, which has reached nearly Tk100,000 crore in December 2018. This amount exceeds the anytime's figure and reaches in the top ever in country's 48-year history. The larger the amount of NPL requires larger amount of provisioning which ultimately affect bank's net profit. As such banks profit is decreased day by day.
NPL is one of the burning problems of the banking sector in Bangladesh for last two decades. The international standard of NPL is 2 percent or below but in our country it is much higher. The NPL percentages in Bangladesh are 5 to 6 times higher than the standard which is alarming for the sector. The NPL data is updated and reviewed quarterly by Bangladesh Bank in the light of the existing classification circular.
According to Bangladesh Bank data, NPL ratio stood 10.30 percent in December 2018, 11.50 percent in September 2018, 10.40 percent in June 2018 and 10.78 percent in March 2018. In 2017, the NPL ratio was 9.31 percent in December, 10.67 percent in September, 10.13 percent in June and 10.53 percent in March. Further in 2016, that ratio was 9.23 percent in December, 10.34 percent in September, 10.06 percent in June and 9.92 percent in March. The year end NPL ratio was 8.79 percent in 2015. It is observed that the NPL ratio is up growing by the passing of time.
The central bank revised loan classification policy by issuing a circular on April 21, 2019 which will come into force on June 30, 2019. In present circular of 2012, loan is classified as sub-standard for non-repayment of installment for three months which was revised from six months time frame. In this time the loan classification policy was tightened in compliance with global standard in the light of Basel III accord which is well acceptable in international forum. Subsequently according to that circular, loans overdue for six and nine months are classified as doubtful and bad respectively.
According to the new regulation, in case an installment or part of an installment of a fixed- term loan is not repaid within the fixed timeframe, the amount of unpaid installment will be treated as overdue after six months, any installment or part of installment of a loan which will remain overdue for a period less than nine months, the entire loan will be treated as sub-standard. Non-payment of installments for twelve months and eighteen months will land the accounts in the doubtful and bad categories respectively.
It seems that this major move of the central bank is caused under political pressure and eased the loan classification. The ultimate goal is to show a lower non performing loan figure by engineering the policy not by the changing of habit of loan defaulter. From June 30, 2019, borrowers will get more time to pay off their installments will intensify the ongoing liquidity crisis and encourage habitual defaulters to not pay back loan on time. Even they can switch or change the bank by not paying consecutive five installments at a row, in present which is treated as loan defaulter.
This amendment is good for lower down NPL figure in papers and records, nonpayment of loan by willful defaulters, keeping minimum provision and maximizing profit which will give more benefit to the shareholders. But it is a threat for development of the banking sector of our country. The willful and habituate defaulter can take a chance of not paying the loan on time and change the bank by enhancing the loan amount. This will extend the financial crisis of the country for longer time.
The burden of NPL has often been transferred to the tax payers through treasury transfers.  This is not only unsustainable as tax revenues become increasingly constrained, it is also unethical. In Bangladesh where there are still millions of poor, using tax revenues to bail out public banks because they have loaned out depositor's money to bad borrowers who often tend to be very rich and powerful would seem to violate all accepted norms of ethics and morality.
NPL management is necessary for sound development of banking sector, moreover development of overall economic condition of a country. It is seems that by implementation of the new circular of loan classification, NPL can be managed in short run; i.e. in papers, records, figures etc. But in the long run it would not be effective for the banking sector and the economic condition of our country as a whole. In coming days, the main challenges of banking sector would be management of NPL with the newly circulated loan classification guidelines of Bangladesh Bank.

(Mir Mahmudul Haque Chowdhury, Banker & Researcher, e-mail; leon_83ais@yahoo.com)