Defaulted loans in the country’s banking sector would surge further as defaulters would now use the coronavirus outbreak as a pretext to not repay their bank debts on time.
The prediction was made in a research paper presented at an online seminar organised by the Bangladesh Institute of Bank Management on ‘NPL in Banks of Bangladesh: Macro Economic and Bank Specific Perspective’ on the day.
BIBM associate professors Md Alamgir, Mohammad Tazul Islam, Antara Zareen and Rahat Banu, and United commercial Bank first assistant vice-president Md Ziaul Hasan jointly conducted the research.
Bangladesh Bank deputy governor and BIBM executive committee chairman SM Moniruzzaman said that non-performing loans of banks ultimately affected the volume of private investment by inflating the required provision and loss accumulation in the banking system.
He, however, said that it was a satisfactory sign that we were not in a very bad position among the SAARC countries.
‘Still there is enough scope to take our NPL level to a tolerable position,’ he said.
The researchers in the research paper said, ‘In order to facilitate business people and combat the economic fallout of coronavirus, Bangladesh asked banks not to downgrade any loan over a failure to pay instalments in the January-September period.’
‘There are two fold challenges faced by the banking sector — high defaulted loan and cutting down the lending rate to single digit before the outbreak of the coronavirus,’ the paper said.
If defaulters needed 10 years to repay their debts when they faced no crisis as big as the coronavirus, they now have a bigger excuse to say that 10 years are not sufficient, the researchers said, adding that so, the defaulted loan crisis was not going away and it would deepen further instead.
Commenting on the impact of the regulatory forbearance introduced by the central bank, the research paper said, ‘Although the classification status of these loans remains almost stagnant due to these circulars of BB and banks will not be required to keep provision against these loans.’
Therefore, the asset quality will deteriorate and the amount of NPLs will increase after the end of this virus outbreak, it said.
‘Persistent default culture and taking advantages of relaxed loan rescheduling policy are the major concerns for asset deterioration in the overall banking sector in the upcoming days,’ the researchers cautioned.
‘In the short-term, it might help the banks to clean the book but in the long run, the result might be even worse,’ it said.
Because of the coronavirus, the banking sector experienced sharp falls in regular loan repayments and recovery from non-performing loans in the second quarter of the year 2020, it said.
‘If this continues, banks’ NPL will significantly rise and will lead to provision shortfall in many banks,’ it said, adding that if that occurred, it would hit the capital base of the banks.
In the absence of a secondary market for real-estate in Bangladesh, the banks will face a critical situation in selling mortgaged assets which may aggravate the situation, mentioned the paper.
‘Banks are now waived from maintaining loan loss provision considering the effects of coronavirus up to December this year,’ it said.
‘But, BB may ask banks to maintain provision after September,’ the researchers suggested, adding, ‘Thus, banks need to take preparation for recovering loan and maintaining provision considering the situation after 2020.’
As per the latest BB data, NPL in the country’s banking sector increased by Tk 3,606 crore to Tk 96,116 crore at the end of June this year from Tk 92,510 crore three months ago.
The researchers in their recommendations said that the borrowers should be stopped from taking credit from too many banks, ensuring proper assessment of credit risk of the borrowers, and the banks should be kept free from political influence in selecting borrowers and introducing sound and effective corporate governance in banks.
BIBM Dr Muzaffer Ahmad Chair Professor Barkat-e-Khuda, BB executive director Mohd Humayun Kabir, Sonali Bank managing director and chief executive officer Md Ataur Rahman Prodhan, Mutual Trust Bank managing director and chief executive officer Syed Mahbubur Rahman, First Security Islami Bank managing director Syed Waseque Md Ali and BIBM director Ashraf Al Mamun attended the seminar.
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