Soniya Akter Lima :
Banks are the mainstream agents of the monetary arrangement of a nation playing a vital role in economy by giving credit to perform financial exercises and at the same time conglomerate the surplus capital from overall population through various kinds of depository incentives. Our money saving framework at the present juncture is such as may confront huge difficulties from several headings. This is most likely that non-performing loan (NPL) and abundance of liquidity will remain the real difficulties in managing accounting system. Then again bank has been confronting major issues identified with its mounting debt levels. The developing heap of bad loans has raised warnings to the economy. Bad debts grew quicker than credit over the last five years, as indicated by the Asset Management Firm, an offshoot of New York-based LR Management Investments. This report additionally says, non-performing loans developed at a speedier pace in private banks than in the state-owned lenders in the above mentioned period. The constant increment in bad loans is making stress on managing the banking sector as well as entire economy.
Huge Burden of Bad Debts in the Economy
As many as 13 out of the 57 banks working in Bangladesh are presently on the controllers' list of banks with bad financial state. The aggregate bad debts in Bangladesh banking sector grew by 23% in 12 months until September, 2017 as the nation's financial institutions keep on struggling with default loans. At the end of September 2016, the bad debts remained at Tk 65,731 crores, however after a year, the figure has swollen to more than Tk 80,307crores, as per the information discharged by the Bangladesh Bank. Banks in Bangladesh conceded loans of Tk 7, 52,730 crores until September, 2017. Of this amount, Tk 80, 307 crores or 10.67% are bad debts, as indicated in the report of Bangladesh Bank. Until June 2017, the defaulted credit remained at Tk 74,148 crores or 10.13% of the disbursed amount. Central bank data demonstrates that six state-owned banks have the most astounding measure of default loans. By the end of September 2017, the aggregate bad debt of Sonali, Janata, Agrani, Rupali, Basic and BDBL remained at Tk 38,517 crores. These banks had disbursed loans of Tk 131,689 crores and are presently confronting capital deficiencies with the ascent in bad loans. Bangladesh Bank report demonstrates that 23.79% loans dispensed by specialized Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank have transformed into default loans. Local private banks had default loans of Tk 33,973 crores or 5.97% and the aggregate bad debts for foreign banks working in Bangladesh remained at Tk 2,298 crores or 7.89% of their disbursed amount. These high loan defaults imply that, financial sector lacks of fund to retain any sudden weakening of asset quality.
Bad Debts Reduce Net Profits of the Bank
In spite of the fact that operating profit took off extending between 10 to 60 percent in 2017 on the back of a resurgence of enthusiasm for credit from the private territory, defaulted loans remain a critical stress as the figure now beat Tk 803 billion. Truly speaking, around 11 percent of the credits get recovered because of a serious governance crisis in the financial sector, actuated by an extraordinary augmentation in terrible obligations, liquidity deficiency and budgetary traps that harmed the new banks, cleared on political thoughts. Lack of good governance, accountability and transparency is also responsible for the continuous growing bad debts.
Operating profit does not demonstrate that the capital management and risk management of the bank is successful, qualified and very much organized on the grounds, if we break down the net profits of the banks in the most recent year. Moreover operating profit can be manipulated.
The banks' net profit is computed in the wake of deducting provisioning against bad debt and tax. Bad debts ate up 51 percent of the operating profits of banks in the half of the year. Amongst January and June in the last year, the banks' operating profits edged up 11 percent yet net profits drooped around 33 percent, as indicated by the Central Bank statistics. In the 1st half of 2017, banks signed in operating profits of Tk 10,355 crores, upon Tk 9,325 crores a year earlier and their net profits came to Tk 1,845 crores, down from Tk 2,741 crores in the 1st half of the year 2016.
The private banks signed in operating profits of Tk 8,662 crores in the 1st half of 2017, which is pretty much, the same as in a year earlier and their net profits was fundamentally down as some of the banks' execution decayed. They signed in net profits of Tk 2,766 crores, down 7.62 percent year-on-year. Farmers Bank, which has been loaning seriously from the beginning, enrolled a net loss of more than Tk 13 crore against the operating profits of Tk 24 crore. However the operating profits of the bank is high, yet the state of managing banking sector is awful due to the growing tremendous bad debts that is keeping a negative effect on net profits.
Reasons behind Growing Doubtful Debt at an Alarming Rate
Now the question is why the bad debts are growing fast in the banking sector at an alarming rate? One of the reasons is that the bank has to keep provisions against default loan but the banks' capital faces trade deficit. As per the LR Global insights,2018
"Poor risk assessment of credit, subdued demand in the economy, rescheduling facilities to known defaulters, and mostly the culture of borrowers' unwillingness to repay loan were the major reasons for the deterioration of the asset quality in Bangladeshi banks".
Lack of good governance, accountability and transparency are also responsible for growing bad debts. It shocks us when we observe the involvement of bank directors and chairmen in political parties. Also there has been a possibility to unhand bank's important deal with using bank's goodwill which will question the factor that our banking industry and its operation are independent and reliable. Because of the lack of good governance, whatever banks are publishing in their annual reports and regulatory paperwork and the data they are putting in those papers, are they reliable or actually correct? Are those papers have been properly audited? There are some questions that always knock the financial experts and advisors because commercial banks' real competition is not only with other banks but also it has to compete with the non-banking financial institutions and micro finance activities. On the other hand our government is failing to achieve growth of the credit target which is contributing to the lower investment. The incremental capital output ratio (ICOR) which measures the investment of any country has showed us that GDP of our country should be increased which has been deteriorating over the past few years due to the negative growth of credit in both private and public sector
Cruel Impact of Bad Debts on Macro Economy
The bad debts impact on the banks specifically, and the economy at large. The occurrence of bad debts has constituted a major spillage in the economy. The outcome is that lendable assets are tied up at the burden of planned financial specialists who are constantly determined on the chance of obtaining such store for investment purposes. In large scale monetary examination, investment as a variable has invaluable role in the assurance of the level of national income or otherwise the wealth of a country. Thusly, if the acquired assets are not compensated for reusing, the nation would unquestionably encounter macro-economic changes like stagflation, existing together with inflation and unemployment. This creates gigantic depletes on the banks' stores, and in the meantime makes capitalization hard.
Last but not the least, this kind of high and rising frequency of bad debts in commercial banks' lending is an unsafe pattern which must be diminished if the economy is to make adequate utilization of these banks, and attempted to prevent the collapse of the banking system. Otherwise corporate existence of the banks will be at stake.
(Soniya Akter Lima, studying in BBA , Accounting & Information Systems, Faculty of Business Studies, University of Dhaka).