Asian Development Bank has said that the recent rise in non-performing loans in several emerging Asian economies including Bangladesh is a concern due to potential macro-financial feedback effect and implications for the region’s financial stability.
Non-performing loans (NPLs) have increased in Bangladesh, China, India, Bangladesh and Indonesia, among others, and the rise of NPLs needs to be closely monitored, ADB said in the Asian Economic Integration Report-2017 released on Tuesday.
A large sustained NPL build-up could damage the financial sector and likewise lead to a reduction in credit supply and slowdown in overall economic activity, the report said.
Multiple studies establish a link between deteriorating macroeconomic conditions and unfavourable financial conditions, it said.
Despite strong resilience against a weak external environment, vulnerabilities in Asia’s financial systems should not be underestimated, it said.
While the banking system in the region remains healthy, high leverage and credit growth could increase some economies’ vulnerability to tightening global financial conditions, it apprehended.
Loan-to-deposit ratios in some Asian countries also remain above 80 per cent and have been rising for most economies since 2006.
Loan-to-deposit ratio in Bangladesh is also nearly 80 per cent.
A high ratio could imply that a country could run out of liquidity to cover unforeseen funding requirements, according to the report.
Dependence on external funding is also a concern for the region.
According to the report, the global financial crisis highlighted several challenges including bank dominated nature of Asian financial systems, role of credit growth and rising private sector debt and high exposure to foreign currency-dominated debt for the region.
Banks remain the biggest source of corporate financing in emerging Asia.
As of 2016, bank credit was 113.6 per cent of corporate financing in emerging Asia as a percentage of GDP, far outstripping stock capitalisation at 68.1 per cent and corporate bonds at 21.8 per cent, the report said.
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