IMF suggests strengthening risk based supervision to reduce NPL

DHAKA To reduce the huge amount of Non Performing Loan (NPL) the International Monetary Fund (IMF) has recommended strengthening risk based supervision in the financial sector and enhancing the governance framework by taking some measures including appointing more independent directors on the boards of banks.

All loans should be treated as non performing when 90 days or more in arrears and the eligibility criteria for the rescheduling of loans and the waiver of provisions should be stricter based on a strong business case so that strategic defaulters do not take advantage of longer maturities and softer lending terms Ragnar Gudmundsson IMF resident representative in Dhaka told BSS in an exclusive interview.

He said the performance of the State Owned Commercial Banks (SOCBs) where most NPLs are concentrated also needs to be improved through better training of staff management and board directors and supervision of those banks should be independent of ownership.

The financial sector in Bangladesh is highly segmented with some banks including foreign banks and some domestic private banks very well run and in good health. However weaknesses are observed in the SOCBs and some of the smaller domestic private banks including those that have been established in recent years he added.

The resident representative said the rising trend of NPLs is one of the issues of concern which now represent more than 11 percent of total loans.

The number was about 2 percentage points lower at the end of 2017. If you add this number to the restructured and rescheduled loans the proportion of loans facing repayment challenges exceeds 20 percent. And on top of that you have loans on which stay orders have been issued by the court system for which legal proceedings may take several years to complete he added.

Ragnar Gudmundsson urged the authorities concerned to enhance the functioning of the judicial system so that cases are resolved more rapidly including through the establishment of more commercial courts with well trained judges.

This would allow for the speedier recovery of collateral and create stronger incentives to meet repayment obligations he added.

He said this is very surprising in the sense that the economy has been doing very well and credit to the private sector has been growing fast.

In such an environment one would expect the NPL ratio to come down which is not the case. This points to the fact that there may be some established businesses doing very well and accumulating significant wealth but not repaying their loans and this calls for corrective action he added.

Otherwise Ragnar Gudmundsson said new borrowers including more innovative SMEs will end up paying for the bad behavior of bad borrowers through higher rates and this would be detrimental to economic growth and the countrys development objectives.

While risks in the financial sector can be contained and managed the main concern is that if measures are not taken to address existing weaknesses and ensure financial stability this would undermine the countrys high growth objectives which will increasingly need to be financed by the private sector including through reliance on a deeper and more robust financial sector he added.

He mentioned that laws and regulations of the banking sector in Bangladesh which are generally adequate are need to be effectively implemented and that regulatory forbearance needs to be avoided.

If a business is poorly run or if a poor credit decision was made by a bank there have to be consequences and the incentives need to be redefined so that bad behavior is punished and good behavior is rewarded he added.

He said maximum exposure to a single borrower or business group should also be reduced and lending interconnectedness should be closely monitored including through thorough stress testing analysis.

Ragnar Gudmundsson welcomed the recent decision to increase the minimum capital requirement from Taka 4 to 5 billion and believed this figure could be further increased over the medium term.

Source: Bangladesh Sangbad Sangstha (BSS)