Non-performing loans in banking sector of Bangladesh: causes and effect

Abstract

Nonperforming loans is common phenomena for banking industry in Bangladesh. A Non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms. NPLs started at the early stage of liberation. During 1980s and 1990s, Privatization and liberalization of banking sector could not control NPLs. Rate of NPLs was 41.1% in 1999. Now it is 11.90%.The amount of NPLs increased to taka 73.3 billion in 2012 from taka 47.3 billion in 2003.There are many reasons behind the NPLs in Bangladesh. First reason is entrepreneurs related. Borrower may be have lack of experience, lack of business and lack of institutional training background or lack of supporting facility. Sometime borrowers do it intentionally. Entrepreneurs age also an important factor. Second reason is business related. Sometime banks give loan to businesses which are not attractive. Strong competition is another business related cause. Borrower becomes defaulter if there is poor management capability, poor financial performance, and poor cash flow. Business could be defaulter because of low market share. Low market share mean low revenue so that business cannot pay the interest payment. Third reason is leading related. It is mainly Bank’s fault. Loan could be default if Bank delayed assessment of loan proposal, delayed disbursement of fund, lack of proper monitoring, lack of taking proper action. Last reason is macroeconomic factors. Low GDP growth, increasing crimes, hartals and frequent policy change effect loan. For those reasons loans become default loan. Effects of NPL are such as Stopping Money Cycling, Earning Reduction, Capital Erosion, Increase in Loan Pricing, Frustration etc. As a result, the values of security are increased and the risks of financial recession also see a rise.