Non-Performing Loan in Bangladesh Banking Industry

Nonperforming loans (“NPLs”) refer to those financial assets from which banks no longer receive interest and/or installment payments as scheduled. They are known as non-performing because the loan ceases to “perform” or generate income for the bank. NPLs are viewed as a typical byproduct of financial crisis: they are not a main product of the lending function but rather an accidental occurrence of the lending process, one that has enormous potential to deepen the severity and duration of financial crisis and to complicate macro economic management. This is because NPLs can bring down investors’ confidence in the banking system, piling up unproductive economic resources even though depreciations are taken care of, and impeding the resource allocation process.

In a bank-centered financial system, NPLs can further thwart economic recovery by shrinking operating margin and eroding the capital base of the banks to advance new loans. This is sometimes referred to as “credit crunch”. In addition, NPLs, if created by the borrowers willingly and left unresolved, might act as a contagious financial malaise by driving good borrowers out of the financial market.

The economic and financial implications of NPLs in a bank-centered financial economy can be best explained by the following diagram:

Nonperforming
Loan (NPL)

Loss of current revenue

High loan loss provision Erosion of banks capital Financial crisis Low economic growth Low rate of investment

High loan price High risk premium Figure: Economic and financial implications of NPLs

The above figure illustrates the catastrophic effect of NPLs in a bank-centered financial system. Having such a system, Bangladesh needs to study the condition of NPLs on a routine basis in order to augment investible capital in the productive sectors as well as to ensure sustainable economic growth.

Smooth and