For NBFIs, 2019 was a terrible year. And 2020 is poised to be even worse.
The year 2019, it seems, was an annus horribilis for the non-bank financial institutions industry.
Not only did it see the fall of an institution, a development that not only undercut the confidence in the sector, the year also the industry's default loans soar 17.19 per cent to Tk 6,399 crore in 2019.
The amount would have been much larger had the default loans of the fallen People's Leasing and Financial Services (PLFS), which were between Tk 600 crore to Tk 700 crore, were added to the list, said a central bank official.
The NBFI had failed to repay the depositors' money despite the maturity of the funds. At the same time, its default loans and net losses were spiralling out of control.
This prompted the finance ministry on June 27 last year to instruct the Bangladesh Bank to shutter the NBFI, which was a first for Bangladesh's financial sector.
Other than PLFS, nearly one dozen NBFIs gave out large amounts of loans in breach of rules and regulations, which fuelled the sector's classified loans, according to industry players and BB officials.
The situation in the NBFI sector is yet to improve. In fact, some of them have plunged into deep trouble due to the ongoing economic fallout brought on by the coronavirus pandemic.
The NBFI sector started facing problems since the middle of 2018 when the banking sector felt the pinch of liquidity crunch, said Arif Khan, managing director of IDLC Finance, one of the big names in the sector.
Earlier in January 2018, to rein in aggressive lending, the BB had instructed conventional banks and Shariah-based banks to lower their loan-deposit ratios to 83.5 per cent and 89 per cent respectively, a move which had a domino effect on the NBFI sector.
The NBFIs are dependent on banks and customer deposits for their funds. The lowering of the loan-deposit ratio meant banks cut back on their lending to NBFIs, leaving the latter short of funds.
The situation had badly impacted a good number of NBFI clients, who were not extended fresh credit for want of funds and subsequently became defaulters, according to Khan.
The central bank, however, backtracked from its decision to lower the loan-deposit ratio on September 17 as it looked to alleviate the sector's ongoing liquidity crunch and facilitate a lower interest rate on lending.
No sooner had the NBFIs got relief from the liquidity shortage that the ongoing economic fallout hit the financial sector, Khan said.
About 50 per cent of the clients are now unable to pay back their loans as demand has collapsed everywhere.
So, defaulted loans in the NBFI sector will see a rise in the coming days, he said, adding that it will take at least one year for the situation to return to normalcy.
"We should take care of those clients as they are not habitual defaulters."
Besides, 5-7 NBFIs violated banking norms while disbursing loans, which is the main reason for the escalation of defaulted loans, Khan added.
Defaulted loans will not increase too much until September this year as the central bank has asked NBFIs not to classify any loans during the period, said Mominul Islam, chairman of the Bangladesh Leasing and Finance Companies Association, an organisation of the NBFI CEOs.
The central bank has also declared several stimulus packages, which will help NBFIs tackle the economic fallout.
"But the classified loans may sharply rise after September. So the central bank should explore ways to curb the default loans," said Islam, also the managing director of IPDC Finance.
The weak NBFIs could follow IPDC's model to bring down their default loans.
In 2007, IPDC's soured loans stood at 37 per cent of its total outstanding credit.
"We implemented various models to improve our financial health in phases. Now, IPDC's defaulted loan is only 1.56 per cent," he said.
The ratio of defaulted loans in the NBFI sector stood at 9.53 per cent of the total disbursed loans amounting to Tk 67,177 crore as of December last year.