Unrealized repayment loans could create a challenging situation for banks’ profitability and solvency in the coming days, the Bank of Bangladesh has warned.
“Rescheduled loans, if not recovered, could adversely affect banks,” the Financial Stability Report (FSR) for 2020 states.
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Close monitoring and strict supervision are required to minimize negative risks to the entire banking system, he said.
Although both default loans and rescheduling loans fell last year, both types of assets under pressure will be a cause for concern for the banking sector, said a BB official who was involved in preparing the report.
Last year, the central bank eased loan classification rules to offset the corporate slowdown caused by the coronavirus pandemic, helping lenders reduce both rescheduled and scheduled loans at the same time.
The BB also instructed banks not to change the loan classification regime between January and December.
However, non-performing loans (NPLs) showed “no significant change” in the last quarter of 2020.
The default ratio was 8.1% in 2020 compared to 9.3% a year ago. The volume of non-performing loans reached TK 88,280 million last year.
Due to the same lax policy, the amount of rescheduled loans fell to a five-year low in 2020. Arresters stuck non-performing loans of TK 13,370 ck, down 74.47% year-on-year.
In 2019, BB issued a loose loan restructuring policy and a one-time exit policy to deal with long-term bad debts, pushing the volume of rescheduled loans higher.
Proper monitoring of regular loans along with rescheduled loans amid the coronavirus pandemic could appear to be a critical challenge for banks in the coming days, the central bank’s annual report said.
“Therefore, strict monitoring and implementation of strict measures to recover loans are extremely important to minimize the negative risks.”
Loans scheduled at least once accounted for 14.4% of total outstanding loans in the banking sector.
At 30 percent, the reprogrammed industrial loans ratio peaked among all sectors last year. Customers in the garment industry reprogram 20.4% of loans.
The percentage amounted to 18.8%, 13.4% and 10.6% for the sectors of agriculture, construction and foreign trade, respectively.
“But, a large amount of rescheduled loans were converted into NPLs once again,” the report said.
For example, although 10.6% of external commercial loans were reprogrammed, 24.3% of them remained NPLs.
The non-performing rescheduling loan ratio for the clothing, working capital, industry and construction sectors was 23.3%, 18.9%, 17.1% and 14.7%, respectively.
The various policy supports extended by the BB to borrowers to revitalize their businesses can also pose a negative risk.
The shocks can be sustained if banks and customers use their support policies correctly, including stimulus packages, the FSR said.
The report also said that the higher increase in deposits from lending had created another problem in the banking sector.
The majority of lenders had adopted a prudent lending policy. As a result, deposit growth outpaced credit growth last year.
The banking sector has experienced a precarious trend since 2019 and the situation worsened last year due to the economic slowdown.
Last year, the increase in deposits amounted to 13.6% against a credit increase of 8.4%.
Total deposits in the banking system amounted to 13,79,740 ck Tk, compared to the total outstanding loans 11,75,000 ck.
The improved liquidity scenario shows that banks had a reasonable amount of cash capital to meet the demand for loans.
The slower growth rate of loans could also be attributed to the slowness of the overall investment scenario in Bangladesh caused by the pandemic.
In order to maintain profitability and use the extra liquidity, banks have turned to government securities.
“However, in order to keep pace with growth and ensure sustainable growth, banks need to use their increased deposit base and ensure the smooth flow of credit to the thriving private sector,” the central bank said in a statement.