Persistently high NPLs on bank balance sheets threaten economic growth: Economists
The discussion, titled “Monthly Macroeconomic Insights,” was held in the capital today (4 January) and was organised by the Policy Research Institute (PRI) in partnership with the Department of Foreign Affairs and Trade (DFAT) of the Australian government.
Bangladesh's economic growth is not sustainable as long as the massive volume of non-performing loans (NPLs) remains on bank balance sheets, which fuels inflation and stifles investment, economists said at a policy discussion.
The discussion, titled "Monthly Macroeconomic Insights," was held in the capital today (4 January) and was organised by the Policy Research Institute (PRI) in partnership with the Department of Foreign Affairs and Trade (DFAT) of the Australian government.
Participants included Zaidi Sattar, chairman of PRI, Nasiruddin Ahmed, former chairman of NBR, Ashraf Ahmed, former president of DCCI, Kamran T Rahman, president of MCCI, and Khurshid Alam, executive director of PRI.
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NPL crisis and macroeconomic instability
Ashikur Rahman, principal economist at the PRI, was categorical about the threat posed by NPLs. He warned that if the estimated Tk6.4 lakh crore in NPLs remains on the balance sheets, the economy will be trapped in a "four bad scenario: high inflation, high interest rate, low investment, and low growth."
Macroeconomic stability has been largely restored after poor management of the external sector since 2022, but inflation remains a major concern.
He added, "The quantum of NPLs currently on the balance sheet means Bangladesh cannot articulate any kind of growth strategy. If Tk6.4 lakh crore remains there, it will keep interest rates high and it will keep inflation high because the government will repeatedly have to print money, leading to investment stagnation and slower growth."
Hidden debt
Ashikur said that the true extent of the NPL problem was previously obscured by accounting practices.
He noted that the NPL ratio for private commercial banks, which was around 7% in the March 2024 quarter, has now surged to 33%. This sharp increase, he explained, was not an organic growth but the result of hidden NPLs being exposed.
"This was hidden. It was concealed through 'accounting magic' and 'accounting tricks,' which are now being revealed through the asset quality review and the impact of strict classification issues," Ashikur said.
He added that the five banks recently merged by Bangladesh Bank collectively hold Tk1.4 lakh crore in NPLs alone, which must now be managed.
High borrowing costs, policy uncertainty, and energy supply concerns continue to restrain business expansion, keeping many firms in a "wait-and-see mode.
To manage this crisis, Ashikur suggested a combination of measures: offloading some NPLs to an Asset Management Company (with valuation to be decided by the Bangladesh Bank), restructuring some loans, and writing off a portion of the debt.
Inflation and slow growth remain concerns
Zaidi Sattar acknowledged that macroeconomic stability had been largely restored after poor management of the external sector since 2022, particularly concerning exchange rate policy and reserve management.
The massive volume of non-performing loans currently on the balance sheet means Bangladesh cannot articulate any kind of growth strategy.
However, he stressed that inflation remains the "only remaining problem," still hovering at 8.3%. "While inflation has stopped rising and is now slowly declining, it remains a major concern." He noted that the external sector is now stable, and the next goal is achieving a sustained overall surplus.
Kamran T Rahman highlighted the trade-offs of the stabilisation efforts. He observed that growth has slowed, investment is weak, and business confidence remains cautious. He noted that high borrowing costs, policy uncertainty, and energy supply concerns continue to restrain business expansion, keeping many firms in a "wait-and-see mode."
Developing a corporate bond market
Ashikur Rahman also warned that reducing NPLs alone would not guarantee financial stability, stressing the fundamental fragility caused by banks using short-term deposits to fund long-term loans.
He called for developing a deep corporate bond market, noting that Bangladesh had raised barely half a billion dollars through corporate bonds, compared to India, which finances around $600 billion through them.
The PRI principal economist concluded that placing the full burden of investment financing on banks without a bond market would inevitably increase banking sector fragility.
Cenbank's stance on exchange rate
Zaidi Sattar lauded Bangladesh Bank's commitment to exchange rate flexibility through buying and selling dollars, calling the managed float approach a "monumental achievement" in the country's monetary and economic policy history.
He noted that exchange rate depreciation tends to raise imports and boost exports over time, with clear trade-offs involved in its management.
