Threat of unrealized restructured loans to banks

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The Bangladeshi bank warned that unrealized revised loans could create a difficult situation for the profitability and solvency of banks in the coming days.

“Rescheduled loans, if not paid back, could have a negative impact on banks,” says the 2020 Financial Stability Report (FSR).

It states that careful monitoring and strict supervision are necessary for the entire banking system to minimize the risks of deterioration of the situation.

Although both defaulted and revised loans declined last year, these two types of distressed assets will pose a concern for the banking sector, said a BB spokesman who helped prepare the report.

Last year, the central bank relaxed its loan classification rules to offset the business slowdown caused by the coronavirus pandemic, helping lenders cut both revised and classified loans at the same time.

BB also instructed banks not to change the loan classification status between January and December.

Nonetheless, problem loans (NPLs) showed no “noticeable change” in the last quarter of 2020.

The NPL ratio in 2020 was 8.1 percent versus 9.3 percent a year earlier. The volume of non-performing loans last year reached Rs 88,280 crore.

Due to the same relaxed policy, the amount of the revised loans fell to at least a five-year low in 2020. The defaulters settled non-performing loans of Rs 13,370 crores, a 74.47% decrease over the same period last year.

In 2019, BB issued a relaxed maturity policy and a one-time exit policy to address long-standing bad debts, resulting in an increase in revised loans.

The central bank’s annual report says that proper monitoring of regular loans along with revised loans amid the coronavirus pandemic could prove to be a major challenge for banks in the coming days.

“Therefore, strict monitoring and the implementation of strict loan recovery measures are of paramount importance to minimize the risk of loss.”

Loans whose maturities were postponed at least once accounted for 14.4% of the total outstanding loans in the banking sector.

The industrial sector revised loan ratio of 30 percent was the highest of all sectors last year. Clothing industry clients restructured 20.4% of loans.

The share was 18.8%, 13.4% and 10.6% for the agriculture, construction and foreign trade sectors, respectively.

“But most of the revised loans turned into overdue loans again,” the report said.

For example, despite the restructuring of 10.6% of foreign trade loans, 24.3% of them remained overdue.

The ratio of overdue loans in the clothing, circulating, industrial and construction sectors amounted to 23.3 percent, 18.9 percent, 17.1 percent and 14.7 percent, respectively.

The varying political support provided by BB to borrowers to revive their business may also pose a downside risk.

The shock can be sustained if banks and clients make the right use of policy support, including stimulus packages, the FSR said.

The report also says that higher growth in deposits than lending has created another problem in the banking sector.

Most lenders have followed prudent lending policies. As a result, last year the growth of deposits exceeded the growth of credit.

There has been a dangerous trend in the banking sector since 2019, and the situation worsened last year due to the economic downturn.

Last year, the increase in deposits amounted to 13.6 percent compared with an increase in lending by 8.4 percent.

Total deposits in the banking system amounted to Rs 13.79,740 crore, compared to a total outstanding loan of Rs 11.75,000.

The improved liquidity scenario indicates that the banks had sufficient liquidity to meet the demand for the loan.

Slower credit growth can also be attributed to the sluggishness of the overall investment scenario in Bangladesh, triggered by the pandemic.

To maintain profitability and tap into additional liquidity, banks turned to government securities.

“However, to keep pace with growth and ensure sustainable growth, banks need to leverage their increased deposit base and ensure a smooth flow of credit to the thriving private sector,” the central bank said in a report.



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