Default loans have reached Tk 1 trillion mark by the end of this March, as indicated by press reports citing Bangladesh Bank. It is in stark contradiction to government's stance to not allowing the default loan to increase even by one Taka. Default loan situation is so dire that Bangladesh Bank convened a meeting with the directors of seven troubled banks to know more about piling up of default loans. According to news reports, key borrowers failed to pay their installments in time in spite of rescheduling their loans.
What is alarming is that banks with sound records are also being contaminated by the rapid rise of default loans. Of the seven banks, three are private: Islami Bank, Al Arafah and National Bank. Earlier default loan problem had not taken a virulent form in these banks.
Bangladesh Bank in its annual report observes that non performing loans (NPL) have the potential to trigger spill over effect and to have profound risks for financial stability by making policy implementation harder.
In 2010, the amount of NPLs was Tk 227.1 billion and rose to Tk 893.4 billion by the end of June 2018. A little less than 50% of those NPLs belong to state-owned commercial banks(SCBs).Meanwhile, NPLs for private commercial banks (PCBs) and for foreign commercial banks(FCBs) stood at Tk 389.8 billions and Tk 22.7 billions respectively. One may argue that SCBs operational and client base are much bigger than those of PCBs and FCBs. Gross NPLs to total loans or net NPLs to total loans, which Bangladesh Bank uses to measure asset quality, may give a better indication of comparison of bad loans by types of banks. In 2010, gross NPLs to totaloans by SCBs was 15.7. Meanwhile, it was 3.2 percent for PCBs and 3.0 percent for FCBs. By the end of June 2018, gross NPLs to total loans for SCBs, PCBs and FCBs rose to 28.2 , 6.0 and 6.7 respectively.Its is evident that percentage of bad loans to total loans is far more higher in SCBs than those in PCBs and FCBs. How the decision was made at the management board and its implementation calls for greater attention.
Bangladesh Bank's management of Equity and Entrepreneurship Fund, a fund created to provide capital for promising businesses, is not beyond controversy. Couple of years ago reports surfaced on the press that thugs swindled hundreds of crore taka from the fund submitting fake documents.
So there is doubt over its ability to rein in curbing NPL.
Bangladesh Bank measures profitability of a bank in terms of its Return on Asset(ROA), Return On Equity(ROE) and interest rate margin. Bangladesh Bank observes that NPL tends to bring down ROA and ROE.
I did a small study on the interaction between ROA and the NPL annd gross NPL to total loan. My objective is to find out whether NPL and NPL to total loans influence ROA. I gleaned data on these three variables for the period between 2010 and 2018(June).In fact, I ran a logit model to see probability of ROA in the presence of NPL and gross NPL to total loan. To get the probability of ROA,P,I hinged on relative frequency, which I got by calculating the ratio of ROA at a particular level of NPL to total ROA in the industry at that level. Taking natural logarithm of P/(1-P) gives us the logit. Next the equation L = a + bNPL+cNPLLOAN+u was transformed by a weight. The weight was derived by multiplying total ROA, P and (1-P) for a corresponding level of ROA. Then I took the square root of weight and then multiplied the above equation by square root of the weight. Transformed equation looked like:
sqrt(weight)L = sqrt(weight)a + sqrt(weight)bNPL+sqrt(weight)cNPLLOAN+sqrt(weight)u
or
wL= wa+bwNPL+cwNPLLOAN+wu
Then I ran an ordinary least squares regression using the transformed equation. The advantage of this transformed data is that it eschewed heteroscedasticity and yielded efficient estimates of the coefficients.
For SCBs the model fitted well, but for the PCBs and FCBs I was not that lucky. The result of statistical analysis for SCBs indicates that for a unit increase in the weighted NPL the weighted log of the odds in favor of ROA increases by 0.0055492. Alternatively, for a unit increase in the weighted NPL the weighted odds in favor of ROA increase by 1.28 percent. The odds could have been much higher without NPL.
Meanwhile for a unit increase, 1 percent in this case, in the weighted gross NPL to total loan the weighted log of the odds in favor of ROA decreases by 0.0944032. In other words, for 1 percent increase in the weighted gross NPL to total loan the weighted odds in favor of ROA decrease by 19.54 percent.
The above findings are pretty much in line with the Bangladesh Bank observation that NPL slows down profitability of banks.
What led the management board of these banks to endorse these bad loans left many puzzled. Recovery of the loans requires higher time, money and effort, increasing the operating expenses. One of the tools Bangladesh Bank uses to measure capability of management is the ratio of total expenditure to total income(EI). For SCBs, EI was 80.7 in 2010. A gradual rise was recorded till 2016 when it reached to 90.2 then lowered in the later years, 81.7 in 2017 and 83.9 in 2018(June). Meanwhile, for PCBs it was 67.6 in 2010, 73.8 in 2017 and 78.4 in 2018(June). For FCBs, EI was 64.7 in 2010, 46.6 in 2017 and 44.3 in 2018(June). This means FCBs managed to lower EI significantly in recent years. The operating expenses are much higher for SCBs and PCBs than those for FCBs. This is clear indication that management board of FCBs are more capable in dealing with their assets(loans ) and in running businesses in this country. The solution also lies here. What does make them different from the SCBs and PCBs? Who are the members of these boards? Did they face intervention from making and implementing decision?
Now we come to the same roundabout. Poor governance at banks leads to piling up of bad loans. Sheer size of this loan spurs operational expenses and makes expectations of sound banking process untenable. At the end of the day, it contributes to corrode depositors' trust and to augur calamity for the whole economy. Fixing corporate governance instead of injecting further taxpayers' money is the prerequisite.
What is alarming is that banks with sound records are also being contaminated by the rapid rise of default loans. Of the seven banks, three are private: Islami Bank, Al Arafah and National Bank. Earlier default loan problem had not taken a virulent form in these banks.
Bangladesh Bank in its annual report observes that non performing loans (NPL) have the potential to trigger spill over effect and to have profound risks for financial stability by making policy implementation harder.
In 2010, the amount of NPLs was Tk 227.1 billion and rose to Tk 893.4 billion by the end of June 2018. A little less than 50% of those NPLs belong to state-owned commercial banks(SCBs).Meanwhile, NPLs for private commercial banks (PCBs) and for foreign commercial banks(FCBs) stood at Tk 389.8 billions and Tk 22.7 billions respectively. One may argue that SCBs operational and client base are much bigger than those of PCBs and FCBs. Gross NPLs to total loans or net NPLs to total loans, which Bangladesh Bank uses to measure asset quality, may give a better indication of comparison of bad loans by types of banks. In 2010, gross NPLs to totaloans by SCBs was 15.7. Meanwhile, it was 3.2 percent for PCBs and 3.0 percent for FCBs. By the end of June 2018, gross NPLs to total loans for SCBs, PCBs and FCBs rose to 28.2 , 6.0 and 6.7 respectively.Its is evident that percentage of bad loans to total loans is far more higher in SCBs than those in PCBs and FCBs. How the decision was made at the management board and its implementation calls for greater attention.
Bangladesh Bank's management of Equity and Entrepreneurship Fund, a fund created to provide capital for promising businesses, is not beyond controversy. Couple of years ago reports surfaced on the press that thugs swindled hundreds of crore taka from the fund submitting fake documents.
So there is doubt over its ability to rein in curbing NPL.
Bangladesh Bank measures profitability of a bank in terms of its Return on Asset(ROA), Return On Equity(ROE) and interest rate margin. Bangladesh Bank observes that NPL tends to bring down ROA and ROE.
I did a small study on the interaction between ROA and the NPL annd gross NPL to total loan. My objective is to find out whether NPL and NPL to total loans influence ROA. I gleaned data on these three variables for the period between 2010 and 2018(June).In fact, I ran a logit model to see probability of ROA in the presence of NPL and gross NPL to total loan. To get the probability of ROA,P,I hinged on relative frequency, which I got by calculating the ratio of ROA at a particular level of NPL to total ROA in the industry at that level. Taking natural logarithm of P/(1-P) gives us the logit. Next the equation L = a + bNPL+cNPLLOAN+u was transformed by a weight. The weight was derived by multiplying total ROA, P and (1-P) for a corresponding level of ROA. Then I took the square root of weight and then multiplied the above equation by square root of the weight. Transformed equation looked like:
sqrt(weight)L = sqrt(weight)a + sqrt(weight)bNPL+sqrt(weight)cNPLLOAN+sqrt(weight)u
or
wL= wa+bwNPL+cwNPLLOAN+wu
Then I ran an ordinary least squares regression using the transformed equation. The advantage of this transformed data is that it eschewed heteroscedasticity and yielded efficient estimates of the coefficients.
For SCBs the model fitted well, but for the PCBs and FCBs I was not that lucky. The result of statistical analysis for SCBs indicates that for a unit increase in the weighted NPL the weighted log of the odds in favor of ROA increases by 0.0055492. Alternatively, for a unit increase in the weighted NPL the weighted odds in favor of ROA increase by 1.28 percent. The odds could have been much higher without NPL.
Meanwhile for a unit increase, 1 percent in this case, in the weighted gross NPL to total loan the weighted log of the odds in favor of ROA decreases by 0.0944032. In other words, for 1 percent increase in the weighted gross NPL to total loan the weighted odds in favor of ROA decrease by 19.54 percent.
The above findings are pretty much in line with the Bangladesh Bank observation that NPL slows down profitability of banks.
Now we come to the same roundabout. Poor governance at banks leads to piling up of bad loans. Sheer size of this loan spurs operational expenses and makes expectations of sound banking process untenable. At the end of the day, it contributes to corrode depositors' trust and to augur calamity for the whole economy. Fixing corporate governance instead of injecting further taxpayers' money is the prerequisite.
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