Assets of stressed banks increased by Rs 1 lakh crore during the year due to increase in defaults and rescheduling

26 banks will face a capital shortfall if the three largest borrowers default

September 29, 2024, 11:40 p.m

Last modified: September 29, 2024, 23:47

Infographics: TBS

“>

Infographics: TBS

At the end of December 2023, stressed assets in the domestic banking sector touched Rs 4.87 lakh crore, with bankers attributing the increase to high number of non-performing loans and rescheduling of large loans with nominal advances.

According to the Bangladesh Bank Financial Stability Assessment Report 2023, released on September 26, stressed assets stood at Tk 3.78 lakh crore by the end of 2022. This means that the amount of stressed assets increased by Tk 1.09 lakh crore in a period of one year.

The disclosure of distressed assets is part of an ongoing $4.7 billion loan package from the International Monetary Fund. The first report detailing non-performing assets for 2022 was published last year.

The latest Financial Stability Report outlines the central bank’s alignment with international financial reporting standards, covering non-performing, postponed and written-off loans. Together, these factors add up to nearly Rs 4.87 lakh crore of non-performing assets in the banking sector by the end of 2023.

Stay up to date, follow Google’s The Business Standard news channel

Among them, outstanding loans stood at Tk 1.45 lakh crore, rescheduled loans stood at Tk 2.88 lakh crore and waived-off loans stood at Tk 53,612 crore.

The bank can only write off loans that have almost no chance of recovery and have been classified as “bad/lossy” for at least three years. The relevant bank had to maintain 100% provision for this particular loan after adjusting the interest uncertainty from the remaining balance.

Syed Mahbubur Rahman, managing director, Mutual Trust Bank, told The Business Standard: “The number of non-performing loans in the banking sector is constantly increasing. Currently, our NPL stands at just over Rs 2 lakh crore, but if loans from some business groups, including S Alam, turn into non-performing loans, it could officially go up to Rs 3.5 lakh crore. This figure does not include loans granted under different legal frameworks.

According to the central bank, the current amount of bank lending is around Rs 16 lakh crore and defaults account for less than 12% of disbursed loans. However, if large loans are taken into account, including those from S Alam Group, the NPL ratio may reach 20%.

“In many countries, including China, the NPL ratio once reached 30-40%,” the banker noted, adding that even many NPLs had managed to bring it under control over time.

“Controlling this issue requires strong leadership across all sectors, as well as strengthening our regulatory and legal systems. India has a circular on willful defaulters which we should consider adopting, along with necessary amendments to various regulatory provisions,” he added.

The central bank’s report said the asset quality of the banking sector may have deteriorated partly due to a lack of supervision of regular, postponed or restructured loans and advances, as well as slow progress in the recovery of non-performing loans.

Additionally, external factors, such as the ongoing Russian-Ukrainian war, the Israeli-Palestinian conflict and other global and domestic challenges, may have limited the ability of borrowers to repay their liabilities, which in turn may have contributed to a decline in the overall asset quality of the bank sector, he added.

Infographics: TBS

“>

Infographics: TBS

Tk91.221cr loan rescheduling for 2023

A record amount of Tk 91,221 crore has been postponed to 2023, up from Tk 63,720 crore in 2022, according to a report by Bangladesh Bank.

This marks a significant increase from the previous high of Tk 52,370 crore in 2019, when the one-time exit policy was introduced to facilitate rescheduling of large loans.

The central bank’s report said: “The policy may have contributed to increasing the rescheduling of loans in 2023. In addition, banks have been allowed to postpone the repayment of loans for specific sectors (such as shipbuilding and cold storage loans) for a longer period.”

Most of the outstanding rescheduling loans were in the industrial, ready-made garments and textile sectors, accounting for 26.4%, 20.9% and 11.3% of the total outstanding rescheduling loans, respectively.

Industry data shows that large industries accounted for 64.8% of outstanding reduced-schedule loans, 10.5% for medium-sized industries, and 15% for others.

26 banks will face a capital shortfall if the three largest borrowers default

Twenty-six banks will not maintain the minimum required capital to risk-weighted assets ratio (CRAR) if the three largest borrowers default, according to the 2023 Stability Assessment Report.

CRAR is the ratio of a bank’s capital to its risk-weighted current assets and liabilities.

International regulations require banks to protect their capital. Under the ‘Basel III’ policy, lenders in Bangladesh must keep 10% of their risk-weighted assets or Tk 400 crore, whichever is higher, in retained capital. If a bank fails to meet this requirement, it is considered to be capital short.

In the previous year’s assessment, the number of banks affected by capital shortfalls was 22. As of end-December 2023, the report indicated that in the pre-shock scenario, 10 scheduled banks would not be able to maintain the minimum required CRAR.

In a stress scenario that includes defaults by the three largest borrowers, an additional 16 banks would also fail to meet the minimum CRAR requirements. In addition, another five banks would underperform due to a 3% increase in non-performing loans.

An additional 27 and 13 banks would not be able to maintain a capital conservation buffer (CCB) of 2.50% under the existing CRAR, following shocks from defaults of the three largest borrowers and a 3% increase in non-performing loans, respectively.

“The insolvency of the three largest borrowers will have a significant impact on the solvency ratios of individual banks and the entire banking sector. The banking sector CRAR will decline to 7.50% from the pre-default level of 11.64% for these borrowers at the end of December 2023.” – we read in the report.

“In the event of a combined shock, which includes the aggregate effects of increases in NPLs, declines in the value of forced sales of mortgage collateral, negative developments in NPL categories, interest rate shocks, exchange rate shocks and equity price shocks, the bank CRAR for the sector is likely to decline to 6. 84% compared to the level before the shock,” he adds.

The banking sector CRAR declined 19 basis points to 11.64% at end-December 2023, compared to 11.83% a year earlier.

However, it still exceeds the minimum regulatory capital requirement of 10.0% of risk-weighted assets under the Basel III capital framework. At the end of December 2023, the number of banks meeting CRAR requirements increased to 51.

For comparison, the solvency ratios of neighboring countries are as follows: India – 16.8%, Pakistan – 19.7% and Sri Lanka – 16.9%, according to data published by their central banks.

Profitability of the banking sector

In 2023, the banking sector recorded a 10% increase in operating profit, reaching Tk 37,643 crore, compared to Tk 34,222 crore in 2022, despite a 20.63% increase in net interest income.

However, the net operating result of the banking sector decreased by 32.95% compared to 2022, primarily as a result of a significant increase in non-interest expenses in 2023.

As a result, net profit recorded a moderate growth of 4.32% to reach Tk 14,841 crore in 2023, up from Tk 14,226 crore in 2022.

Moreover, the allocation for expenses or loan loss provisions increased by 24% to Tk 10,944 crore in 2023 compared to Tk 8,767 crore in 2022.