Non-performing Loans in Banking Sector of
Bangladesh Causes and Effect
Submitted to:
Sk. Alamgir Hossain
Lecturer
Dept. of Finance
Jagannath University, Dhaka.
Submitted by:
Md. Abdullah Al Masum
MBA ID. M130203055
Session: 2013-14
Dept. of Finance
Jagannath University, Dhaka.
Table of Contents
Serial No.
1.1
1.2
1.3
3.1
3.2
3.3
3.4
4.1
4.2
4.2.1
4.2.2
4.2.3
4.2.4
4.3
5.1
5.2
6.1
6.2
6.3
Topics
Page No.
Letter of transmittal
Acknowledgement
Executive Summary
Chapter – 1 Introduction
Objective of the Study
Methodology of the Study
Limitations of the Study
Chapter-2 Literature Review
Chapter – 3 Banking industries of Bangladesh
Strategic Objectives
Ethical Standards
Chapter – 4 Definition of NPL
Classified Loan
Non Performing Loan in BD
Base for Provisioning and accounting treatment of NPLs
Trend of Loan Default Problem in Bangladesh
The Present status of Loan Defaults Culture in Bangladesh
Present Status of Non-performing Loans
Causes Of Non Performing Loans
Chapter – 5 Analytical Part
Descriptive Analysis
Multiple Regression Analysis
Chapter – 6 Findings, Recommendation & Conclusion
Findings
Recommendation
Conclusion
Appendix
List of tables
Name of Tables
Table-1 Banking industries of Bangladesh
Table-2 Contribution of Banking sector in National Import
Table-3 National and Agrani Bank Limited’s Export Performance
Table-4 Country wise remittance of Banking sector
Table-5 Data Analysis
Table-6 Income from Export, Import and Remittance comparison with Net
Income
Table-7 Amount of Export, Import, Remittance and Net Income
Page no.
Letter of Submission
3rd Septeber, 2015
To
SK. Alamgir Hossain
Lecturer
Department of Finance
Jagannath University, Dhaka.
Subject: Submission of internship report.
Dear Sir,
It is my great pleasure to submit the report on NPLS in Banking Industry of Bangladesh: Causes
and Effects that you have assigned me.
It has been a great experience for me to prepare a report. I tried my level best to put meticulous
efforts for the preparation of this report. Any shortcomings or flaw may arise as I am novice in this
aspect.
I have tried to make each and every element relevant to my topic and discussed under the context
of whatever I have learned from the course. It would be pleasure for me, if this report can serve its
purposes.
Thanks and Regards
Yours Faithfully
…………………………...
Md. Abdullah Al Masum
MBA Program (4th Batch)
Roll No. M130203055,
Reg. No. 1001335292
Department of Finance
Jagannath University, Dhaka
Supervisor’s Certification
This is to certify that Md. Abdullah Al Masum is a student of MBA (Finance), Jagannath
University bearing ID No: M130203055. He has completed his Internship Report entitled “NPLS
in Banking Industry of Bangladesh: Causes and Effects”. He has completed the Internship
report under my supervision for the partial fulfilment of the award of MBA (Finance) degree.
As far as I know he tried his best to conduct this report successfully. I think this study will help him
in the future to build up his career.
I wish his every success in life.
With best wishes & regards
…………………………………....
SK. Alamgir Hossain
Lecturer,
Department of Finance
Jagannath University, Dhaka
Declaration
I affirmed that the Internship report titled Non-performing Loans in Banking Sector in
Bangladesh being submitted for the internship part of MBA program is the original work carried
out by me. I further declare that this Internship report is based on my original work and no part of
this project has been published or submitted to anybody.
Thanks and Regards
Yours Faithfully
………………………............
Md. Abdullah Al Masum
MBA Program (4th Batch)
Roll No. M130203055
Reg. No. 1001335292
Department of Finance
Jagannath University Dhaka
Acknowledgement
The report on “Nonperforming Loans in Banking Sector of Bangladesh: Causes and Effects” has
been prepared to fulfill the requirements of MBA degree. I am very much fortunate that I have
received sincere guidance, supervision and co-operation from various respected people while
preparing this report.
At the very beginning I would like to express my gratitude to God for special blessing in
completing the report. Then, I would like to thank my academic supervisor of the Internship
Program SK. Alamgir Hossain, Lecturer,Department of Finance ,Jagannath University, Dhaka for
giving me the opportunity to prepare this report. He also provided me some important advices and
guidance for preparing this report. Without his assistance, this report would not be a
comprehensive one.
………………………….
Md. Abdullah Al Masum
MBA Program (4th Batch)
Roll No. M130203055
Reg. No. 1001335292
Department of Finance
Jagannath University Dhaka
Abbreviation
AD
BLC
CC
DPS
ERC
FDD
L/C
LTR
PF
HBL
OD
DL
CLS
=
=
=
=
=
=
=
=
=
=
=
=
=
Authorized Dealer
Bills under letter of Credit
Cash Credit
Deposit Pension Scheme
Export Registration Certificate
Foreign Demand Draft
Letter of Credit
Loan against Trust Receipt
Provident Fund
House Building Loan
Overdraft
Demand Loan
Consumer Loan Scheme
Executive Summary
Nonperforming loans is common phenomena for banking industry in Bangladesh. A Nonperforming loan is a loan that is in default or close to being in default. Many loans become nonperforming after being in default for 90 days, but this can depend on the contract terms. NPLs
started at the early stage of liberation. During 1980s and 1990s, Privatization and liberalization of
banking sector could not control NPLs. Rate of NPLs was 41.1% in 1999. Now it is 11.90%.The
amount of NPLs increased to taka 73.3 billion in 2012 from taka 47.3 billion in 2003.There are
many reasons behind the NPLs in Bangladesh. First reason is entrepreneurs related. Borrower may
be have lack of experience, lack of business and lack of institutional training background or lack of
supporting facility. Sometime borrowers do it intentionally. Entrepreneurs age also an important
factor. Second reason is business related. Sometime banks give loan to businesses which are not
attractive. Strong competition is another business related cause. Borrower becomes defaulter if
there is poor management capability, poor financial performance, and poor cash flow. Business
could be defaulter because of low market share. Low market share mean low revenue so that
business cannot pay the interest payment. Third reason is leading related. It is mainly Bank’s fault.
Loan could be default if Bank delayed assessment of loan proposal, delayed disbursement of fund,
lack of proper monitoring, lack of taking proper action. Last reason is macroeconomic factors. Low
GDP growth, increasing crimes, hartals and frequent policy change effect loan. For those reasons
loans become default loan. Effects of NPL are such as Stopping Money Cycling, Earning
Reduction, Capital Erosion, Increase in Loan Pricing, Frustration etc. As a result, the values of
security are increased and the risks of financial recession also see a rise.
Chapter -1
Introduction
Smooth and efficient flow of saving-investment process is a prerequisite for the economic
development of a country. Bangladesh, being a developing country and with an underdeveloped
capital market, mainly depends on the intermediary role of commercial banks for mobilizing
internal saving and providing capital to the investor. Thus, it matters greatly how well our
financial sector is functioning. Looking at the performance of our financial sector for the last
decade or so, we observe that our banking sector is heavily burdened with a high percentage of
non-performing loans (NPLs).
It is obvious that NPLs reduce banks’ profitability, as banks cannot appropriate interest income
from their classified loans. NPLs reduce loan able funds by stopping recycling. Banks need to set
aside a portion of their income as loan loss reserve to make up bad debt. A bank with a high
percentage of NPLs suffers from erosion of the capital if there is no provision (assume). All
those adverse impact of NPLs on banks’ financial health such as low profitability and low capital
base are clearly reflected in Bangladesh banking sector.
The ratio of NPL to total loans of all the banks had shown an overall declining trend from its
peak 34.9% percent to 10 percent in December 2012.The ratio further increased to 11.9 percent
at the end of June 2013.
1.1. Objective of the Study
The objectives of this paper are
i. To assess the present situation of non-performing loans in our banking sector.
ii. To show the trend of the “loan default problem’’ in Bangladesh.
iii. To examine the loan default status of commercial banks.
iv. To discuss legal aspect to recover loans from the defaulters.
v. To identify the causes and remedies of non-performing loans and.
vi. To raise some issues and observations which need to be looked upon quickly for ensuring a
financially sound banking sector.
1.2. Meth od ology of Study:
The research methodology of the study has been enumerated below:
Sources of Data and Data Collection:
Data has been collected from the various secondary sources like research works of individuals,
different publications, journal of different institutions, Bangladesh Bank Credit Risk Grading
manual , Bangladesh Bank annual report etc.
1.3. Limitations of the study:
The limitations of the study are
1. This study did not cover primary and unpublished data.
2. The major problem faced while conducting the research was unavailability of relevant data.
3. Time constraint.
Chapter – 2
Literature Review:
Non-performing loans refer to those financial assets from which banks no longer receive interest or
installment payments as scheduled. It is a very critical but frequent issue in bank fund management and the
present situation of NPLs in Bangladesh is a topic of great concern. It can bring down investors’
confidence and if created by the borrowers willingly and left unresolved might act as a contagious
financial malaise by driving good borrowers out of the financial market. The volume of default loans of
state owned commercial banks in Bangladesh (BD) has been increasing at an alarming rate. It is not a new
issue but the tendency of fraud, embezzlement and loan default is in a serious situation in recent years due
to excessive political interference and illegal interruption of the concerns. The amount of total NPLs in the
banking system of BD was Tk 523.1 billion at the mid of 2014, which was Tk 427.3 billion in 2013 and 200.1
billion in 2007. The amount doubled within 8 years. For last 8 years, loan default as a percentage of
outstanding loans in state owned commercial banks was 50% or above where Private commercial banks and
foreign commercial banks and hold maximum 5-10 % amount of the total. If the scam series continues
then it may put the entire banking sector in an embarrassing situation with the increase of Non-Performing
loan in an alarming rate. Bangladesh Bank has given ultimatum to 11 local and foreign banks to bring down
their soaring non-performing loans to below 10 per cent of their respective outstanding loans .
Lending decision of a bank is very important because it determine the future profitability and performance of
the bank. Recently banks are becoming more and more conscious in customer selection to avoid the
negative impact of bad loan or non-performing loan. The issue of nonperforming loans (NPLs) has gained
increasing attentions in the last few decades. Amounts of bad loans are alarmingly increasing in not only the
developing and under developed countries but also in developed countries. Banks’ lending policy could have
crucial influence on non-performing loans. A default is not entirely an irrational decision. Rather a defaulter
takes into account probabilistic assessment of various costs and benefits of his decision. Lazy banking’
critically reflects on banks’ investment portfolio and lending policy (Reddy & Mohan (2003); Sinkey
(1991) & Dash (2010) sector. According to the definition of the Financial Reconstruction Law (FRL), the
total amount of NPLs of all banks in Japan as of the end of March 2003 was 35.3 trillion yen, although there
are claims that the actual amount of NPLs might exceed 100 trillion yen. On the other hand, the causes of the
financial and exchange rate crisis that erupted in East Asia (Thailand, Taiwan, Malaysia and Indonesia) in
1997 are viewed as high short-term external debts, excessive loans for real estate, large current account
deposits, high international interest rates and weaknesses in the balance sheet of financial institutions. In
addition, Kwack (2000: 195-206) finds that the 3-month LIBOR interest rate and nonperforming loan rates
of banks were the major determinants of the Asian financial crisis. Huang and Yang (1998: 11) report that
unlike the other countries of East Asia, China did not face financial fragility because of the size of its foreign
exchange reserve, its current account surplus, the dominance of foreign direct investment in capital flows and
the control of the capital account. As of June 2003, China recorded only 5.68% of its total loans as
nonperforming while, in contrast, Thailand, Indonesia, Philippines and Malaysia record NPLs at 15.29%, 8%,
15% and 8.7% respectively. Unfortunately, the present (December, 2005) rate of NPLs in China has
increased to 8.6%.
In the Indian subcontinent (India, Pakistan, Sri Lanka, Bangladesh and Nepal), however, the causes of
nonperforming loans are usually attributed to the lack of effective monitoring and supervision on the part of
banks (as required by the BASEL principles of bank monitoring and supervisions), lack of effective lenders’
recourse, weaknesses of legal infrastructure, and lack of effective debt recovery strategies. Among the
countries in the Indian sub-continent, the rate of NPLs as a percentage of total loans disbursed in 2005 is seen
to be minimal in India (5.2%), followed by Sri Lanka (9.6%). Bangladesh, however, still records a staggering
rate of 13.56%.
Chapter -3
3.1 History of Banking Industry in Bangladesh :
After the independence, banking industry in Bangladesh started its journey with 6 Nationalized
commercialized banks, 2 State owned Specialized banks and 3 Foreign Banks. In the 1980s
banking industry achieved significant expansion with the entrance of private banks. Now, banks
in Bangladesh are primarily of two types:
Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991
(Amended in 2003) are termed as Scheduled Banks.State-owned commercial banks, private
commercial banks, Islamic commercial banks, foreign commercial banks and some specialized
banks are Scheduled Banks.
Non-Scheduled Banks: The banks which are established for special and definite objective and
operate under the acts that are enacted for meeting up those objectives, are termed as NonScheduled Banks. These banks cannot perform all functions of scheduled banks. Grameen Bank,
Probashi Kallyan Bank, Karmasangsthan Bank, Progoti Co-operative Land Development Bank
Limited (progoti Bank) and Answer VDP Unnayan Bank are Non-Scheduled Banks.
Non-banking financial institutions which are not banks.These institutions cannot perform all
functions of banks, which get license to operate under Financial Institution Act, 1993 are termed
as Non-banking financial institutions.
3.2 List of commercial Banks
State-owned Commercial Banks
1. Sonali Bank Limited
2. Janata Bank Limited
3. Agrani Bank Limited
4. Rupali Bank Limited
5. BASIC Bank Limited
6. BDBL (Bangladesh Development Bank Limited)
State-owned Specialized Banks
1. Rajsahi Krishi Unnoyon Bank (RKUB)
2. Bangladesh Krishi Bank Limited
Private commercial Bank
Private banks are the highest growth sector due to the dismal performances of government banks
(above). They tend to offer better service and products. Here is the list:
1. AB Bank Limited
2.
3.
4.
5.
6.
Bangladesh Commerce Bank Limited
Bank Asia Limited
BRAC Bank Limited
Dhaka Bank Limited
Dutch Bangla Bank Limited
7. Eastern Bank Limited
8. IFIC Bank Limited
9. Jamuna Bank Limited
10. Meghna Bank Limited
11. Mercantile Bank Limited
12. Midland Bank Limited
13. Modhumoti Bank Limited
14. Mutual Trust Bank Limited
15. National Bank Limited
16. NCC Bank Limited
17. NRB Bank Limited
18. NRB Commercial Bank Limited
19. NRB Global Bank Limited
20. One Bank Limited
21. Prime Bank Limited
22. Pubali Bank Limited
23. Simanto Bank Limited (proposed)
24. South Bangla Agriculture and Commerce Bank Limited (www.sbacbank.com)
25. Southeast Bank Limited
26. Standard Bank Limited
27. The City Bank Limited
28. The Farmers Bank Limited
29. The Premier Bank Limited
30. Trust Bank Limited
31. United Commercial Bank Limited
32. Uttara Bank Limited
There are eight private Islamic Commercial Banks in Bangladesh:
1. Islami Bank Bangladesh Limited
2.
3.
4.
5.
6.
7.
8.
Al-Arafah Islami Bank Limited
Export Import Bank of Bangladesh Limited
Social Islami Bank Limited
Shahjalal islami Bank Limited
First Security Islami Bank Limited
Union Bank Limited
ICB Islamic Bank Limited
Foreign Commercial Banks
There are nine foreign commercial banks currently operating in Bangladesh. These are:
1. Bank Al-Falah
2. Citibank NA
3. Commercial Bank of Ceylon
4. Habib Bank Limited
5.
6.
7.
8.
9.
HSBC (The Hong Kong and Shanghai Banking Corporation Ltd.)
National Bank of Pakistan
Standard Chartered Bank
State Bank of India
Woori Bank
Specialized Banks
Specialized banks were established for specific objectives like agricultural or industrial
development. These banks are also fully or majorly owned by the Government of Bangladesh.
1. Bangladesh Development Bank Limited
2.
3.
4.
5.
6.
7.
Bangladesh Krishi Bank
Rajshahi Krishi Unnayan Bank
Karmasangsthan Bank
Probashi Kallyan Bank
Palli Sanchay Bank
Grameen Bank
8. Ansar-VDP Unnayan Bank
9. Bangladesh Samabaya Bank Ltd
10. The Dhaka Mercantile co-operative Bank Ltd
11. Progoti Co-operative Land Development Bank Limited (Progoti Bank)
NPSB member Banks
1. AB Bank Limited
2. Al-Arafah Islami Bank Limited
3. Bangladesh Krishibank
4. Bank Asia Limited
5. BASIC Bank Limited
6. BRAC Bank Limited
7. Dutch-Bangla Bank Limited
8. Eastern Bank Limited
9. EXIM Bank Limited
10. First Security Islami Bank Limited
11. ICB Islamic Bank Limited
12. IFIC Bank Limited
13. Islami Bank Bangladesh Limited
14. Jamuna Bank Limited
15. Meghna Bank Llimited
16. Mercantile Bank Limited
17. Midland Bank Limited
18. Modhumoti Bank Limited
19. Mutual Trust Bank Limited
20. National Bank Limited
21. NRB Bank Limited
22. NRB Commercial Bank Ltd
23. NRB Global Bank Limited
24. One Bank Limited
25. Prime Bank Limited
26. Pubali Bank Limited
27. SBAC Bank Limited
28. Shahjalal Islami Bank Limited
29. Social Islami Bank Limited
30. Sonali Bank Limited
31. Southeast Bank Limited
32. Standard Bank Limited
33. Standard Chartered Bank Limited
34. The City Bank Limited
35. Trust Bank Limited
36. Union Bank Limited
37. United Commercial Bank Limited
38. Uttara Bank Limited
39. Agrani Bank Limited
40. Habib Bank Limited
Non-banking financial Institutions
1. Investment Corporation of Bangladesh (ICB)
2. Uttara Finance and Investments Limited
3. United Leasing Company Limited
4. Union Capital Limited
5. The UAE-Bangladesh Investment Company Limited
6. Saudi-Bangladesh Industrial & Agricultural Investment Company Limited (SABINCO)
7. Reliance Finance Limited
8. Prime Finance & Investment Limited
9. Premier Leasing & Finance Limited
10. Phoenix Finance and Investments Limited
11. People's Leasing and Financial Services Limited
12. National Housing Finance and Investments Limited
13. National Finance Limited
14. MIDAS Financing Limited
15. LankaBangla Finance Limited
16. Islamic Finance and Investment Limited
17. International Leasing and Financial Services Limited
18. Infrastructure Development Company Limited (IDCOL)
19. Industrial Promotion and Development Company of BangladeshLimited (IPDC)
20. Industrial and Infrastructure Development Finance Company (IIDFC) Limited
21. IDLC Finance Limited
22. SUMON Bank
23. Hajj Finance Company Limited
24. GSP Finance Company (Bangladesh) Limited (GSPB)
25. Firt Lease Finance & Investment Limited
26. FAS Finance & Investment Limited
27. Fareast Finance & Investment Limited
28. Delta Brac Housing Finance Corporation Limited (DBH)
29. Bay Leasing & Investment Limited
30. Bangladesh Industrial Finance Company Limited (BIFC)
31. Bangladesh Finance & Investment Company Limited
32. Agrani SME Finance Company Limited
33. CAPM Venture Capital and Finance Limited
34. Meridian Finance and Investment Limited
35. Realistic Finance Bank Limited
Chapter -4
4.1Definition of Nonperforming Loans (NPLs):
A Non-performing loan is a loan that is in default or close to being in default. Many loans
become non-performing after being in default for 90 days, but this can depend on the contract
terms.
According to IMF, definition of NPLs
is
“A loan is nonperforming when payments of interest and principal are past due by 90 days or
more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by
agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt
that payments will be made in full” (Wikipedia, definition of NPLs).By bank regulatory
definition non-performing loans consist of:
•
Loans that are 90 days or more past due and still accruing interest, and
•
Loans which have been placed on nonaccrual (i.e., loans for which interest is no longer
accrued and posted to the income statement).
Loan may also be non- performing if it is used in a different way than that for which it has
been taken. As per Section 5 (cc) of Bank Company Act 1991, 'defaulting debtor' means any
person or institution served with advance, loan granted in favor of him or an institution
involving interest or any portion thereof, or any interest which has been overdue for six
months in accordance with the definition of Bangladesh Bank. Non-performing loans are also
called non-performing assets (NPA), which are loans, classified by a bank or a financial
institute, at the instruction of the regulatory authority, on which repayments or interest
payments are not being made on scheduled time. A loan is an asset for a bank as the interest
payments and the repayment of the principal create a stream of cash inflows. Interest cash
inflow is excess money over principal .Banks usually treat assets as non-performing, if they
are not serviced in scheduled time. If payments are late for a short time, a loan is classified as
past due. Once a payment becomes late (usually 60 days), the loan is classified as nonperforming.
NPL is a sum either of the borrowed money upon which the debtor has not made his/her
scheduled payments, which is in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If
the debtor starts making payments against a non-performing loan, it becomes a performing
loan.
C la s s i f i ed L oa n :
A classified loan is the term used for any loan that a bank examiner has deemed to be in
danger of defaulting. The borrower does not necessarily need to miss payments order for a
bank to label the account in this manner. A borrower can have what the bank calls a
classified loan for different reasons. This is simply a precaution that financial institutions
take to prepare for a possible loss and to prevent any further risk.
The Bangladesh Bank defines an 8-tier loan classifying system such as Superior, Good,
Acceptable, Marginal, Special Mention, Sub-standard (SS), Doubtful (DF) and Bad/ Loss
(BL). This is actually the key risk grading system in order to measure the assets' quality. This
grading must be used to check asset-quality periodically. Downgrading of any facility should
be informed in Early Alert Reporting (EAR) for decision-making authorities.
The loans are usually classified by the lending bank, whenever the bank has reasons to believe
that the borrower would not be able to repay the loan regardless of whether the loan is overdue
or not. Loans extended by a bank are classified into the following three categories.
i. Substandard: Advances which appear substantial degree of risk to bank by reason
of unfavorable record or other unsatisfactory characteristics.
ii. Doubtful: Advances the ultimate realization of which is doubtful and in which a
substantial loss is probable.
iii. Bad/Loss: Advances which may not be recoverable at all and entire loss is
probable.
4.2 Nonperforming Loan in Bangladesh:
The issue of nonperforming loans in Bangladesh is not a new phenomenon. In fact, the seeds were
cultivated during the early stage of the liberation period (1972-1981), by the government’s
“expansion of credit” policies on the one hand and a feeble and in firm banking infrastructure
combined with an unskilled work force on the other. The expansion of credit policy during the early
stage of liberation, which was directed to disbursement of credit on relatively easier terms, did
actually expand credit in the economy on nominal terms. However, it also generated a large number
of willful defaulters in the background who, later on, diminished the financial health of banks
through the “sick industry syndrome”. Despite the liberalizing and privatizing of the banking sectors
in the 1980s with a view to increasing efficiency and competition, the robustness of the credit
environment deteriorated further because of the lack of effective lenders’ recourse on borrowers.
Government direction towards nationalized commercial banks to lend to unprofitable state owned
enterprises, limited policy guidelines (banks were allowed to classify their assets at their own
judgments) regarding “loan classification and provisioning”, and the use of accrual policies of
accounting for recording interest income of NPLs resulted in alignments of the credit discipline of
the country till the end of 1989.
In the 1990s, however, a broad based financial measure was undertaken in the name of FSRP,
enlisting the help of World Bank to restore financial discipline to the country. Since then, the
banking sector has adopted “prudential norms” for loan classification and provisioning. Other laws,
regulations and instruments such as loan ledger account, lending risk analysis manual, performance
planning system, interest rate deregulation, the Money Loan Court Act 1990 have also been enacted
to promote sound, robust and resilient banking practice. Surprisingly, even after so many measures,
the banking system of Bangladesh is yet to free itself from the grip of the NPL debacle. The present
study has concentrated on the above issues mainly with a view to assisting policymakers to
formulate concrete measures regarding sound management of NPLs in Bangladesh.
4.2.1. Base for provisioning and accounting treatment of NPLs:
A balance sheet item representing funds set aside by a company to pay for losses that are anticipated
to occur in the future. The actual losses for the earmarked funds have not yet occurred, but the
general provisions account is counted as an asset on the balance sheet.
The bank managers of Bangladesh deduct the amount of interest suspended and the value of
“eligible securities” from the outstanding amount in order to determine the base for provisioning to
NPLs. For unclassified loans, however, they keep a general provision (1%) against the outstanding
amount and include it in the capital to determine the capital adequacy of the bank (at present 10%).
With regard to income recognition, bank managers do not consider the amount of interest on
substandard and doubtful loans as income for the bank, but rather keep it separately in an “interest
suspense account”. However, if any amount is received against sub-standard and doubtful loans, the
said amount is deducted from the total interest suspense amount. In the case of a bad/loss loan, the
interest on such loan is also kept in the interest suspense account if a suit is filed in the court.
Seemingly, with regard to substandard and doubtful loans, this interest is also excluded from the
income of the bank. These accounting measures have made the banking sector more transparent and
credible than they were in the past.(Marge with provision) .
4.2.2 Trend of the Loan Default Problem in Bangladesh
Emergence of Default Loans
As banking remains the main intermediary vehicle of harnessing investible capital for accelerating
the growth of the productive sectors in Bangladesh, the continuing crisis of accumulation of nonperforming and defaulted banks loans has emerged as one of the most serious constraints in the path
of economic development of our country. Now we will discuss how the loan default problem has
emerged in our country by year-wise.
Post liberation period
After the liberation of Bangladesh, the Awami League Government’s decision to nationalize the
banks and insurance companies operating in Bangladesh should be considered a logical step but the
task of re-organization of the nationalized banks in the chaotic, war-ravaged and crisis-ridden postliberation years and a very rapid expansion of banking network in rural Bangladesh created some
problems for the banking sector. There was no time after nationalization as the most corrupt,
undisciplined, over manned and mismanaged concerns mired in sea of recurrent losses in the
backdrop of the political and administrative inexperience of the post liberation regime.
In this scenario, the nationalized banks were involved in two sorts of pressure situations, firstly, the
almost insatiable demand for credit from the loss making state-owned enterprises kept the banks
under constant pressure due to a shortage of adequate liquidity and secondly the newly emerging so
called “briefcase business man” with connection with politics and politicians, top bureaucrats and
top bankers, and retired military and civil bureaucrats were constantly lobbing for access to bank
credit and in the process were vitiating the work atmosphere in the banks by alluring a section of the
banker to indulge in corruption and malpractices. It is now widely recognized that today’s
millionaires of Bangladesh came mostly from the Ranks of those “briefcase businessman” and the
groups mentioned, who could successfully establish and maintain this types of patron clients
relationship with the bankers and in the process created a host of millionaires from amongst those
bankers themselves, who had actively connived and harvested the illicit margins in exchange of the
favors rationed out to those fortunate loaners.
The political changes of 1975 ushered in an era of political culture, where in corruption gradually
became institutionalized; the economics of rent seeking took firm roots in the body politic of
Bangladesh. In the process, sanctioning of bank loans became one of the prime victims of the
buying and selling process afflicting the political party affiliation process, and a popular mechanism
for doling out financial favors to party leaders as well as political cadres. This politicization of the
banking practices has seriously hampered the institutional disciplines of the banks, where
professional expertise, integrity and ethical values have become exceptions to some extent rather
than rules. Ex-banker emerged as financiers as the newly floated private banks, but
there was no mechanism to make them accountable or to know about the sources of their cash.
Defaulters of bank loans taken from nationalized banks or state-owned development finance
institutions swelled the rank of directors of the newly established private banks, but nobody
intervened on behalf of the loan-giving banks caught in the middle with defaulted loans. The laws,
rules and regulations relating to banking remained mostly in the books; and the judicial process
utterly failed to take the willful defaulters to task, thereby making the process of lender’s recourse
on borrowers almost a mockery in Bangladesh. Therefore, we surmise that behind all these malaises,
the nature of the state and of politics played the real villainous role by patronizing and developing a
class of ‘comprador bourgeoisie’ in Bangladesh, created, nursed and constantly nourished by statepatronage, and in this nursing process, bank loans were rampantly used as lucrative doles.
In the eighties, the rapid liberalization of Bangladesh’s import regime has created the so-called
‘sick-industry syndrome’, which provided a potent excuse for some, and created genuine hardships
regarding repayment of bank loans for the other. The domestic industries have been bearing the
brunt of this ill-advisedly too rapid pace of liberalization of Bangladesh’s international trade without
appropriate preparatory policy measures. The political doldrums of the late-eighties provided
additional excuses to these swelling groups of defaulters. The BNP government of 1991-96 tried to
stem the rot in this field in the initial years of its term. They repeated the blunders of its predecessor
of providing lavish encouragement to bank managements to ease and expedite the process of term
lending, especially according to its own political exigencies at the later stated of its rule, which
added a massive amount of fuel to the fire of the so-called ‘default-culture. And earlier lending
sprees continues to haunt the banking section even today be sustaining the momentum of the buildup of the defaulted loans of the earlier two decades.
4.2.3. The Present status of Loan Defaults Culture in Bangladesh:
As loans comprise the most important asset as well as the primary source of earning for the banking
financial institutions and on the other hand also the major source of risk for the bank management so
a prudent bank management should always try to make an appropriate balance
between its return and risk involved with the loan portfolio. But Banking sectors recent involving
activities, guidelines and their concentration in that is not satisfactory.
The prudential guidelines also call for making adequate “provisions” against classified loans in
order to protect the financial health of the banks are prepared but which is meaningless as by making
provision the number of willful defaulters increasing day by day. The economic implications of the
non-performing/default loans are not only stoppage of creating new loans but also the erosion of
banks profitability, liquidity and solvency, which might sometimes leader towards collapse of the
baking financial system. It has therefore become sine qua non for policy makers to study the loan
default scenario of the banking sector of routine basis for estimating classified loan, making
appropriate provisioning, adopting effective recovery strategy and thus ensuring soundness and
efficiency of the banking sector.
Before privatization and liberalization this banking activities were thus directed to disburse credit,
according to the government’s economic priority, and hence little attention was placed to identify
the problem loans and making provisions thereon, although there was significant amount of hidden
default loans. After 1982, the banking sector of Bangladesh underwent a rapid denationalization and
privatization process. The out of six nationalized commercial bank Uttara Bank and Pubali Bank
were denationalized in 1983 and 1984 respectively with a view to increasing the efficiency of the
banking sector. Henceforward, private bank were allowed to conduct banking operations in order to
increase, competition, reasons, the efficiency and productivity of the banking sector. But due the
various reasons, the efficiency of the banking sector did not increase rather the credit discipline was
further eroded.
The very frequent and fashionable style of loan defaulting story in banking sector of Bangladesh is
loan scam. Recently a series of scams has started threatening the banking sector in a great way. Last
year, Sonali Bank loan scam started the episode and is continuing with Bismillah loan scam, Basic
Bank loan scam and so on in a large scale. The story of all episodes is almost same and follows a
cycle.
According to Anti-Corruption Commission, 41 reputed commercial banks in Bangladesh were
involved actively in Sonali bank scam of Tk.3665 crore with Hallmark(The Financial Express). Over
100 branches of seven state-run banks, 29 private banks and five foreign banks patronized that loan
scam according to them.
In 2009, Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangsta were merged due to huge
amount of NPL in both of them. The operational activities of BSRS came to a halt, when its
classified loans reached up to 85 to 90 percent of its total portfolio. The situation was almost same
for BSB although it tried to expand its deposit collection on its own rather than rescheduling the
previous non performing loans. It had about Tk 250 crore classified loans on the eve of being
merged, according to media reports.
Defaulted Loan between September 31, 2014 to March 31, 2015
(in crore)
Bank Name
SONALI
AGRANI
RUPALI
BASIC
BDBL
AB
BANK ASIA
BRAC
DHAKA
DBBL
EBL
EXIM
FIRST SECURITY
ICB ISLAMIC
IBBL
JUMUNA
ONE
MUTUAL TRUST
NATIONAL
Defaulted Loan as of
Sept 31, 2014
11,570.21
4387.17
5118.36
1697.45
1883.27
716.04
596.18
899.01
783.85
755.23
474.33
597.96
1003.29
218.46
749.28
2788.33
331.40
605.28
698.90
Defaulted Loan as of Dec
31, 2014
9629.29
2605.26
3317.84
1053.0
1282.36
520.38
440.48
580.92
750.70
375.24
402.04
369.82
516.82
248.38
717.59
1364.29
173.10
448.96
465.98
Defaulted Loan as of
March 31, 2015
10,432.43
3343.48
332354
1588.57
2557.54
616.32
463..61
979.90
840.23
563.14
477.06
427.55
677.02
248.63
725.88
2065.99
281.45
558.08
534.74
4.2.4. Present Status of Non-performing Loans:
The most important indicator intended to identify the asset quality in the loan portfolio is the
ratio of gross non-performing loans (NPLs) to total loans. In 2012 Foreign Commercial
Banks(FCBs) have the lowest and State owned Development Financial Institutions (DFIs) have
the highest ratio of gross NPLs to total loans. State owned commercial banks (SCBs) had a gross
NPLs to total loans of 23.9 percent, whereas Private Commercial Banks (PCBs), FCBs , and
DFIs, had ratios of 4.6,3.5 and 26.8 percent respectively at the end of December 2012.
NPL ratios By( % ) of Banks
Bank
2007
2008
2009
2010
2011
2012
2013
2014
types
End
June
2013
SCBs
21.4
22.9
29.9
25.4
21.4
15.7
11.3
23.9
26.4
DFIs
34.9
33.7
28.6
25.5
25.9
24.2
24.6
26.8
26.2
PCBs
5.6
5.5
5.0
4.4
3.9
3.2
2.9
4.6
6.6
FCBs
1.3
0.8
1.4
1.9
2.3
3.0
3.0
3.5
4.7
Total
13.6
13.2
13.2
10.8
9.2
7.3
6.1
10.0
11.9
The gross NPLs ratios to total loans for the SCBs, PCBs, FCBs and DFIs were recorded as 26.4,
6.6, 4.7 and 26.2 percent respectively at the end of June 2015. The ratio of NPLs of all the banks
had shown an overall declining trend from its peak (34.9 percent) I 2000 up to 2011 before it
increased to 10.0 percent in December 2014.
The amount of NPLs of the SCBs increased from taka 105.7 billion in 2003 to
taka 215.1 billion in 2014. The PCBs recorded a total increase of taka 81.8
billion in their NPL accounts, which stood at taka 130.3billion in 2014 as
against taka 48.5 billion in2003. The amount of NPLs of the DFIs increased to
taka 73.3billion in 2014 from taka 47.3 billion in 2003.
Sonali Bank has the Highest default loan (10,432.43 cores) and HSBC has the
lowest default loan(128.06 cores) among the banks at the end of March 2015. In
September 2015, Sonali Bank had the highest default loan (12570.21 cores) and
HSBC had the lowest default loan (109.05 cores).
4.3 Causes of Nonperforming Loans
A. ENTREPRENEURS RELATED
A1: Lack of business experience.
Sometimes people without prior business experience want to do something. It may so happen that
after retirement from govt. or private service people want to establish a business, which is not very
relevant to his past experience. Besides his own equity they look for bank finance. Normally banks
do not finance in the projects where the key personnel do not have enough background in that
particular business. When banks finance in the projects here the key personnel lack relevant business
experience, it becomes risky for the bank. Probability of failure in these sorts of projects tends to be
higher.
A2: Lack of Business and Lack of Institutional Training Background.
Business experience is somehow related to business background. Here business background means
family business background. Though family business has a role in entrepreneurial orientation, there
is no direct relationship between business background and business performance of loan repayment.
It is true that youths coming from business background are familiar with business and banking but
there are other ways to get oriented with the same, not necessarily one has to come from business
family.
A3: Unwillingness to Pay
.
We all know this is one of the most common reasons behind default culture in Bangladesh. It can
happen in some situations like when security-backing loan is weak; customer feels that defaulting
the loan will not harm him much. In that case he tends to default. In other cases like when cash flow
from the business is not impressive, people are unwilling repay the loans.
A4: Lack of Supporting Facilities
Sometimes business need support from other sources like government authority. When cash flow is
lean and the project is in lull, it needs feeding. Without further feeding company may become sick
and incur loss in consecutive time periods. In our country most of the companies do not have the
supporting sources with which they can withstand the turmoil that comes in to their business from
time to time.
B: BUSINESS RELATED
B1: Non-attractive Industry
Sometimes non-attractive industry acts as primary cause of loan default. Companies operating in
non-attractive industries have higher probability of performing poor. Because of poor financial
performance, company’s cash flow gets affected. Because of cash flow the company becomes less
liquid which contributes in defaulting bank loan. Not necessarily that all the companies no nonattractive industry perform poor. For example: suppose in Bangladesh Jute industry is one of the non
–attractive industries. Now any investor want to invest in this sector may be cause loss. So this
investor can’t pay the interest.
B2: Strong Competition
Strong competition does not directly contribute in defaulting loan. Strong competition takes place
when many companies enter into an industry where the industry cannot accommodate so many
companies. In strong competition only efficient players survive. So the inefficient companies find it
difficult to make profit and sale their product. Once they fail to make profit, the company is likely to
default its loan installment in the bank.
B3: Poor Management capability
Before sanctioning a loan banks look into the matter that how the management of the company is. If
the bank feels that the management is capable enough to successfully run the business and
utilize bank finance, then bank agree to finance otherwise not. Even sometimes banks sets
conditions like some of the key personnel must not quit the organization before repayment of the
loan. Managerial capability plays vital role in repaying bank loan. The more professional the
management is, the less is the probability of defaulting loan.
B4: Poor Financial Performance
Definitely poor financial performance is the most important cause of loan default. Once a company
is not solvent, it is unlikely to repay its loan. Poor financial performance is the key reason behind
maximum loan default. Poor financial performance can be arisen from many other reasons described
above.
B5: Poor Cash Flow
In most cases poor cash flow is the aftermath of poor financial performance. Because of poor cash
flow companies mainly default loan. Because of irregular cash flow, business becomes unstable and
illiquid. In that case business does not have enough cash to service loans payment and interest. Even
if a company is profitable, the company may default because of cash flow. In some cases, a business
may sell most of its finished goods on credit. So it may not have enough cash to support the loan and
other debts. So it may cause default.
B6: Low Market Share
Low market share may be a reason of loan default but not a single respondent mentioned it as one of
the reasons of their loan default. Low market share means low sales, low sales mean low profit and
low profit results default. Operating in a niche market, having a very low market share a firm can be
profitable enough to repay its entire loan obligation as well as retain sizable earning. But operating
in niche product in a market which is not proper or have fewer customers that it expected then it
cannot be profitable. So it cannot pay its interest payment.
C: LENDING RELATED
C1: Delayed Assessment of Loan Proposal
Banks sometimes make delay in assessing loan proposals of the business firms. When the firm badly
needs money, it does not get enough funds because of delayed assessment by the bank.
This infuses shortage of cash in their business operations. They hardly manage their day-to-day
business expenses let alone repayment of the loans.
C2: Delayed Disbursement of Fund
Even after assessment of the proposal and taking positive decision, banks do not disburse funds
until security documentation formalities are completed. As a result business do not get fund when
actually it requires it. Some of the defaulters complained about subsequent disbursements.
C3: Lack of Proper Monitoring
Monitoring is one of the most important parts for financial institutions. Through monitoring lenders
come to know that whether their fund is being used for the desired purpose or not. Sometimes
disbursed money is used for purposes other than the specific areas. In that case risk of loan default
gets higher. Banks sanction loan on the basis of feasibility of the project. Bank as a lender expect
that the loan will be serviced by the cash flow generated from that particular business. But if credit
is used in some other areas desired cash flow may not come from the business and chance of loan
default gets high. Therefore banks monitor activities of the borrower whether the fund is being
properly utilized or business is generating enough cash flow or not. Banks use specialized formats
for loan monitoring. Bank periodically review the performance of the borrower and based on that
bank decides whether to renew the facilities or not. The tools used for monitoring are portfolio
reviews, profitability analysis etc. before diverse loan, Banks can check the credit rating of the
organization. Banks can generate information about borrowers from Bangladesh Bank. Then banks
can decide how much money investor needs and how much money he will be invested. Valuation
culture of the security or collateral is absent in many of banks.
C4: Lack of taking Proper Action
Action comes after loan monitoring. Monitoring is done for identifying deviations or exceptions. If
there is any exception then corrective action needs to be taken. If corrective actions are taken on
time chance of default loan reduces. When Customer misses one installment, concerned officer of
the bank must visit the customer and understand where the problem lies. If proper action is taken,
probability of loan default is reduced
D: MACROECONOMIC FACTORS
D1: Low GDP Growth
It is evident that companies which deal in consumer products are directly affected by the GDP
growth of the entire economy. Regular customers and defaulters have opined that this macro
indicator influences the cash generation of a company and hence the repayment of the loan.
D2: Increasing Crimes
It is revealed that the effect of the increasing crimes in the business of the companies. They think
that forced subscription sometimes make the profitability of the company lower.
D3: Hartals by the Political Parties
Political instability of the country hampers the production and the distribution of the products in a
smooth way and the political turmoil is considered one of the other causes of the loan default in our
country.
D4: Frequent polity Changed by the Government
Government is considered as the minor cause of the loan default as per the survey since it has a little
impact on the local sales and distribution of the products of the companies. For example: in this
budget government increase tax on mobile phones which are imported from foreign country, so
mobile phone importer may not generate expected revenue. So importer could not par their interest
payment. So they could be defaulter. Without these are other causes such as imperfect lending
practice, lack of analysis of business risks, lack of proper valuation of security or mortgage property,
undue influence by borrowers, external pressure, loan go Govt. organization, Govt. policy for
disbursement of credit, lack of legal action.
Name of firm
Approved
Loan
Types of Loan Year of
Expiry Reason
Disbursement
Samam Trade
01 Crore
Term Loan
for
International
3 years
2011
2014
It is a trading firm. It imports
Locker from
china through issuing L/C. From
Oct’13Jan’14 the firm didn’t open any
L/C, due
to political unrest. It happened
because the
firm had enough stock in its
warehouse,
but due to strike it could not sell its
goods,
as a result the firm got stuck in fund
shortage. On the contrary, the firm
has a
limit of fund for importing goods.
Due to
nonpayment of loan that created
problem
against Import process, the
outstanding of
the loans were getting higher. At
the end
of November’13 the client listed as
SMA,
And In March’14 the loan declared
Bad
Loan
.
Causes :
1. Hartals by the Political Parties:
Due to strike, firm did not perform
according their plan. So they can
not
generate enough revenue to pay the
interest payment.
2.
Poor Financial Performance:
lack of proper strategy for strike. So
It cannot generate revenue.
Swadesh Steel
50 Lac
OD loan
revolving
2013
2014
The client is a local supplier of rod,
angel
bar etc. It approached the loan to allow
a
OD limit of 80 Lac. The bank approved
50
Lac for extension of its operation. But
the
proprietor‘s intention was mischievous.
Instead of investing the fund into
business
the owner purchased Land in Savar.
Just
after 3 month of disbursement the
client’s
transaction became irregular. The bank
tried to make the client pay the out
standings. But the client’s business was
not capable of to pay the proceeds on
regular basis. After 1 year the Loan
became Bad Loan. The Bank is trying
to
recover the amount.
Cause:
1. Lack of Proper Monitoring:
Bank should take information about
the client before approve loan.
2. Unwillingness to Pay:
The client intension was not good.
May be bank kept low collateral so
that he thought that it will not harm
him a lot.
3. Mis use of fund: Client use the
fund to buy the land rather than
invest in business. He may thought
that it will be more profitable than
business.
Chapter -5(Analytical part )
5.1Descriptive analysis
Some research regarding identification, measurement, causes and effect analysis of NPLs has been done by
scholars of our country in different times both issues within country as well as cross boarder comparison.
Nonperforming loans in the banking sector of BD, realities and challenges of NPLs in BD, Impact of
supervisions in controlling NPLs are some frequent topics of articles published in reputed journals in
our country in recent years. SCBs in our country holds major proportion of total deposit of the hole industry
but it is very unfortunate to see the regular default of loan recovery and scams by them in recent times. So to
realize the impact of this evil practice on their performance is a need of time. This paper focuses some
factors directly or indirectly affects their performance that may quest the thrust to some extent.
Figure 1: Capial to risk weighted asset ratio %
30
25
20
15
SCBs
10
PCBs
5
FCBs
0
2007
1.1
2008
7.9
2009
6.9
2010
9
2011
8.9
2012
11.7
2013
8.1
2014
1.2
PCBs
9.8
s
FCB 22.7
10.6
11.4
12.1
10.1
11.5
11.4
11.4
22.7
24
28.1
15.6
21
20.6
20.3
SCB
s
Source: Banking Performance Indicators, Appendix-3 (Table II), Banking regulation & Policy Department,
Bangladesh Bank, (2005-2013)
Non Performing Loan Rate is the most important issue for banks to survive. There are lots of factors
responsible for this ratio. Some of them belong to firm level issues and some are from macroeconomic
measures. Capital to risk weighted assets of SCBs for the selected 8 years is very much dissatisfactory. In
FY 2007 it was 1.1 % that was really alarming but gradually they started to recover it and in FY 2011 it
reached up to 8.9% which reaches up to 11.7 % in 2011 that is the highest among all the years. But in 2013
it decreases to 8.1 % and drastically fell in 2014 by touching only 1.2%. If we make a comparison the
ratio of SCBs with PCBs and FCBs then we easily have a clear idea about the competitive scenario. The
lowest value of PCBs and FCBs are
9.1 % and 15.60% respectively where the highest value of SCBs is below than 9%.
Figure 2: NPLs to Total Loans ratio %
30
25
20
15
10
SCBs
5
PCBs
FCBs
0
SCB
PCBs
s
FCB
2009
22.9
2008
29.9
2009
25.4
2010
21.4
2011
15.7
2012
11.3
2013
23.9
2014
26.4
5.5
5
4.4
3.9
3.2
2.9
4.6
6.6
0.8
1.4
1.9
2.3
3
3
3.5
4.7
s
Source: Banking Performance Indicators, Appendix-3 (Table III), Banking regulation & Policy
Department, Bangladesh Bank, (2006-2014)
NPL is a general factor for banking as it is acceptable up to a certain limit. How much loans are being
non- performing each year is a relevant measurement in this regard. NPLs to total loans ratio for SCBs
for selected 8 years is really alarming as most of the years it holds more than 20% NPLs as per Total Loans
and Advances. In 2011 there was a breakthrough in NPL ratio in SCBs as it shows a negative growth rate
of -0.27% and the ratio was 15.70 that was a positive sign but it could not keep it up rather it touches 26.4
% in 2014 that is surely alarming. (See Figure 2) If we make a comparison among three categories of
banks we find that PCBs has maximum NPLs in 2014 and the ratio was 6.6 % and in maximum years they
are maintaining a limit within 5%.Again, FCBs are performing with a great excellence in this topic by
maintaining the limit of NPLs ratio within 3% in every selected years.
Figure 3: Comparative position of NPLs
600
500
400
300
200
100
Total NPLs (in
NPLs
billion)in SCBs
2009 2008 2009 2010 2011 2012 2013 2014
200.1 226.2 224.8 224.8 227.1 226.4 427.3 523.1
115
137.9 127.6 121.6 107.6 91.7 215.1 261.55
Source: Banking Performance Indicators, Appendix-3 Banking regulation & Policy Department,
Bangladesh Bank, (2007-2014)
From the above graph it has been found that SCBs hold the maximum portion of the total NPLs in banking
industry over the selected years from 2007 to 2014. Among them in 2015 the industry tested the largest
amount of NPLs that was tk. 523.1 billion dollar. There exists a consistent harmony in NPLs amount which
depicts that there is very poor initiative in controlling and recovery process of those banks. The graphical
presentation given below (figure 4) is showing the percentage of NPLs hold by SCBs of the total amount.
Here, it is found that each of the years holds more than 50% of total NPLs except in FY- 2011 and FY2012. So, there is a red light to the SCBs to reduce the amount of problem lending as early as possible.
30
25
20
15
10
5
0
-5
-10
-15
SCB
PCB
s
FCB
s
SCBs
PCBs
FCBs
2007
0
2008
0
2009
22.5
2010
26.2
2011
18.4
2012
19.7
2013
-11.9
2014
11.7
15.2
16.7
16.4
21
20.9
15.7
10.2
5.5
21.5
20.4
17.8
22.4
17
16.6
17.3
19.7
s
Source: Banking Performance Indicators, Appendix-3 (Table IX), Banking regulation & Policy
Department, Bangladesh Bank, (2007-2014)
The graph can be a great source to understand how much poor the profitability trend of SCBs in our
country. In 2007 and 2008 ROE for SCBs was just 0. But this horrible situation has been changed
drastically in 2009 when the ratio touched 22.5% and the next 26.2%. In 2011 it decreased but the
percentage is tolerable. The growth rate of ROE was also so poor and in a declining mode up to 2013
also with a negative value in 2013. If we try to draw a comparative idea then find PCBs maintained at least
15% ROE in last 8 years except 2013 and 2014 with huge fall. But FCBs show a great performance as it
maintains at least 17% ROE in every year.
Based on the review of the literature it has been clear that there is extensive national as well as
international evidence which suggests that NPLs can be explained by both macroeconomic and bank
specific factors. But there are some qualitative variables that have significant effect on increasing NPLs that
can be included in a model to find out the effect. Moreover NPLs have serious negative impact on
loan growth rate. So there should have a impact of NPLs on banks profitability as it reduces loan amount
and interest income of the banks simultaneously.
5.2Multiple Regression analysis :
In order to investigate the impact, the following four research hypothesis have been developedH0 (1): There is no significant impact of Non Performing Loan Ratio on profitability (Net Interest
Income) of SCBs for last 8 years.
H1 (1): There is significant impact of Non Performing Loan Ratio on profitability of SCBs for last 8 years.
H0 (2): The impact of Deposit Growth Rate on SCBs profitability (NII) is statistically insignificant for last 8
years.
H1 (2): There is significant impact of Deposit Growth Rate on SCBs profitability (NII) for last 8 years.
H0 (3): The impact of Growth Rate of NPLs on SCBs profitability (NII) is statistically insignificant for last 8
years.
H1 (3): There is significant impact of Growth Rate of NPLs on SCBs profitability (NII)
H0 (4): The impact of Provision Growth Rate on SCBs profitability (NII) is statistically insignificant for
last 8 years.
H1 (4): There is significant impact of Provision Growth Rate on SCBs profitability (NII) for last 8 years.
In this paper, I have selected 4 state owned commercial banks in Bangladesh and collected data based on
some factors affect bank’s profitability as well as performance. NPL is one of the major factors of the
analysis. A model has been established to find out the significance of impact of those factors on
performance of the SCBs like the model used by Yixin Hou (2006) to find out the effect of NPLS on loan
growth rate of commercial banks. The model developed is as follows:
Y= α + β1X1 - β2 X2- β3 X3+ β4 X4+ β5 X5+ β6 X6+℮i
Where,
Y= Net Interest Income (NII)
α= Intercept Coefficient
X1= NPLs Ratio (NPLR)
X2= Deposit Growth Rate (DPGR)
X3= NPLs Growth Rate (NPLG)
X4= Provision Growth Rate of (PRVG)
β i = Slope Coefficient,
℮i =Error Term
The data used in this linear regression model is time series data as the values used here is collected
from same sources at a fixed interval of time for FY-2006 to FY-2014. Excess ratio of NPLs to total
loans is harmful for a bank as it negatively affects the lending behaviour by decreasing interest income and
loan growth rate. This paper is mainly focused on how much negative effect NPLs have on NII of SCBs
in Bangladesh.
Table : 1 Model Summary
b
Std. Error of
Model
1
R
R Square
.979a
Adjusted R Square
.959
.904
the
Estimate
3.21333
Durbin-Watson
2.310
a. Predictors: (Constant), PRVR, NPLR, NPLG, DPG
b. Dependent Variable: NIIR
Table-1 represent that the coefficient of correlation of the model R is 0.979that states there is strong
relationship between dependent and independent variables used in this model. Coefficient of determination
R2 0.959 that shows the highest percentage value that the independent variables explain 96 percent change
of NII. The goodness of fit test of the model is also excellent as the adjusted R2 is 0.904. The value of
Durbin Watson is 2.310 that lie within the range between 1.5 and 2.5. so we can easily state that there is
no autocorrelation among the independent variables of the study.
Table : 2 Coefficients
a
Standardize
Unstandardized Coefficients
B
Model
1
Std. Error
d
Collinearity Statistics
Coefficient
Beta
t
s
8.200
.004
Sig.
Tolerance
VIF
(Constant)
73.178
8.925
NPLR
-1.880
.242
-1.087
-7.777
.004
.701
1.427
DPG
-.899
.295
-.481
-3.050
.055
.549
1.820
NPLG
.091
.072
.195
1.257
.298
.569
1.758
PRVG
-.074
.029
-.354
-2.568
.083
.719
1.391
a. Dependent Variable: NIIR
From table-2 it is found that there is a positive value of intercept coefficient (α) means that if
all the independent variables remain constant then NII will be 73.178 percent carrying a viable
economic meaning that generally there exist around 73.178 percent NII in SCBs of the
country. Slope coefficient of NPLR is -1.880 that means if NPL ratio increases by 1 percent
then the NII will be decreased by 1.88 percent and it is statistically significant at 1% percent
significant level. In case of Deposit growth rate it is found that there is inverse relationship
between NII and DPG as NII
decreases by 0.899 percent due to 1 percent increase DPG where at 5 percent significance level
it is accepted. Again, the slope coefficient of NPL growth is 0.091 that states if NPL grow
by 1 percent NII increased by 0.091 percent that is statistically insignificant at 10% significant
level. So there exists no strong negative relationship between Growth rate of NPL and NII.
Here, slope coefficient of PRVG has a value of -0.074 show a negative relationship with NII.
Due to 1 percent increase in provision growth rate NII will be decreased by 0.74%.
b
Table : 3 ANOVA
Model
1
Sum of Squares
Regression
Residual
Total
df
Mean Square
723.482
4
180.871
30.976
3
10.325
754.459
7
F
17.517
Sig.
.020
a
a. Predictors: (Constant), PRVG, NPLR, NPLG, DPG
b. Dependent Variable: NIIR
The variables used in the regression are potentially endogenous as they are simultaneously determined
through banks’ balance sheet constraints and are correlated with each other. From the ANOVA table
(Appendix I) it is found that comparing calculated F value of 17.517 with table value at 2% significance
level the null hypothesis of H0 (1): There is no significant impact of Non- Performing Loan Ratio on
profitability (Net Interest Income) of SCBs for last 8 years, H0 (2): The impact of Deposit Growth Rate
on SCBs profitability (NII) is statistically insignificant for last 8 years, H0 (3): The impact of Growth Rate
of NPLs on SCBs profitability (NII) is statistically insignificant for last 8 years, H0 (4): The impact of
Provision Growth Rate on SCBs profitability (NII) is statistically insignificant for last 8 years are rejected.
So, with 98 % confidently we can conclude the statement that alternative hypothesis of H1 (1): There is
significant impact of Non -Performing Loan Ratio on profitability of SCBs for last 8 years. H1 (2): There is
significant impact of Deposit Growth Rate on SCBs profitability (NII) for last 8 years. H1 (3): There is
significant impact of Growth Rate of NPLs on SCBs profitability (NII)H1 (4): There is significant impact
of Provision Growth Rate on SCBs profitability (NII) for last 8 years are accepted .
Chapter- 6
Findings Recommendation Conclusion
6.1 Findings :
Finding’s of NPL are such as Stopping Money Cycling, Earning Reduction, Capital Erosion,
Increase in Loan Pricing, Frustration etc. As a result, the values of security are increased and the
risks of financial recession also see a rise. Amplifications of the effect of NPL are as follows:
1. NPL can lead to efficiency problem for the banking sector. It is found by a number of economists
that failing banks tend to be located far from the most-efficient frontiers, because banks do not
optimize their portfolio decisions by lending less than demanded.
2. There is a negative relationship between the non-performing loans and performance efficiency.
So, increase in NPL hampers the performing loan. Most of the cases, it occurs when there is an
adverse selection. Averse selection is asymmetric information problem that occurs before the
transaction. For example: big risk takers or outright crooks might be the most eager to take out a
loan because they know that they are unlikely to pay it back. Because adverse selection increases the
chances that a loan might be made to a bad credit risk, lender might decide not to make any loans,
even though there are good credit risks in the market place.
3. NPL creates the Credit Crunch situation. Credit crunch is a phenomenon that banks ration loan
disbursement and new credit commitments in order to protect, but add more risks. Banks treat loan
as an asset. They expect return from it. If loans become NPLs then banks have lack of fund to give
loan according their commitment or banks could give loans at their previous interest rate. Clients
have to pay more. So loans may be defaulted. Credit crunch also increases the rate of NPL.
4. There is a cyclic relation between poor economic condition and the depressed economic growth
as follows:
a. During the crisis moment, in order to restore the credibility among creditors and depositors,
failing financial institutions not only try to expand their equity bases, but also reduce their risk assets
or change the composition of the asset portfolio. Because of such defensive actions, the corporate
debtors are always targeted, thus the economic growth is being stalled overall. Bank try to collect
loans amount as fast as possible and most of the banks have huge number of corporate clients so
they try to recover those loans as early as possible to reduce risky assets.
b. Money cycling gets stopped due to increase in NPL. Slow flowing of cash always has negative
impact on any business.
c. When the NPL is increased, interest earning gets stopped. But the cost of fund and the cost of
management are not stopped. To run the management cost along with the cost of fund, the existing
lending price has to be increased. Suddenly increased rate of interest makes hard the return of bank
money for a new borrower. So rate of investment will be lower.
d. NPL affects opening of LC (Letter of Credit). International importers always choose healthy
condition of the exporter's bank. Worse health condition of the bank affects the opening of new LCs.
Low rate of LCs makes low bank earning.
5. NPL exists as a natural consequence of lending behavior. When banks re-balance their portfolio,
they decide on the degree of risks they will tolerate for a given level of expected return according to
their risk preference because banks have to keep 10% of their risk weight asset as capital or 400
cores. Banks treats loans as a risky asset. If the risk is high, banks will expect high return. When the
level of non-performing loans goes beyond a certain point banks cannot accept, and then it affects
bank's re-balancing actions. So, when NPLs cross the boundary of the above threshold, they start to
spawn negative effects on more lending.
6.NPL has a positive relationship with interest rate. When NPL increases, loan which is treaded as
asset becomes more risky. So that the rate of interest also increases to get sufficient retune from the
loan to cover the risk.
6.2Recommendation
1. No compromise with due diligence in the sanctioning process. Keeping in mind
"prevention is better than cure."Banks should take high collateral. If a borrower defaults
on a loan, the lender can sell the collateral and use the proceeds to make up for the loss.
The security or collateral provided must be valued by proper agency or put up on a
regular ‘mark to market’ valuation process.
2. Action plan for potential NPLs. Banks should have some step to collect the NPLs loan.
At the end banks should go to Artha Rin Adalat.
3. Identification of highly risk sensitive borrowers in the credit portfolio. Banks should take
information about the clients before giving loans. Banks could go Bangladesh Bank to
collect the information and verify the financial statement carefully from reliable sources
to identify the risky borrowers.
4. Identification of geographical area-wise risk sensitivity. Banks should identify the clients
according area wise that’s mean in Bangladesh, there is some places where growth rate is
low or rate of repay rate is low.
5. Targeting high value end NPL accounts (having exposure of Tk. 5.00 crore and above)
6. Prompt action on credit reports
7. Capacity building of officers and executives in the recovery department. Banks should
give proper training to employee. So they can handle loans properly. If there is short of
experience employee, bank should recruit experience employee for recovery department.
8. A robust risk management culture, with a ‘well articulated’ risk management policy can
help the institutions to avoid such loan default.
6.3 Conclusion :
Our banking sector is characterized by low profitability and inadequate capital base because
there are lots of banks in Bangladesh. Banks revenue comes from spread (Lending rate –
borrowing rate).But there is huge competition among banks. So the profit is minimum. The crux
of the problem lies in the accumulation of high percentage of non-performing loans over a long
period of time. The problem is most severe for NCBs and DFIs. However, starting from a very
high rate of 41.1% in 1999 it came down gradually to 11.90% in 2014 according to latest
published data. Still, it is very high by any standard. Unless it can be lowered substantially we
will lose competitive edge in the wave of globalization of the banking service that is taking place
throughout the world. We have had a two-decade long experience in dealing with the NPLs
problem and much is known about the causes and remedies of the problem. Unfortunately, the
banking system is still burdened with an alarming amount of NPLs and lags far behind the
neighboring countries of India and Sri Lanka. Although Bangladesh has to a large degree
adopted international standards of loan classification and provisioning, the management of NPLs
is found ineffective, as the system has failed to arrest fresh NPLs significantly. It needs to be
mentioned that management of NPLs must be multi-pronged, with different strategies pursued at
the different stages through which a credit facility passes. Measures should be in place for both
prevention and resolution. With regard to preventive measures, emphasis needs to be placed on
credit screening, loan surveillance and loan review functionaries both at individual bank levels
and in the central bank of the country. Resolution measures must be accompanied by legal
measures, i.e. improving the efficiency of the legal and the judicial system and developing other
out of the court settlement measures like compromise settlement schemes, incentive packaging,
formation of asset management companies, factoring, and asset securitization and so on.
Unfortunately, Bangladesh is found to be very weak from the above point of view, and strictly
speaking, it has mainly concentrated on a few legal measures that have also been found to be
ineffective. Therefore, this study has highlighted some challenges, shown below, for improving
the debt recovery environment and solving the NPL problems of the country as well.
Bibliography:
Books:
Basely, Scote & Brigham, F. Eugine, “Essential Managerial Finance” 13th edition,
Thomson (New York).
Peter S. Rose “Commercial bank Management” fifth edition, McGraw-Hill .
Websites:
http://www.Investopedia .com
http://www.oppapers.com
http://www.ask.com
website www.bangladesh-bank.org
http://www.Financialexpress.bd.com
Articles :
 Ahmed, Shahabuddin. 1998. “Ethics in Banking,” The First Nurul Matin Memorial
Lecture, May 6, Bangladesh Institute of Bank Management, Dhaka. Unpublished.
 Asian Development Bank. 2003. Regional and Country Highlights - Sri Lanka.
Bangladesh Bank. 1991. Loan Classification Manual.
 Bangladesh Bank. 2003. Annual Report, 2002-2003.
 Bangladesh Institute of Bank Management (BIBM). 2000. Studies in Bangladesh
Banking: Series 1, BIBM, June: 67.
 Banking Regulation and Policy Department, Bangladesh Bank. BCD and PRPD
Circulars, 1989-2001.
 Bernanke, Ben and Lown, Cara. 1991. “The Credit Crunch.” Brookings Papers on
Economic Activity 2: 204-248.
Software:
Megastat Excel(2003), (2007); SPSS (2007) .
Appendix :
Compartive positon of NPL Table- 1 :
Urban
Rural
Total
NCBs
21.99 %
37.36 %
59.35 %
SBs
2.45 %
17.15 %
19.60 %
FCBs
0.56 %
0%
0.56 %
PCBs
15.22 %
5.27 %
20.49 %
NPLs to total loan ratio Table-2 :
Year
NCB
SB
PCB
FCB
Total
1997
254,540
20,110
114,230
21,240
410,120
1998
277,560
21,330
129,720
27,370
455,980
1999
307,380
25,530
135,450
31,220
499,580
2000
342,390
29,660
155,180
41,940
569,170
2001
375,790
38,170
188,730
48,240
650,930
2002 (Sept.)
400,662
44,880
222,300
60,256
728,098
Capital to risk weighted assest Table-3 :
Types of Bank
Urban
Rural
Total
NCB
276,318
124,344
400,662
SB
24,303
20,577
44,880
PCB
202,556
19,744
222,300
FCB
60,256
-
60,256
Total
563,433
164,665
728,098
NPLs Ratio of Types of banks table-4 :
Bank
2007
2008
2009
2010
2011
2012
2013
2014
types
End
June
2013
SCBs
21.4
22.9
29.9
25.4
21.4
15.7
11.3
23.9
26.4
DFIs
34.9
33.7
28.6
25.5
25.9
24.2
24.6
26.8
26.2
PCBs
5.6
5.5
5.0
4.4
3.9
3.2
2.9
4.6
6.6
FCBs
1.3
0.8
1.4
1.9
2.3
3.0
3.0
3.5
4.7
Total
13.6
13.2
13.2
10.8
9.2
7.3
6.1
10.0
11.9