SYFUL ISLAM
DHAKA — Bangladesh is getting serious about dealing with bad loans in its banking industry and plans to enforce a bank resolution act later this year in an effort to stabilize the sector.
Bangladesh Bank, the country’s central bank, in April will shorten period after which delinquent loans are classified as nonperforming from the current six months to three months, in line with the Basel III international bank standards.
Bangladesh is undergoing a $4.7 billion International Monetary Fund loan program, the terms of which call for a drastic reduction in bad loans to shore up banks’ financial health, and stabilize the country’s economy.
The central bank has been working to tighten standards for a while. In September last year, it shortened the nonperforming loan (NPL) classification period to six months from nine months, resulting in a spike in the value of such loans. In December last year, bad loans totaled 3.45 trillion taka ($28.4 billion), up 21% from 2.84 trillion taka in September. That comes to around 20% of the total 17.11 trillion taka outstanding loans in Bangladesh.
Mustafa K. Mujeri, executive director at Institute for Inclusive Finance and Development in Dhaka, called the state of country’s banking sector “horrific,” saying it was “at the edge of the ditch.” He added: “The government should have taken emergency step much sooner, like closing down of some weak banks that have no chance to survive.”
Mujeri, a former chief economist at the central bank, said the government must first decide whether it wants to keep struggling banks alive or merge them with others. “What is important now is [to] act immediately. I think we are failing to do so, and taking a huge [amount of] time. Thus, the banking sector is becoming sicker,” said Mujeri.
Bangladesh Bank, for its part, is trying to sound tough: “We will see an … accelerated climbing of NPL in the next quarter,” Gov. Ahsan H. Mansur said recently, after the criteria are tightened in April.
Zahid Hussain, a former lead economist at the World Bank’s office in Dhaka, said that in the past, nonperforming loans were hidden in many ways to help big, influential borrowers. Now, with that “bad practice” ended, the volume of bad loans has shot up.
He added nonperforming loans may rise to nearly 30% of all outstanding loans when the new standards are introduced. The total value of distressed assets in the country’s banking sector as of June last year was 6.75 trillion taka, per a white paper from the interim government.
Last year, the central bank took steps to consolidate some banks as their financial condition worsened. A number of struggling banks had signed merger deals with stronger institutions. However, the initiative faltered after the ouster of former Prime Minister Sheikh Hasina.
Officials say a number of banks have been looted by political and business cronies of the previous government. Bangladesh’s new leaders are now spoon-feeding aid to the banks, but the authorities believe struggling banks must merge to survive.
To facilitate consolidation, Dhaka is preparing a bank resolution act, officially the Bank Resolution Ordinance, which will govern merger and acquisitions, recapitalization, bridge banks, temporary ownership and winding up of banks, among other provisions.
“We will try to merge the weak banks, bring in new investors for them and recast them,” Bangladesh Bank’s Mansur said. The South Asian nation does not yet have a law governing the winding up of banks. Mansur said the central bank is reviewing the asset quality of six banks and will begin doing so for others soon. “After that, we will take measures to recast banking sector in line with the bank resolution act.”
The objectives of the act are to ensure the stability of the financial system, including payments, clearing and settlement systems; to provide for the continuity of banks’ critical functions; to safeguard insured bank deposits; to preserve public funds by minimizing public financial support for banks; to avoid destruction of asset values; and to minimize creditor losses. The act also aims to maintain public confidence in the financial system.
Central bank spokesperson Arif Hossain Khan said that in the past the central bank classified loans as nonperforming if they were three months or more past due. However, the bank relaxed the rules “to facilitate the business and to mitigate the impact of COVID-19 and other economic crises,” Khan said. “Now the central bank has decided to align it with international best practices again.”
“The shortening of classification period [for NPLs] will help [regulators] to quickly recognize problem assets, and the banks will supervise them closely,” he told Nikkei Asia. “It will strengthen the financial system in the long run. Banks that adapt to these changes effectively and implement stronger risk management and credit assessment processes will likely see improved stability and resilience in their operations,” Khan said.
The article appeared in the asia.nikkei