Introduction:

Non-performing loans (NPLs) pose a significant threat to the stability and growth of banks.
Bangladesh's banking sector is not immune to this challenge, and it requires effective strategies
to arrest the rising trend of NPLs. The banking sector in Bangladesh has faced challenges with
non-performing loans in recent years.
Several factors contribute to the rise in NPLs, including weak loan recovery mechanisms,
inadequate credit risk assessment, poor governance, and economic downturns. These NPLs can
adversely impact banks' financial health, profitability, and overall stability. Addressing the issue
of NPLs is crucial for the stability and growth of Bangladesh's banking sector. Efforts are being
made to improve risk management practices, enhance corporate governance, and strengthen the
legal framework for loan recovery. Additionally, initiatives are being taken to promote financial
literacy, encourage responsible borrowing and lending practices, and foster an environment
conducive to sustainable economic growth.
To address the issue of NPLs, the government and the central bank of Bangladesh, the
Bangladesh Bank, have implemented various measures. These include introducing stricter loan
classification and provisioning norms, establishing specialized loan recovery tribunals,
encouraging loan rescheduling and restructuring programs, and enhancing supervisory oversight
of banks' loan portfolios.
By effectively managing non-performing loans, banks can ensure the efficient allocation of
capital, maintain financial soundness, and support the overall development of the economy.

Objective of the report:

To present strategies to arrest rising trend of non-performing loans in the banking sector.

Overview of Non-performing Loans in Bangladesh:

Non-performing loans (NPLs) refer to loans that are in default or have a high risk of default,
where the borrower is unable to repay the principal or interest as per the agreed terms.
Bangladesh's banking sector has the second-highest ratio of non-performing loans (NPL) among
the countries in South Asia as lenders continue to face multiple challenges emanating from
scams, a lack of corporate governance and borrowers' growing reluctance to make instalments
regularly.  
Bangladesh Non-Performing Loans Ratio stood at 8.2 % in Dec 2022, compared with the ratio of
9.4 % in the previous quarter.
 Source: The Daily Star, May 14, 2023
The NPL ratio in Bangladesh is higher compared to the international level which is about 2.0 per
cent or below. The NPL ratios in Bangladesh were 9.32 per cent and 10.30 per cent in 2019 and
2018 respectively.

Causes of NPLs in banking system of Bangladesh:

Reasons for NPLs from the Banks’ side:

☞ Excessive interest rate, many other service charges and some secluded charges raised the
number of installments of borrowers that kicked in as the key factor to loan default.

☞ The failure of banks to provide the loans to the borrowers within the stipulated time. Relying
on banks’ commitment borrowers invested partially in the business/project before getting bank
loans and finally they incurred large amounts of loss due to the lack of timely finance.

☞ When the borrowers were defaulted because of loss in business, banks denied lengthening the
current loan or granting a new loan. As a result, borrowers couldn’t escape from the difficulties,
hardly keeping up the businesses amiably and failing to repay the loans on time. 

☞ Borrowers claimed that many things were not clarified to them like upward adjustment of
interest rate, imposition of different charges etc. Also, borrowers did not give due focus to that
part since they stayed busy getting the loan, without knowing the loan conditions appropriately.
☞ In other cases, depending only on the personal relationship, bank managers sanctioned loans
without adequate collateral and proper analysis of business. In many of these cases, improper
documentation causes the loans to default.

☞ Some clients divert their funds for other activities as they face no proper monitoring.

☞ Sometimes, the ignorance of bank officials in the assessment of the necessity of loans leads to
loan default. 

☞ The greed of bankers is also liable for making a vulnerable banking sector to some extent by
disbursing loans to risky clients. 
Reasons of NPL from Clients’ side: 

☞ There are some habitual defaulters who are actually willfully providing wrong information to
take loans from banks without any intention of repayment.  Because of imperfect information,
very often banks failed to properly identify this class of people.

☞ Financial illiteracy of many clients causes their loans to default. They usually own small
businesses and have no idea of the pros and cons of banking operations.

☞ Fund diversion is one of the root causes of the creation of NPL. In such instances,
management diversified the fund and their business. One type of mentionable fund diversion is
sharing market investment from business money. Also, funds are diverted for medical purposes,
family affairs, repaying loans taken from various sources, house building, and other businesses
etc. 

☞ The installment size is too big or rescheduling period too small for borrowers to avail
conditions for rescheduling.

☞ Due to sales on credit, in many cases, small businessmen face losses in businesses. When they
fail to run businesses, they fail to recover the money from the debtors in due time (or totally
unrecovered).

☞ In other states, borrowers use the bank-disbursed working capital for buying fixed assets.
rather than starting businesses. Eventually, the loan becomes defaulted because of this.

Strategies to Arrest Rising Trend of NPL in Banking Sector:

Non-performing loans (NPLs) pose a significant threat to the stability and growth of banks. The
banking sector plays a crucial role in the economic development of Bangladesh. However, the
rising trend of non-performing loans have emerged as a major concern. But there are some
strategies which can followed to mitigate the increasing NPLs and ensure the stability and
growth of banks. Some of them are given below:
 1. Enhancing Credit Risk Management:
Implementing robust credit risk management practices can help prevent and mitigate NPLs. Key
strategies include:
a. Strengthening loan underwriting standards: Banks should conduct thorough due diligence,
assess borrowers' creditworthiness, and adopt stringent loan approval processes.
b. Implementing risk-based pricing: Pricing loans based on the risk profile of borrowers ensures
appropriate returns and discourages high-risk lending.
c. Enhancing collateral valuation: Ensuring accurate assessment of collateral value reduces the
potential losses in case of loan default.
d. Improving credit monitoring and early warning systems: Regular monitoring of borrower
performance and early identification of deteriorating loan accounts can facilitate timely
intervention.
2. Loan Recovery and Debt Restructuring:
Efficient loan recovery mechanisms and debt restructuring processes are crucial for reducing
NPLs. Key strategies include:
a. Strengthening legal and regulatory frameworks: Enhancing the legal and regulatory
environment for loan recovery can expedite the resolution process.
b. Developing specialized loan recovery units: Establishing dedicated units with skilled
professionals can expedite NPL resolution.
c. Encouraging debt restructuring and alternative repayment arrangements: Offering borrowers
viable options for debt restructuring can help them manage their financial obligations and reduce
the likelihood of default.
3. Capacity Building and Training:
Investing in capacity building and training programs for bank personnel is essential. Strategies
include:
a. Training programs on credit risk assessment: Enhancing the skills and knowledge of bank staff
in evaluating credit risk can lead to improved loan decision-making.
b. Professional development initiatives: Encouraging employees to participate in professional
courses and certifications related to credit risk management and loan recovery can enhance
expertise in managing NPLs effectively.
 Some Strategies to Prevent Non-Performing Loans

Enhancing Credit Risk Management

Loan Recovery and Debt Restructuring

Capacity Building and Training

Collaboration and Information Sharing

No Target Pressure for the employee

4. Collaboration and Information Sharing:

Effective collaboration and information sharing among banks, regulator (Bangladesh bank) and
relevant stakeholders can play a vital role in managing NPLs. Strategies include:
a. Establishing a centralized credit information bureau: A centralized database can provide banks
with comprehensive borrower information, enabling informed lending decisions.
b. Strengthening cooperation between banks and regulators: Regular dialogues and information
sharing between banks and regulators can facilitate timely intervention and preventive measures.
5. No target pressure for the employee:
Nowadays many commercial banks set a target pressure for their employees and if they fail to
achieve it, bank often demote their position in the bank. So many employees become extremely
serious to fulfill the target and sometimes, in order to achieve it, they don’t take all the checking
and inspecting seriously as a result some of these loans get default. For example, employee who
has huge target pressure to give loans, sometimes provide loan with high risky borrowers which
can be harmful for the bank stability so by promoting no target pressure instead giving rewards
and incentives for better performance can help to prevent NPLs.

Conclusions:
Mitigating the rising trend of non-performing loans is crucial for the stability and growth of the
banking sector in Bangladesh. Implementing proactive risk management practices, enhancing
loan recovery mechanisms, investing in capacity building, and enforcing robust regulatory
measures are key strategies to address this issue effectively. Addressing the challenge of rising
non-performing loans in Bangladesh's banking sector requires a context-specific approach that
takes into account the unique characteristics of the local market. By implementing these
strategies and collaborating with the Bangladesh Bank and other stakeholders, banks can
mitigate non-performing loan risks, contribute to financial stability, and support sustainable
economic growth in Bangladesh.