Higher GDP growth fails to translate into lower NPL: BIBM

An increase in the gross domestic product (GDP) reduces non-performing loans in advanced economies, but it has no such impact on the bad loans in Bangladesh, found a study of the Bangladesh Institute of Bank Management (BIBM).

The BIBM presented the report during a webinar titled "NPL in Banks of Bangladesh: Macro Economic and Bank Specific Perspective" yesterday.

The growths of GDP and NPL are inversely proportional because a strong, positive growth in real GDP usually translates into more income, which improves the debt servicing capacity of borrowers, thereby contributing to lower the NPLs, says the report.

Interestingly, Bangladesh's GDP growth rate has no impact on the NPLs of banks, it said.

"This is because of the presence of a substantial number of wilful defaulters," said Md Alamgir, an associate professor at the BIBM who presented the report.

The amount of the NPLs in the banking sector stood at Tk 96,116 crore at the end of June 2020, which was 9.16 per cent of the total amount of loan disbursed.

Average lending rate of banks has an immense impact on the NPLs, Alamgir said, adding that both regulators and bankers could assist borrowers in Bangladesh by charging a lower rate of interest and thereby increasing their capacity to repay loans.

The BIBM analysis shows that loan growth rate has an inverse relationship with the NPLs.

The increase of the NPL both in quantity and percentage of the total loans disbursed is connected to either financial crises or bank failures or both, and it negatively impacts private investment, said Alamgir.

The report recommends developing a data sharing system connecting the banks and Bangladesh Bank so that lenders can carry out a background check to identify bad debtors.

"Then banks will only approve loans upon checking the sound credibility of the borrower and this idea can be developed from cloud computing systems," Alamgir said.

Strong internal management and good governance by banks can reduce the NPLs, said SM Moniruzzaman, a deputy governor of the Bangladesh Bank.

There is a sense of satisfaction over Bangladesh not being in a very bad position among the countries of the South Asian Association for Regional Cooperation, but still, there is enough scope for the betterment of the NPL level to a tolerable level, he said.

As banks give out term loans from short-term deposit, they tend to fall into problems, for which they need to enhance their deposit base, Moniruzzaman said.

Banks also need to assess borrowers properly to avert the NPLs as much as possible, the deputy governor added.

Banks' strong monitoring and assessment of borrowers are very important to reduce the NPLs, said Md Akhtaruzzaman, director general of the BIBM.

The lenders may make adverse selections in lending due to the presence of fake documentations, but with continued monitoring they can reduce the amount of money being siphoned off by the defaulters, he said.

Another big problem for the rise in the NPLs is delays in the judicial process for the sale of mortgages, he said, adding that whenever a bank initiates the process, defaulters tend to go to courts and get a stay order issued.

Md Ataur Rahman Prodhan, CEO and managing director of Sonali Bank, said a case was filed in 1985 but it was yet to be settled. So, the bank still cannot materialise the mortgage and bring money into its books.

In most of the cases, banks cannot sell mortgaged assets for the lengthy legislative processes, he said, adding that many good borrowers do not even have anything to show as mortgage and avail a loan but their ideas and potential were immense.

"So, security or mortgage is not the solution for the NPLs," he said.

Many good borrowers end up getting finance in excess due to unethical competition between lenders, resulting in them also becoming defaulters, he said.

Due to a lacklustre performance of capital markets, banks lend for longer terms and it creates mismatch in fund mobilisation. The Sonali Bank managing director recommend strengthening the capital market.

Banks need to maintain due diligence in lending money, said Syed Waseque Md Ali, managing director of First Security Islami Bank.

But it might not be possible in cases where political pressure is involved and these are the types of loans that become the NPL in most cases, he said.

Monitoring is very important because a good loan can turn bad due to the absence of monitoring, he said, recommending that the central bank form a database so that lenders can get authentic data about borrowers.

Ali also recommended finding ways to provide loans at lower interests as an incentive for good borrowers, reasoning that the interest rate for a good customer should not be the same as that for bad customers.

While giving out a loan, it is very important to figure out the actual reason for the borrower availing it, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

But the banking sector lacks qualified manpower, which hinders proper assessment and monitoring, he said.

The central bank should monitor the boards of directors of banks to see if they have the banking knowledge to run the establishments properly, he said.

On the other hand, banks need to start giving out more working capital but they are doing the opposite and giving out more term loans. So, entrepreneurs sometimes face problems in running their businesses due to a lack of working capital.

A high interest rate does not always result in an NPL, he said, citing the example of Brac Bank.

The MTB CEO sought permission to run their own audits on companies before providing loans, reasoning that now there were so many credit rating companies that their valuations were not credible all the time.

Due to the spread of the Covid-19, businesses will be affected and the amount of the NPLs will increase once the pandemic ends, the report says.

Banks must remain vigilant so that the facility provided by the central bank withholding classification of loans this year is not misused, it added.

The report recommended stopping a borrower from being able to take loans from many banks, strengthening management efficiency and having bank agent monitor borrowers from within the latter's enterprise.

It also recommended proper assessments, ensuring effective corporate governance, and reducing unhealthy competition.

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