Unrealised rescheduled loans threat to banks
Unrealised rescheduled loans might create a challenging situation for the profitability and solvency of banks in the coming days, the Bangladesh Bank has warned.
"Rescheduled loans, if not recovered, might have an adverse impact on banks," it said in its Financial Stability Report (FSR) for 2020.
Close monitoring and stringent supervision are needed to minimise downside risks for the entire banking system, it said.
Although both default and rescheduled loans went down last year, the two types of stressed assets would become a cause for concern for the banking sector, said a BB official, who was engaged in preparing the report.
Last year, the central bank relaxed rules on loan classification to offset the business slowdown derived from the coronavirus pandemic, helping lenders bring down both rescheduled and classified loans in tandem.
The BB also instructed banks not to change the loan classification status between January and December.
Still, non-performing loans (NPLs) demonstrated "no notable changes" in the final quarter of 2020.
The ratio of default loans stood at 8.1 per cent in 2020 versus 9.3 per cent a year ago. The volume of the NPLs reached Tk 88,280 crore last year.
Because of the same relaxed policy, the amount of loans rescheduled fell to at least a five-year low in 2020. Defaulters regularised NPLs amounting to Tk 13,370 crore, down 74.47 per cent year-on-year.
In 2019, the BB issued a relaxed policy on loan rescheduling and a one-time exit policy to address the long-standing bad debts, pushing the volume of the rescheduled loans higher.
Proper monitoring of regular loans along with rescheduled ones amid the coronavirus pandemic may appear to be a critical challenge for banks in the days ahead, the central bank annual report said.
"Therefore, rigorous monitoring and implementation of stringent measures for the recovery of loans have utmost importance in minimising downside risks."
The loans that had been rescheduled for at least once accounted for 14.4 per cent of the banking sector's total outstanding loans.
At 30 per cent, the rescheduled loan ratio in the industrial sector ranked top among all the sectors last year. Clients in the garment industry rescheduled 20.4 per cent of the loans.
The proportion stood at 18.8 per cent, 13.4 per cent and 10.6 per cent for the agricultural, construction and foreign trade sectors, respectively.
"But, a large amount of rescheduled loans turned into NPLs once again," the report said.
For instance, although 10.6 per cent of foreign trade loans were rescheduled, 24.3 per cent of them remained NPLs.
The non-performing rescheduled loan ratio of garment, working capital, industrial and construction sectors was 23.3 per cent, 18.9 per cent, 17.1 per cent and 14.7 per cent, respectively.
The various policy supports extended by the BB to borrowers to revive their businesses may also pose a downside risk.
The shocks can be withstood if banks and clients use the policy supports, including the stimulus packages, accurately, the FSR said.
The report also said higher deposit growth than lending had created another problem in the banking sector.
The majority of lenders had adopted a cautious policy in giving out loans. As a result, deposit growth surpassed credit growth last year.
The banking sector had been witnessing a precarious trend since 2019, and the situation worsened last year due to the economic slowdown.
Last year, deposit growth stood at 13.6 per cent compared to a credit growth of 8.4 per cent.
Total deposits in the banking system stood at Tk 13,79,740 crore, against total outstanding loans of Tk 11,75,000 crore.
The improved liquidity scenario indicates that banks had a reasonable amount of liquid funds to fulfil the loan demand.
The slower pace of loan growth could also be attributed to the sluggishness in the overall investment scenario in Bangladesh caused by the pandemic.
In order to maintain profitability and utilise the extra liquidity, banks have turned to government securities.
"However, to keep pace with the growth momentum and ensure sustainable growth, banks need to utilise their increased deposit base and ensure smooth credit flow to the thriving private sector," the central bank report said.