PREPARED FOR PREPARED BY

Ashik-Uz-Zaman Group-6
Assistant Professor,
Dept. of AIS, BSMRSTU

REDUCING RISK OF NON-PERFORMING

LOAN (NPL)
IN BANGLADESH
Bangabandhu Sheikh Mujibur Rahman Science
& Technology University, Gopalganj-8100
Research Paper
Reducing Risk of Non-performing Loan (NPL) in
Bangladesh
Course Title: Research Methodology
Course Code: AIS 355
Submitted to:
Ashik-Uz-Zaman
Assistant
Professor,
Department of Accounting & Information
Systems Faculty of Business Studies
BSMRSTU

Submitted by:
NAME ID
Md. Fahad Islam Fahim 18AIS042
Anjan Majumdar 18AIS016
Johora Tara 18AIS003
Sumon Mia 18AIS027
Date of Submission: 21 June 2023
 Letter of Transmittal

21 June 2023
Ashik-Uz-Zaman
Assistant Professor,
Department of Accounting and Information Systems
Bangabandhu Sheikh Mujibur Rahman Science and Technology University, Gopalganj

Subject: Submission of Research paper on “Reducing Risk of Non-performing Loan (NPL) in

Bangladesh”.

Dear Course Instructor,

Good day!
As requirements on the subject “Research Methodology”, we would like to present the report entitled
“Reducing Risk of Non-performing Loan (NPL) in Bangladesh”, in accordance with your
instruction. The purpose of this research paper is to understand the reasons behind non-performing
loan and find the way to reduce the risk of Non-performing Loan (NPL) in Bangladesh.

I hope that this research paper will meet your approval. NPLs in Bangladesh: Significant Causes

Obediently yours,

NAME STUDENT ID ROLE IN THE PAPER

Md.Fahad Islam Fahim 18AIS042 Research objectives, NPLs
in Bangladesh: Significant
Causes, Bangladesh
Economy: Impact of NPLs,
Anjan Majumdar 18AIS016 Literature Review,
Recommendation
Johora Tara 18AIS003 Finding and Analysis
Sumon Mia 18AIS027 The Methodology of
the Study, Scope and
Limitation of the Study,
Introduction ,context

Session: 2018-19
Department of Accounting and Information Systems,
Bangabandhu Sheikh Mujibur Rahman Science and Technology University, Gopalganj

iii | P a g e
 Acknowledgement

Foremost, I, on behalf of my team members would like to express our sincere gratitude to our course
advisor Assistant Professor Ashik-Uz-Zaman for the continuous support of our Research
Methodology course for his patience, motivation, enthusiasm, and immense knowledge. His
guidance helped us in all the time of research and writing of this research paper. We could not have
imagined having a better advisor and mentor for our Accounting for Specialized Institutions study.

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 Student's Declaration
We are the students of Bachelor of Business Administration , under the Faculty of Business Studies ,
Department of Accounting and Information Systems at Bangabandhu Sheikh Mujibur Rahman
Science and Technology University declaring that this research paper on “Reducing Risk of Non-
performing Loan (NPL) in Bangladesh” have only been prepared for the fulfillment of the course of
Research Methodology as the partial requirement of the Bachelor of Business Administration.

We hereby declare that this research paper has been solely prepared by us with the help of primary
and secondary sources and the knowledge gathered from this course and some books. It contains no
materials previously published. It has not been prepared for any another purpose, or reward.

Obediently yours,

Md. Fahad Islam Fahim, ID:

18AIS042 Anjan Majumdar, ID:
18AIS016 Johora Tara, ID: 18AIS003
Sumon Mia, ID: 18AIS027
Session: 2018-19
Department of Accounting and Information Systems,
Bangabandhu Sheikh Mujibur Rahman Science and Technology University, Gopalganj

v|Pag e
 Table of Contents Part 1

Particulars Page No.

Title Page i
Cover Page ii
Letter of Transmittal iii
Acknowledgement iv
Student Declaration v
Table of Content vi-vii
Executive Summary viii
Abstract ix
References x

Part 2
Particulars Page No.
Introduction 1-2
Context 2
Objective of the Study (Research Objectives) 3
- Broad Research Objectives
- Specific Research Objectives
- Hypothesis
The Methodology of the Study 4-5
Scope and Limitation of the Study 5
Literature Review 6-8
- Formalization of Nonperforming Loans (NPLs)
- Classified Loan
NPLs in Bangladesh: Significant Causes 8 - 10

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 - Diversion of fund
- Share market crash
- Political instability
- Rescheduling (Option)
- Co-ordination issues specially among related parties
- Loan sanctioning and recovering: Political Interference

Bangladesh Economy: Impact of NPLs 11 - 12

Findings and Analysis 13 - 18
Recommendation 19 - 20
Conclusion 20

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 Executive Summary

The actual scenario of non-performing loans in the Banking sector of Bangladesh is tried to be
understood by the research. By reading this report, reader will be able to get a glimpse of why
Banks in Bangladesh are suffering through NPLs and what are the steps that can be taken to
minimize or eradicate this problem. To complete this report, researchers tried to use existing
literature found throughout the web and in their academic books to understand what NPL is and
how to recognize NPL problems. Like the researchers, readers of this report will get to realize
that the actual scenario can diverge a lot from what booking knowledge alone can tell us. Every
Bank the researchers visited and explored had diverse reasons behind their NPLs. But some
common causes and grounds were also found which will be discussed throughout the report. The
scope of this research was limited by number of members conducting the research and time
limitations. Researchers used 3 Hypothesis to try and come to conclusions. These Hypothesis are
discussed the Objectives section. Quantitative research type with a Descriptive Design seemed
best to tackle this report. Researchers used questionnaire, visited multiple Banks and persons of
interested working in the Banking sector to conduct physical interviews and use the collected
data to find Correlations. Readers will understand what Formalization of NPLs, Classified loans
and its classifications are and also how to use them to determine correlations. Researchers found
some problems causing NPLs which will be discussed in the report. Among them are, Diversion
of fund, Share Market crash, Insufficient Customer Information Political instability, Real estate
issues etc. These problems are further exploited by weak monitoring, coordination issues, weak
implementation of laws, fictitious loans etc. By analyzing these problems and the correlation
between them, the researchers came up with some surface level solutions to take steps in the
right direction. These recommendations are in no way the ultimate solution but a very promising
starting point for further discussions and implementations.

viii | P a g e
 Abstract

This project aims to shed light on the real scenarios of Non-Performing Loans in Banking sector.
Our motivation behind this is to get knowledge on the NPL scenario in Banks and also help any
reader of this project understand what the NPL scenario in banks of Bangladesh is. This paper
can help find out the differences between academic and NPL attributions. Right now, very few
papers are addressing if a Bank can avoid NPLs by itself or if it needs outside support and to
what extent. We aim to bridge this research gap by developing our own questionnaire, use
collected data to analyze through different tool and techniques and generate own opinions on
how these problems can be addressed. From our research, we could see that to solve this
problem, banks or any other financial organizations cannot work alone. Our best chance at solving
the problems regarding NPL comes when all parties involved works together. Furthermore,
Training programs, Monitoring system, and transparency needs to be tightened or revamped.
This study helped us shed light to various problems existing in the Banking and other financial
sectors of Bangladesh regarding NPL. We were able to come up with some surface level
solutions which still needs to be discussed more broadly.

Key words: Bangladesh, Non-performing loan, Reduce, Bank, Risk.

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Introduction

In every country banking sector plays an important role in the performance of an economy. And
this sector completely depends on a client’s financial stability. However, due to its enormous
impact on economic performance, it serves as a foundation for the long-term development of our
economy as well.

The initial role of bank is it collects individuals' funds, who then lend them to companies and
manufacturers as loans. In addition to the principal, interest is earned. These interests are main
revenues for a bank. But if an individual takes out loans and does not pay interest against it
becomes a default loan or non-performing loan (NPL). NPLs are loans that have not been paid for
a predetermined amount of time, which is why they are considered to be in default.

Once again, the banking sector is a vital part of an economy's growth. A financial ecosystem's
money lenders and borrowers rely on this organization to maintain equilibrium in the money
supply. Slowing or interrupting this flow due to NPLs puts an economy's economic and public
policy implementation at risk. The problem of non-performing loans (NPLs) has recently arisen
among Bangladeshi banks. The banks' ability to make loans has been hampered by nonperforming
loans (NPLs). It was BDT 227.1bn in 2010 and BDT 893.4bn in 2018, a three-fold increase in
NPLs in the banking industry in just nine years. Furthermore, according to World Bank
information, NPLs in Bangladesh result in an annual GDP loss of 1%.

To remove this problem, there are many strategies or can say managerial function which should
be taken as early as possible. As a solution, a huge number of banks of our country that have led
to aggressive banking, has led to increasing levels of non-performance. And what are the reasons
might be causing these? Speaking of which, Loan forgery is a common method used by
unscrupulous bankers to steal money from the institutions they work for. Another factor
contributing to the rise in non-performing loans is a lack of coordination among the many
regulatory agencies. After granting a loan, many huge defaulters transfer their funds and are able
to avoid prosecution under the law. The board of directors and political leaders have interfered in
the approval and distribution of loans.

People with prominent social or political backgrounds play a large role in Bangladesh's NPLs,
according to a recent study. The association of managerial entities with these crooks reflected
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these

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realities. As a result, it may be said that the "unwillingness to pay" is the primary cause of NPLs
in Bangladesh. Bangladesh has been plagued with a huge quantity of non-performing loans for all
of these reasons. A thorough knowledge of the behavioral motivations of these fraudsters is
critical to identifying the drivers of NPLs. To find out why people don't pay back their loans and
how to reduce the risk of non-performing loan this research looks at the causes and ways from
the point of view of behavior and other reasons in respect to our country’s situation.

Context
Throughout our entire journey of making this paper we learned that NPLs in Bangladesh's
banking industry are fueled by the country's social and cultural setting, political coalition,
psychological rationalization, and law enforcement backdrop. The responses we collected from
our targeted respondents gave us a real insight about the actual scenario that was occurring right
beneath the authority. We’re referring to the loan defaulters. It turns out that the behavioral
morals affect each client more than anything.

Moreover, we can interpret this situation saying something like, we’re Bengali’s and our habit is
to enjoy anything free that actually does not belong to us. And this behavior restrains us to repay
the loan, or it may cause unwillingness to pay. This a psychological disorder that we, Bengalis
just happen to inherit it in our blood.

However, we already mentioned about political coalition measures like corruption, nepotism etc.
All of us will agree that it is a real thing in our country, but nothing can be done to prohibit this
except enforcing the law in equity.

Lastly, the cultural context is basically when the first-time fraudsters and former good citizens
perpetrate the vast majority of white-collar offenses. These established businesspeople and upper-
middle-level managers are well-versed in idealism and thinking, yet they've turned into con
artists. As a result, it would be incorrect to draw the conclusion that the business is solely
attractive to bad actors.

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Objective of the Study (Research Objectives)

An objective exhorts the reason behind executing an operation. In our assignment we have taken
measures to figure out the truth behind non-performing loans in banks.

This paper has been done as a research paper of our Research Methodology course (AIS 355) as an
undergraduate program of Accounting and Information Systems’ requirement.

 Broad Research Objectives

1. Aiming to minimize the risk of NPLs in Bangladesh, we have selected ten private commercial
banks with the highest NPLs and know how they may lower the risk of non-performing loans
for this research. We will also try to illustrate how a group of people borrows money from
many banks, only to fail on their loans again and time again. And know the impact of various
types of loans on the country's economy.

 Specific Research Objectives

1. Finding out the real scenario of NPL in Banks.

2. Finding out the difference between academic and real NPL attributions.
3. Finding out how to reduce NPLs.
4. Viewing NPL through the eyes of experts.

 Hypothesis

1. 𝐻0: NPLs cannot be avoided by a bank alone.

2. 𝐻0: Banks' directors do not have a significant impact on NPL occurrences.
3. 𝐻0: Banks cannot reduce NPLs by becoming involved in their clients' businesses.

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The Methodology of the Study

A methodology shows how an operation has been conducted through proper techniques and tools.

Research Type Qualitative

Research Design Descriptive
Tools Used Google Analytics and Form, Stata 16th version, Microsoft Excel

Data and Sample taken from:

Targeted Population General Bankers from Private Commercial Banks

Sample Method Techniques 100 Responses mentioned by Course Faculty
Sample Distributed 156 People
Sample Received 113 Responses (11 responses were eliminated due to ambiguity)

Respondents from Private Commercial Banks (Primary Data)

No. Private Commercial Banks Number of Respondents Percentage

1 BRAC Bank Limited 15 14.71%
2 Prime Bank Ltd 9 8.84%
3 Dutch-Bangla Bank Limited 12 11.76%
4 IFIC Bank Limited 11 10.78%
5 Bank Asia Limited 8 7.84%
6 Trust Bank Limited 14 13.72%
7 Standard Bank Ltd 11 10.78%
8 City Bank Ltd. 6 5.89%
9 NRB Bank Ltd. 12 11.76%
10 Eastern Bank Ltd. 4 3.92%
Total 102 100.00%

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Secondary Data:

In terms of secondary sources, we collected the aforementioned bank's 2020 annual report.
Additionally, we gathered data from a variety of journals, books, and websites in order to make
the report as comprehensive as possible.

Scope and Limitation of the Study

Despite our best efforts, we were unable to provide a flawless report due to a few constraints. The
most significant constraints (few boundaries) that we encountered were as follows:

1. Limited data and information in the web on non-performing loan in Bangladesh

2. No or not many earlier exploration led on non-performing loan in Bangladesh
3. Less measure of journal in the newspaper on non-performing loan are available
4. Limited time-frame for leading the report
5. All the courses has given term paper and other works and also the final exams are very
near, so this is very much difficult to investing much time to prepare this term paper.

In spite of certain issues there were a few advantages too:

1. The research area was chosen before so it spares some time

2. Earlier research on the same area which is basically very useful to prepare this paper
3. Data and information is collected mainly from primary sources and already having some
relevant data in bank’s annual report
4. Information from blog relating non-performing loan

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Literature Review

Commercial banks generally rely on interest from loans to provide the majority of their revenue.
Loans are supposed to be repaid with interest, but the banking cycle as a whole isn't working
properly. The loan may not be operating well at times. There are a number of distinct types of
banks in Bangladesh, each of which focuses on a specific form of lending. Nonperforming loans
are those that aren't able to meet their repayment obligations. Defaulted loans dating back to the
1970s were included in this category. Ex-central bank deputy governor Khondkar Ibrahim Khaled
claims that from 1980 on, categorized loans increased by up to 35%. Bank failure rates peaked at
32% in 1993 and climbed to 47% in 1999. Classified loans accounted for as much as 50% of the
total in certain insolvent private banks. Defaulted loans have made the banking industry more
hazardous, making it more difficult to increase capital inflows and make the best use of capital,
according to the report. No poorly made, questionable or bad/loss loan existed between 1990 and
1993, but now the NPLs are growing at an alarming rate, which is harming our country
(Bangladesh Institute of Bank Management (BIBM)-2006, Bishnu Kumar ADHIKARY. It's
important to remember that going with the default option (not entirely) isn't always a bad idea.
"Lazy banking" examines in depth the investment portfolios and lending practices of financial
institutions.

Bank lending policies have been tightened in the wake of an increasing number of non-performing
loans. It follows that both many would-be entrepreneurs would be reluctant to obtain financing
from financial institutions, which will put the economy's stability at risk while also discouraging
entrepreneurs from starting new enterprises. There is a correlation between the rise of non-
performing loans (NPLs) and the tightening of lending by financial institutions, according to
Aziz et. al. (2009). As a result, viable enterprises were unable to secure the funding they needed
to produce revenue. Non-performing loans have a negative impact on a bank's profit growth and
interest income if the rate is high. In such cases, the bank's capital may be eroded, threatening the
bank's long-term viability. There are a variety of ways to recover nonperforming loans, and
central banks from across the world are working together to help banks and financial institutions
in their efforts.

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  Formalization of Nonperforming Loans (NPLs)

Non-performing loans are those that have defaulted or are about to default on their payments. In
many cases, loans become non-performing after 90 days of default, however this might vary
depending on the conditions of the agreement.

For the purposes of central banking regulations, non-performing loans include:

- Loans that have been overdue for 90 days or longer and are still being charged interest
- Amounts owed but not yet repaid (i.e., lenders who are no longer charging interest on debts
that have been repaid).

 Classified Loan

The phrase "classified loan" refers to any loan that a bank examiner has determined to be at risk
of default. As long as the borrower pays on time, the account will be labeled as "delinquent." For
several reasons, a borrower may be classed as having a three-category debt by the bank. Financial
institutions use this precautionary measure to ensure that they are adequately prepared in the
event of a loss and to avoid any further risk. The Bangladesh Bank has established an eight-tiered
structure for categorizing loans.

Classification Meaning Need for Intensity % of becoming

of Review Problem Loans
Prime Loan Providing to the prime customer Not Require at All 0%
with lower interest rate
Satisfactory Loan Paying all installment by due date Once in a Year 1%
Good Loan Following the terms of loan Twice in a Year 5%
agreement
Standard Advances that the bank perceives Once in Every 20%
Marginal Loan as having a high level of risk due Quarter
to their history or other adverse
features
Doubtful Loan Advances whose final fulfillment Once in Every 50%
is uncertain and in which a Month
significant loss is probable (If
realized, it may not be fully)

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 Bad Loan It signifies that a debt of this As many times as 100%
magnitude will almost certainly possible depending
be unrecoverable. on the necessities

NPLs in Bangladesh: Significant Causes

 Diversion of fund

Nonperforming loans have been on the rise in our country recently because of this. These are the
qualities of borrowers who, if offered loans, will use the money to invest in more risky
businesses in order to improve their profits. There are a lot of high-profile defaulters who took
out huge bank loans, but then used the money they received for something else entirely.
Commercial banks have lately been robbed of billions of dollars by Bismillah Group, Hallmark
Group, Showen Garments, Mostafa Group, Nur Jahan Group, and Ananda Shipyard, Ellias
Brothers.

 Share market crash

The stock market in the United States suffered an unprecedented collapse in 2010. Since this
disaster, a forgery syndicate has taken $64 million from the market. Obtaining short-term capital
from brokerage companies and other financial institutions has become a popular strategy for
many would-be investors. There were also several people who borrowed money from banks and
invested in the stock market under false pretenses, only to be unable to return their loans when
the bubble burst. This is another important factor contributing to the recent increase in non-
performing loans.

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  Political instability

It is not uncommon for political unrest to erupt in the United States. It has, nevertheless, grown
in popularity in recent years. Economic instability is exacerbated by long-term political
instability like the blockade. Many company owners have been unable to pay their operating
expenses from their revenues because of the blockade and strike, which has resulted in capital
erosion in certain cases. To repay the debt, where will they acquire the money? So, we need to
fix this problem to reduce the risk of NPLs.

 Rescheduling (Option)

It was revealed to us throughout our investigation that big defaulters have been given the choice
of resetting their loan defaults for recoupment. In certain cases, banks have sent money to
significant defaulters after a loan has become nonperforming. As a result, defaulters assume that
banks will help them find postponement option if their loans become nonperforming. In order for
borrowers to run their companies and pay the principal, banks may take into account interest while
approving their loans. This is seen as a loophole by the forgery circles as well. It's impossible to
avoid postponing payments when you're a good borrower because of everything.

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  Co-ordination issues specially among related parties

It is critical for upper financial managers, the Bangladesh Bank, and the specially Ministry of
Finance to work together effectively and efficiently to distribute, give, and recover loans,
according to experts. There's no way for them to figure out who gets the loan, how much of it
should go to a certain project, and whether or not they can get it back since they don't work
together. Nonperforming loans rise as a result of this lack of cooperation. If the two countries are
to work together effectively, the Bangladesh Bank must step up and play an important role.

 Loan sanctioning and recovering: Political Interference

The financial sector is not exempt from political interference due to the unanticipated trend of
ruling parties intervening in every field. Political groups or influential corporate personalities are
stealing tens of thousands of crores of taka from a variety of organizations, mainly government
banks. The so-called "debt default culture" is mostly the outcome of deliberate default on the part
of governmental authorities or other dominating corporations. Numerous banks and businesses in
our country are controlled by politicians, according to our investigation. Due to their monopoly on
lending, they have a high rate of non-performing loans.

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Bangladesh Economy: Impact of NPLs

Economic growth and corporate success have been negatively affected by financial markets'
inability to provide funding to all businesses through an initial public offering (IPO). The
economy will be badly impacted if financial institutions are unable to function as they should..
Currently, financial institutions are struggling under the weight of massive amounts of non-
performing loans, which only seems to be becoming worse by the day. The Bangladesh Bank
recently stated that the total amount of non-performing loans has reached about 56000 corer taka,
which is extremely worrying news for the country's economic well-being. A wide range of
negative effects are caused by these non-performing loans in our economy. Due to a high
percentage of nonperforming loans,

the banking industry is currently striving to limit its lending strategy in an effort to avoid taking
on too much risk. Many potential businessmen may not take out loans from banks that limit their
ability to grow their enterprises, and the economy will be calmer as a result. Businesses that could
create revenue were unable to do so as a result of this. As interest revenue declines as a result of
non-performing loans, it has a negative impact on bank profitability and performance.

Whereas if bank's functioning is not sufficient, depositors and stockholders may not receive a
satisfactory return. Because of this, depositors and stockholders will be less inclined to maintain
their money in the banks. As a result of the high non-performing loan percentage, the money cycle
will come to a grinding halt. There will be liquidity issues in the market because of lenders' fear
of taking on risk. A bank's capital may be eroded as a result of a high percentage of non-
performing loans, putting its very survival at risk. Initially, non-performing loans (NPLs) might
not always appear to have a significant negative impact. As long as banks are open and
depositors have faith in the system, things should be ok. However, if banks are permitted to earn
a return on their non- performing loans, the risk rises in scale (NPLs).

Banks' ability to develop their operations is hampered as a result of NPLs. This results in a
reduction in the number of jobs available in the financial sector. As a result, many potential
businesses are unable to expand, resulting in the loss of numerous job possibilities in many
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industries. If banks and businesses can't earn money, they'll both have to lay off their current

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employees and that means more people are out of work. Non-performing loans will also impede
the process of saving and investing money. As a general rule, investment is aimed at ensuring the
long-term viability of a project, as well as recouping the money invested with interest. If
investing is not possible, then it is not possible for the company to grow. If the invested assets
can be retrieved on time, they can be reinvested or consumed to create new capital. Both
consumption and reinvestment have a beneficial effect on the economy. Because the economy is
provided with opportunities to perform work that has a higher level of value added. There are
times when unforeseen events inflict enormous harm to economic frameworks and structures if
the recovery does not occur, and the investment party should be prepared to travel a long
distance in order to recover. To put it another way: If nothing is done, the economy will remain
stagnant for the foreseeable future. For the time being, it will hasten the process of becoming and
becoming impoverished.

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Findings and Analysis

BDT Billion except Percentage (%) – Year 2020

(Amount rounded)
No. Banks Name NPL Industry NPL Loan and Deposits NPL
Ratio (%) Ratio (%) Advances (X) Amount
(Y) (X) (X) (Y)
1 BRAC Bank 2.93% 9.45% 273.06 289.05 8.001658
Limited
2 Prime Bank Ltd. 3.46% 9.45% 232.40 233.03 8.04104
3 Dutch-Bangla 2.2% 9.56% 256.24 362.41 5.63728
Bank Limited
4 IFIC Bank 3.97% 9.01% 260.65 296.37 10.347805
Limited
5 Bank Asia 3.24% 8.88% 244.64 303.03 7.926336
Limited
6 Trust Bank 4.51% 8.08% 2.16723 0.08684 0.0097742
Limited
7 Standard Bank 4.87% 8.06% 159.450 169.603 7.765215
Ltd.
8 City Bank Ltd. 4% 8.73% 268.20 254.78 10.728
9 NRB Bank Ltd. 3.71% 9.06% 38.848 41.830 1.4412608
10 Eastern Bank 2.72% 9.48% 228.94 242.36 6.227168
Ltd.
Average 3.561% 8.976% 196.45952 219.2549 6.6125537

Correlation with Y

Factors Correlation value Correlation with Y

Loan and Advances 0.88678 Strong, positive correlation
Deposits 0.77109 Strong, positive correlation
Industry NPL Ratio -0.8951 Strong, Negative correlation
Where Y is dependent variable and X is independent variable

From this correlation, we can see that, loan and advances and also deposits have strong correlation
with non-performing loan. So, to reduce the risk of non-performing loan bank should manage
this two segment most carefully. They should make an idle balance between them and bank
should very careful when providing loan. Here, bank industry non-performing loan ratio have
negative correlation with individual bank correlation which means most of the banks are

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failed to take

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necessary steps to reduce the risk of non-performing loan and there are very common scenario
where bank face a significant loss. Not only loan and advances, deposits is liable for non-
performing loan. There are some other factors that directly or indirectly impact on recovery of
loan amount, as a result of increasing non-performing loan.

From the questionnaire answers, we find some relevant and judgmental data

Strongly Disagree – 1; Disagree – 2; Neutral – 3; Agree – 4; Strongly Agree – 5

No. Questionnaire 1 2 3 4 5
1 Regardless every other measure taken - - - 43 59
to avoid Non-performing loan, NPL
can occur nonetheless
2 Internal influence is one of the reasons - - 14 47 41
of NPL
3 The higher the interaction/ influence of - - 20 42 40
the family members of the authority the
higher the rate of occurring NPL
4 Directors and their family members - - 22 40 40
have significant impact on occurring
NPL
5 Securities have significant impact on - - - 41 61
recovering loans.
6 Even with proper contingent/securities - - 15 53 34
in hand, NPL can occur
7 By hiring or training skilled Bankers - - - 45 57
NPL can be reduced
8 Analyze of companies/individual - 3 64 32 3
previous bank data is fair enough to
reduce the risk of NPL
9 Among other problems moral hazard of 14 33 27 22 6
the banker’s -is the main problem
behind NPL, do you agree?
10 Political decisions and Bureaucratic - 22 74 6 -
favors make significant impact on
occurring NPL

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11 Non-performing loans (NPLs) in - - 4 66 32
Bangladesh can be minimized
with effective underwriting and
lending
regulations in place at the time of
origination
12 Loan Grading or Classifications based - - 88 14 -
on recoverability can actually help
in terms of avoiding NPLs
13 Quantitative Indicator are better the - - 12 66 24
qualitative indicators in terms of
identifying the possible NPLs?
14 Banks usually give considerations on - 3 52 27 20
reputations, while maintaining
procedures
15 Banks usually give considerations to - - 16 62 24
its regular customers while giving the
loans
16 Bank’s loan overall structures changes 6 12 73 6 5
based on clients
17 In order to recover NPLs Legal - - 10 89 3
procedures are more effective than
Banks own attribution to help
clients
18 Ensuring identical documentation - - - 74 28
among the banks can avoid
future complications
19 Regular update of the loan system can 36 28 22 14 2
avoid NPLs
20 Banks interference in client’s business - - 20 23 59
can reduce NPL?
Overall (102 responded × 20 56 101 533 812 538
questions =2,040)
Percentage 2.74% 4.95% 26.12% 39.81% 26.38%

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Normal probability plot between above statements and NPL in Bangladesh showed below:

Normal Probability Plot

8
6
4

Y
2
0

0 20 40 60 80 100
Sample Percentile

Also, according to response very few people strongly disagree with some statement but in majority
all this statement have directly and indirectly (neutral) connection with NPLs. To reduce the risk
of NPLs in Bangladesh, according to questionnaire, steps should be taken. Specially, statement 2
and 4 and also statement 17 and 20 is interrelated and due to this risk of NPLs increasing.

So, according to bank information and from questionnaire statement answer analyses, we can say
that,

 Hypothesis 1 (Remain Unchanged):

𝐻0: NPLs cannot be avoided by a bank alone.

This hypothesis is strongly correct and true in perspective of Bangladesh.

So, 𝐻1: NPLs cannot be avoided by a bank alone.

 Hypothesis 2 (Changed):

𝐻0: Banks' directors do not have a significant impact on NPL occurrences.

This hypothesis is not true, directors have significant impact on NPL where their professional
competence can reduce the risk of NPL
So, 𝐻2: Banks' directors have a significant impact on NPL occurrences.

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  Hypothesis 3 (Remain Unchanged):

𝐻0: Banks cannot reduce NPLs by becoming involved in their clients' businesses.

This hypothesis is true in perspective of Bangladesh.

So, 𝐻3: Banks cannot reduce NPLs by becoming involved in their clients' businesses.

From the bank’s annual report and journals, we find some others significant factors for which
NPLs occur in Bangladesh and those are

1. Nonperforming loan was formed due to abnormalities and corruption that were involved
in the lending process.
2. Another cause for increasing nonperforming loans is that Bangladesh bank does not have
an independent board.
3. In addition, even when the banks learned that the loans had gone into default, no action
was made to rectify the situation.
4. Bangladesh's nonperforming loans have increased as a result of a lack of action on the
part of the country's lenders.
5. Recapitalization of state-owned banks raises the amount of non-performing debt in
Bangladesh.
6. Due to a lack of guidelines, banks are mostly responsible for the default of loans. Lenders
have continued to make loans in the same way, regardless of the circumstances or quality
of the borrowers, and when the loans default, the banks find methods to maintain the
provision against them in place. To put it simply, if the loans are not given to the correct
people, the quality of the assets developed from the loan obligations cannot be guaranteed,
which leads to an increase in nonperforming loans.
7. In Bangladesh, a lack of political stability is the primary cause of a rise in nonperforming
loans. Taking loans and blocking banks from taking action are two ways that political
influence operates. The other method is when loans go bad.
8. Nonperforming loans are exacerbated by weak governance at bank boards, insufficient
credit information, and insufficient financial reporting from debtors.

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 9. Disputed loans take a long time to settle, making it difficult for banks to recoup the value
of non-performing loans (NPLs) or the collateral they serve as security for.
10. External shocks, such as a rapid drop in commodity prices, can cause loans to go sour
without the borrower's knowledge.
11. Many consumers believe that if he defaults on the loan, it will not have a big impact on his
life. In such circumstances, he's more likely to give in.
12. Due to the loss of a project, decline in revenue, or profitability, a corporation may default.
Most businesses in our nation lack the resources necessary to weather the current storm.
13. Loan default is the leading source of financial distress. Poor cash flow is the primary
cause of underwhelming financial performance in our country. In the event that a
corporation is insolvent, it is unable to pay back the debt.

By reducing lender error

Non- Reduce the risk By ensuring strong business practices

performing
Loan (NPL)
By ensuring external development

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Recommendation

 Effective Training Program

Formal education, seminars, and other skills training are offered for increasing risk analysis,
determining borrower creditworthiness, successful recovery, periodic credit evaluation, and
qualitative judgment for early loan classification. Controlling non-performing loans may be
made easier by a training program that helps the person in charge become more efficient.

 Strict Monitoring System

The most effective post-loan sanction nurturing methods include close monitoring and
frequent nursing of the borrower, as well as building a connection to foster an early alarm
system. A borrower's situation in terms of transactions, funds utilized, and funds diverted
should be reviewed on a daily, weekly, or fortnightly basis as part of regular monitoring.

 Reducing the involvement of political people and BOD

With the political authorities and boards of directors of so many developing nations meddling
or influencing loan and advance sanctioning, it is typical for borrowers who are not worthy of
loans or only deserve minor amounts to be classed as risky. One such country is Bangladesh.
No one other than the sanctioning authority should be able to influence the approval of a loan.

 Transparency in loan disbursement and loan sanctioning

The right quantity of credit should be made available to the appropriate borrowers, and banks
should make the loan approval procedure as transparent as possible at every level. It will stop
the growth of NPLs by weeding out bad debtors. For the borrower, the distribution procedure
should also be supervised and open.

 Enforcing strict laws that exist for loan classification

Due to the impact on the branch's bottom line, the Central Bank of Bangladesh is more lenient
when it comes to enforcing or categorizing a loan in Bangladesh than it is in other countries.
The central bank should impose fines and other remedial measures to implement laws
governing loan categorization more rigorously. Political concerns must be ruled out in this
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 situation, and the government must ensure that people who fail on large loans are properly
penalized.

Conclusion

In spite of Bangladesh's government efforts to remove non-performing loans, recent bank scandals
of a very significant size have generated a sense of urgency in investors' minds. Every one of the
above-mentioned suggestions has the potential to make a substantial dent in the crippling problem
of bad loans. However, cash diversion, political and board of directors influence, political
instability, the involvement of compromised bankers, competitive banking, a decline in the real
estate market, insufficient supervision, and a lack of cooperation among relevant parties have
exacerbated non-performing loans. It is easier to minimize non-performing loans (NPLs) when all
parties involved work together and abide by the rules. An important role for the Bangladesh
Bank should be played here. Bangladesh Bank should guarantee that the implementation of credit
sanctioning rules is being followed when issuing new loans, and commercial banks should
maintain openness in credit providing. In order to minimize non-performing loans (NPLs),
adequate debt collection measures must be employed, as well as safe and healthy new
investment. As a result of this situation, the regulatory body must be extremely vigilant and take
all necessary measures to remove this cancer from banking.

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 References

Arefin, M. S. (30 january,2020). Reducing risks of non-performing loans. Financial Express.

Bank Asia Ltd. (2020). Annual Report. Dhaka: Bank Asia Ltd.

Brac Bank. (2020). Annual Report. Dhaka: Brac Bank.

City Bank Ltd. (2020). Annual Report. Dhaka: City Bank Ltd.

Dutch Bangla Bank Ltd. (2020). Annual Report. Dhaka: Dutch Bangla Bank Ltd.

Eastern Bank Ltd. (2020). Annual Report. Dhaka: Eastern Bank Ltd.

IFIC Bank. (2020). Annual Report. Dhaka: IFIC Bank.

Khan, D. A. (2020). Bank Management: A Fund Emphesis. Dhaka: Brothers Publications.

Moniruzzaman, S. e. (October 2018). Risk Management Guidelines for Banks. Dhaka:

Bangladesh Bank.

NRB Bank Ltd. (2020). Annual Report. Dhaka: NRB Bank Ltd.

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