The stability of the financial sector is at risk due to High amount of defaulted loans: BB report


The Bangladesh Bank report warns that the financial sector’s stability is at risk due to the increasing number of non-performing loans. On October 5, the quarterly report for April-June 2023 was published by the central bank, in which it made the observation.


The report reveals that the gross NPL ratio to total loans increased from 8.8% in March 2023 to 10.1% in June 2023. This rise remains a concern, and defaulted loans require closer monitoring. According to the data released by BB on October 1, the amount of defaulted loans surged from Tk 1,31,620 crore in March 2023 to Tk 1,56,039 crore at the end of June 2023. The amount of defaulted loans was Tk 1,20,656 crore at the end of December 2022. The banking sector’s ratio of non-performing loans to total loans increased due to withdrawn loan repayment policies and weaker business activities at the end of Q4 in FY23, according to a report. The gross NPLs to total loans ratio for state-owned commercial banks and private commercial banks also increased to 25.01% and 6.46% respectively, at the end of June from 19.87% and 5.96% at the end of March.

The percentage of gross NPLs to total loans for foreign commercial banks (FCBs) and specialized banks (SBs) slightly decreased from 4.90 percent and 12.80 percent in March to 4.80 percent and 12.14 percent in June, respectively. However, experts are deeply concerned about the continuous increase in defaulted loans, and they stress the severe repercussions it has for both the banking sector and the broader economy. The rise in NPLs has resulted in a decreased capacity for banks to lend, causing a hindrance in credit flow for productive sectors and ultimately impeding economic growth. The report states that the BB has reinforced its policies to tackle the problem of NPLs by signing memoranda of understanding and increasing internal inspections to reduce the NPLs. 

The Bangladesh Bank is issuing guidelines on Prompt Corrective Actions (PCA), which will allow it to intervene early and take corrective measures for weak banks. New legislation has been enacted that stipulates punitive measures for malicious loan defaulters. Commercial banks have been instructed to strengthen their frameworks for supervision and loan recovery mainly through internal audit management. However, the banking sector has seen a rise in non-performing loans, a decline in banks’ advance growth, and deterioration in provision maintenance and excess liquidity in the banking system.

At the end of Q3 in FY23, the net NPLs to total loans ratio was 0.30 percent. However, by the end of Q4 in FY23, the ratio had risen significantly to 1.58 percent. This increase was due to a considerable inadequacy in provisions maintained during this quarter compared to the previous quarter.

Picture and Article Sources: The New Age 

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