May 27, 2024

Senior Correspondent: Country’s banks are struggling to contain a surge in non-performing loans (NPLs), posing a significant threat to the country’s financial stability. Despite efforts by the central bank to curb the rise, lax lending practices and weak governance are being blamed for the growing problem.

The Bangladesh Bank has implemented various measures to address the NPL crisis, including offering loan renewals at discounted rates and allowing banks to write off bad debts. However, these initiatives have yielded limited success, with the NPL ratio stubbornly persisting at an elevated level.

In recent years, Bangladeshi banks have increasingly resorted to writing off defaulted loans as a strategy to manage risk on their books. This approach has demonstrably reduced the official NPL ratio; however, it has also triggered concerns about the potential misuse of this practice.

Critics argue that write-offs may mask underlying problems in the banking system and create moral hazard issues.

There have been some positive developments amidst the NPL challenge. The NPL ratio has shown a downward trend compared to 2003, indicating some progress.

Additionally, credit disbursement to the economy has exhibited growth, signifying a continued flow of funds for businesses and individuals.

Weak corporate governance within Bangladeshi banks is identified as a significant contributor to the NPL crisis. Lax credit appraisal procedures and inadequate risk management frameworks have created an environment conducive to bad loans. Strengthening governance standards and fostering a culture of accountability are crucial steps towards stemming the tide of NPLs.

Political influence on loan approvals and recoveries is another factor hindering efforts to tackle NPLs. Allegations of politically connected borrowers being granted easy access to credit and enjoying implicit immunity from repayment obligations pose a major challenge. Addressing political interference requires a concerted effort from policymakers and regulators.

State-owned banks (SoBs) in Bangladesh are often singled out for their disproportionately high NPL ratios compared to private banks. This disparity is attributed to factors such as political pressure to disburse loans to non-viable projects and a lack of autonomy in credit decisions.

Restructuring SoBs and bolstering their credit appraisal processes are essential for improving their financial health.

Bangladesh’s NPL crisis bears an uncanny resemblance to the financial sector woes it faced in the late 1990s. The current situation underscores the importance of learning from past mistakes and implementing robust regulatory frameworks to prevent a repeat performance.

The Bangladesh Bank needs to strengthen its supervisory and enforcement capabilities to effectively address the NPL crisis. Regular inspections, stricter loan classification norms, and prompt action against errant banks are crucial measures for ensuring financial sector stability.

Bangladesh’s battle against bad loans is far from over. A multi-pronged approach that addresses governance issues, fosters a culture of repayment discipline, and strengthens regulatory oversight is necessary to place the banking sector on a sounder footing.

The ultimate goal is to create a robust and efficient banking system that can propel Bangladesh’s economic growth in the years to come.

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