Financial sector vulnerabilities may worsen: WB

Bangladesh's financial sector vulnerabilities may worsen due to an increase in bad loans and create further pressure in terms of liquidity in the banking system, warned the World Bank (WB) yesterday.

The caution comes due to a rise in total stressed assets, including rescheduled loans, non-performing loans (NPLs) and net written-off loans.

At the end of June this year, default loans hit an all-time high of Tk 156,039 crore due to a relaxed central bank policy, slowdown in business sales and deliberate non-payments, showed Bangladesh Bank data.

The WB, citing the central bank's latest Financial Stability Report, said stressed assets grew nearly three-fold, reaching Tk 377,920 crore at the end of 2022 from Tk 134,010 crore four years ago.

The amount of distressed loans was 9.5 percent of Bangladesh's gross domestic product last year, according to the multilateral agency, which says that the share of bad/loss category of NPLs has been increasing since 2012.

The bad/loss loans constituted 88.7 percent of total NPLs in 2022.

"This indicates that the majority of NPLs have remained non-performing for a long period of time," said the WB in its Bangladesh Development Update released yesterday at its office in Dhaka.

"Banking sector vulnerabilities deepened, with a rise in stressed assets," it added.

The latest BB data showed that the gross NPL ratio increased to 10.11 percent of total outstanding loans from 8.8 percent in March 2023. The proportion of NPLs was 8.96 percent a year ago.

The WB said loan-loss provisioning deteriorated, covering only 58 percent of NPLs at the end of March 2023.

It said the capital adequacy ratio declined to 11.2 percent in March 2023 from 11.4 percent the previous year.

"However, these financial soundness indicators understate banking sector vulnerabilities due to lax regulatory definitions, reporting standards, forbearance measures, and weak regulatory enforcement," the WB said.

The international financial agency said profitability indicators of banks and financial institutions were enhanced by loan rescheduling.

In 2022, profits after provision and tax increased by 183.3 percent to Tk 14,230 crore from Tk 5,020 crore last year, it said.

"Loan rescheduling enabled banks to avoid recognising impaired assets, artificially boosting profitability," the WB said.

The multilateral agency said addressing financial sector vulnerabilities is fundamental to supporting economic growth.

"Increased stressed assets in the banking system and existence of chronic under-capitalised banks necessitate immediate measures to strengthen weak bank management and financial sector safety nets, including deposit insurance and other crisis preparedness measures."

It said in addition to recognising NPLs in line with international standards, a viable NPL resolution mechanism, improvement of corporate governance and modernisation and restructuring of state-owned banks remain critical.

The international financial organisation said addressing longstanding structural reforms could accelerate the pace of the recovery and strengthen resilience to future shocks.

"Bold steps are needed," said Abdoulaye Seck, its country director for Bangladesh and Bhutan, at the launch of the report.

He said the risk of a financial crisis should not be underestimated and added that financial sector reform is most important.