BB unveils roadmap to reduce NPL

Bangladesh's banking sector is poised for a significant decline in nonperforming loans (NPL), projected to decrease by 2.76% over the next two years. This estimate comes in the wake of Bangladesh Bank's strategic move to streamline its bad loan management, reducing the write-off period from three years to two.

The Bangladesh Bank disclosed this at a press conference yesterday after the board's approval of the new roadmap.

Under this roadmap, the central bank has eased the loan write-off policy, empowering banks to expedite the process within a two-year timeframe instead of the previous three years. This policy adjustment is anticipated to contribute to a significant reduction of NPL by Tk43,300 crore, equivalent to 2.76% by 30 June 2026.

Aligned with the guidelines outlined in the International Monetary Fund's (IMF) first review report on the $4.7 billion loan package, Bangladesh Bank's roadmap encompasses the establishment of an asset management company in the private sector.

The roadmap also includes measures to restrict banks from reflecting uncollected interests, indications of revisiting loan classification rules in accordance with international best practices, the formulation of policies addressing willful defaulters, and an overhaul of the fit and proper test for prospective bank directors.

While the banking community has welcomed the decision to reduce the loan write-off period, concerns have grown regarding the financial capacity of banks to meet the mandatory 100% provision required for loan write-offs. Bankers point out that an estimated Tk43,300 crore in bad loans is expected to be written off by 30 June 2026, due to the shortened write-off tenure. The challenge lies in determining where banks will secure this substantial amount, given the mandatory provision requirements.

How long will it take to write off Tk43,300cr?

Banks are mandated to write off loans by allocating an equivalent amount as a provision from their profits. According to the latest financial stability report from Bangladesh Bank, the combined net profits of the banking sector amounted to Tk14,230 crore.

Considering that all banks collectively need to write off Tk43,300 crore in loans, it would take three years to achieve 100% provision based on current profits. If banks opt to allocate 50% of their profits, the timeline extends to six years, while a 25% profit allocation would extend the period to 12 years.

Also, some banks already maintain provisions for NPLs, with certain institutions holding over 100% provision to safeguard against potential future risks. However, concerns arise among bankers as several banks facing provision shortfalls may encounter challenges in writing off bad loans. A senior banker from a private commercial bank expressed this apprehension.

As of September 2023, the banking industry grappled with a Tk25,271 crore provision shortfall. Despite some banks meeting or exceeding the 100% provision requirement, eight banks, including certain state banks and NBL, faced significant shortfalls.

Stressed assets and IMF's conditions

In fulfilment of its commitment to the IMF, the central bank in its last financial stability report published in the middle of 2023 disclosed total distressed assets amounting to Tk377,922 crore. This included NPLs totalling Tk120,649 crore, outstanding rescheduled loans amounting to Tk212,780 crore, and written-off loans of Tk44,493 crore. However, the NPLs saw an increase to Tk155,398 crore by the end of September in the previous year.

In response to the IMF's first review report, the Bangladesh Bank pledged to implement a default loan roadmap by March 2024. This commitment involves reducing the timeframe for classifying an account as defaulting from three months of overdue to the existing nine months.

Experts welcome the move

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard that the central bank's new roadmap to reduce classified loans and ensure good governance in the banking sector is a good initiative.

"Under the new policy, bad loans can be written off within two years. This will reduce the amount of NPLs in the banking sector. However, banks will have to make 100% provisioning for the write-offs. This will significantly reduce the profits of the banks."

The managing director of another bank, who preferred not to be named, told TBS that the Bangladesh Bank roadmap states that stressed asset interest cannot be taken into the income account. 

"This is a good initiative, meaning that it cannot be done unless the principal amount of the loan is recovered," he added.

He said that there is no detailed explanation of which assets are considered stressed assets. "Some banks secretly show their stressed assets in the income account to show higher profits. This will be stricter under the new policy," he said.

Former Bangladesh Bank Governor Salehuddin Ahmed told TBS that the initiative taken by the central bank to reduce bad loans is commendable. 

"However, the success depends on the implementation of the initiative. Many such initiatives often remain confined to paper and are not effectively implemented," he said.