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Nonperforming loans of commercial banks in Bangladesh

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  • Parven, Salena

Abstract

This paper discusses the magnitude of Nonperforming Loans (NPL) in the banking sector of Bangladesh since the adaptation of prudential norms in the loan classification and provisioning system in 1990. Smooth and efficient flow of saving-investment process is a prerequisite for the economic development of a country. Bangladesh, being a developed country and with an underdeveloped capital market, mainly depends on the intermediary role of commercial banks for mobilizing internal saving and providing capital to the investor. Thus, it matters greatly how well our financial sector is functioning. The process of economic development of Bangladesh has been seriously constrained by the continuing crisis of the accumulation of classified loans. As Loan is the prime asset of a bank, it is essential to know the asset quality of a bank, regulation helps to determine the financial health and efficiency of the banking sector. Besides, a proper loan classification and provisioning system ensures credibility of the financial system that in turn restores trust and confidence in the mind of depositors. Loan classification and provisioning system is also essential for regularizing follow-up, monitoring activities and improving the recovery position. However, the criteria for classifying and provisioning loan portfolios depend on the prudential policies of the central bank. There are several reasons of classified loans in our banking sector such as flow problem of bad loans, dissatisfactory performance of the courts, having no concrete NPL management strategy equipped with both preventive and resolution measures, having no measurement of the meaningful application of the CRG device in the credit environment etc. For this, there is huge amount of classified loans in our banking sector. The Bangladesh Bank has given the guidelines regarding the provisioning system against classified loans through the BCD and BRPD circulation. Due to increasing default risks of loans, the provisioning system has been revised several times. For protecting the depositor’s interest and keeping the bank’s financial condition solvent huge amount of provisions are kept against the classified loans. For the causes of classified loans, provision of the banking sector is increasing. As a result the profit of the banks is coming down. Besides government also deprive from current year taxes due to higher rate of provisioning. So it is needed to maintain a standard asset quality and so need to follow related prudential regulation. Besides, maintenance of an ethical standard in the banking profession from all concerns can be viewed as an important means for making the credit environment credible and vibrant. We have had a two-decade long experience in dealing with the NPLs problem and much is known about the causes and remedies of the problem. So, it is very important for the lenders, borrowers and policy makers to learn from the past experience and act accordingly. It is optimistic that at present the trend of classified loans has begun to decline.

Suggested Citation

  • Parven, Salena, 2011. "Nonperforming loans of commercial banks in Bangladesh," MPRA Paper 65248, University Library of Munich, Germany, revised 28 Dec 2011.
    • Handle: RePEc:pra:mprapa:65248
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    References listed on IDEAS

    as
    1. Mr. David Woo, 2000. "Two Approaches to Resolving Nonperforming Assets During Financial Crises," IMF Working Papers 2000/033, International Monetary Fund.
    2. Klingebiel, Daniela, 2000. "The use of asset management companies in the resolution of banking crises - cross-country experience," Policy Research Working Paper Series 2284, The World Bank.
    3. Blejer, Mario I. & Feldman, Ernesto V. & Feltenstein, Andrew, 2002. "Exogenous shocks, contagion, and bank soundness: a macroeconomic framework," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 33-52, February.
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    Cited by:

    1. Anju Goswami, 2023. "COVID-19: boon/disguise for Indian banks?," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(4), pages 381-402, December.

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    More about this item

    Keywords

    Nonperforming Loans; Loan Classification; Bangladesh;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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