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The ratio hit a record low of 6.1 percent in 2011, but not for the best reasons. This happened mostly due to written-off loans, provisioning and a sharp decline in new bad debt. It rose again in 2012 when it increased to 10 percent.
As the economy began recovering from Covid-19 shocks, NPLs saw a new surge.
Having 100 percent provisions to write off loans will have two-fold problems. Firstly, most banks do not have 100 percent provision. Even if the central bank instructs banks to do it, they will need excess capital, whereas most banks actually have a capital shortage.
Another obstacle is the fact that if banks have to make 100 percent provision for the write-offs, this will significantly reduce their profits, and the shareholders may not be supportive.
Aligned with the guidelines put up in the International Monetary Fund's first review report on the $4.7 billion loan package, Bangladesh Bank's roadmap encompasses the establishment of an asset management company in the private sector. Though the government was thinking of some steps towards that, an asset management company can't operate in isolation. It has to be part of an ecosystem, which includes the creation of laws, institutions, regulations, systems and processes.
We have been successful in reducing NPL because the policies were taken and implemented. However, in the last 10-15 years, the problems were not addressed at all, and now they have accumulated and brought the crisis to an unmanageable level.
Hence, a comprehensive approach needs to be taken to find out the financial, legal and institutional issues and resolve them systemically. The central bank should also focus on preventing new bad debts and ensure banks abide by regulations and the roadmap.
The author is an economic analyst
