Pvt banks see rise in defaulted loans, provision shortfalls

The volume of non-performing loans (NPLs) is no longer a major problem for state-run banks only, but also for private banks, and with the rise in NPLs in the country, the amount of defaulted loans has soared and shortfall of provision has widened at private banks

According to Centre for Policy Dialogue (CPD), the total volume of non-performing loans (NPLs) rose to 49 per cent in the second quarter of the 2023-24 fiscal from 31 per cent in the fourth quarter of the 2011-12 fiscal at the private banks, apparently showing that the performance of the banks has worsened substantially over time.

The findings were presented at a dialogue titled ‘What Lies Ahead for the Banking Sector in Bangladesh?’ organized by CPD on Thursday.

CPD Said the total volume of NPL has increased by more than three times in the last ten years, from 427.25 billion taka in in the fourth quarter of 2011-12 fiscal to 1456.33 billion taka in the second quarter of 2023-24 fiscal. As a result, private banks cannot avoid its effect.

However, actual NPL will be much higher if loans in special mention accounts, loans with court injunctions, and rescheduled loans are included. Combined together, total gross NPL, outstanding balance of written-off loans and total rescheduled loans outstanding amount to 3779.22 billion taka.

The huge amount of bad loans overall threatens the health of the banking sector and banks cannot maintain provisions properly in this context.

As of the second quarter of the 2023-24 fiscal, the required loan loss provisioning was 989.41 billion taka, whereas the actual loan loss provisioning maintained was only 796.79 billion taka, which was 80.5 per cent of the requirement.

The amount of provision shortfalls is nearly similar in government-run banks and private banks despite a higher number of private banks.

Banks’ expenditure-income ratio also deteriorated. From 2008 to 2022, the average expenditure-income ratio was 0.81 in state-owned banks and 0.74 in private banks.

An expenditure-income ratio between 0.5 and 1 indicates that a bank is poorly managed but not making a loss while a ratio below 0.5 indicates better-managed banks.

Besides, the situation related to return on asset (ROA) and return on equity (ROE) deteriorated, thus, indicating low profitability.

Excess liquidity in the banking sector also declined from 2.32 trillion taka in June 2021 to 1.62 trillion taka in February 2024.

Analysts said, currently, loans can be rescheduled by paying only 2 per cent, and the amount once was 10 per cent for the first time rescheduling, 20 per cent for the second time and 30 per cent for the third time. People hardly opted for loan rescheduling at the time, but now borrowers are taking advantage of Bangladesh Bank’s slack regulations. Besides, anonymous loans are being provided rampantly, but nobody knows where these go and these loans are not being recovered either. Banks allegedly sanction 500 million taka instead of a demand of 200 million taka, resulting in a deteriorating banks’ health, as well as a rise in discrimination in society.