The Financial Express

Rising NPLs' possible financial feedback impacts worrisome

ADB says employment, GDP may receive major shocks in BD, India and other regional countries

| Updated: October 29, 2017 18:29:07

Rising NPLs' possible financial feedback impacts worrisome

Swelling non-performing loans in Bangladesh, among other regional countries, is worrisome for their potential macro-financial "feedback" effects like economic growth and employment slowdowns.

The Asian Development Bank (ADB) made such observations following surveys that found the NPLs on such problematic rise, both by amount and share of total credits, in Bangladesh and India in South Asia and some other countries on the regional plane.

Feedback effect on financial indicators, such as NPLs, could affect macroeconomic conditions and in turn affect macroeconomic indicators like employment and gross domestic product (GDP).

Asian Economic Integration Report (AEIR) 2017, a report of the Manila-based Asian development-financier, released few days back, noted that NPL has been on the upturn in such proportion particularly since 2010.

The AEIR also cited regional countries like China, Indonesia and Mongolia where such idle loans marked such increase disproportionately.

"Increasing NPL levels reflect weak macroeconomic conditions and excess leverage; and they have harmful feedback effects on the overall economy," the report says.

Its empirical findings show that while macroeconomic conditions and bank-specific factors such as rapid credit growth and excessive bank lending contribute to the buildup of NPLs, a sustained increase can likewise lead to a reduction in credit supply and slowdown in overall economic activity.

A panel vector auto-regression analysis of macro-financial implications of NPLs in emerging Asia offers new insights and significant evidence for the feedback effects of NPLs on real economy and financial variables.

The ADB report, however, says the recent rise in NPLs in some Asian economies calls for close monitoring due to potential macro-financial feedback effects and implications for the region's financial stability.

"This conceptual framework captures the interplay between macro financial variables and NPLs along with the potential channels of financial spillovers across borders."

Moreover, the panel VAR impulse response functions confirm that positive shocks to GDP growth and credit supply both slow NPL-ratio growth while contractionary monetary policy shocks and shocks to unemployment both increase growth in NPL ratio.

"More importantly, rising NPL ratio growth decreases GDP growth, credit supply, and increases the unemployment rate," it said.

In its policy consideration for enhancing resilience in financial sector it said growing cross-border banking activities and systemic importance of some large regional financial institutions underscore the need to discuss regional regulatory cooperation, including resolution mechanisms for interconnected regional banks.

Supervisory colleges for regionally active foreign banks can be an effective regional cooperation tool to strengthen cross-border supervision in Asia.

The ADB suggests regional cooperation to develop effective resolution mechanisms for distressed assets of cross-border financial institutions that, in turn, can also complement national efforts to address NPLs efficiently and sustainably.

Leading economists say that the report rightly cited Bangladesh's financial sector in this regard as they also think there is no scope to close the monitoring of the regulators.

Dr Zahid Hussain, the lead economist at the Dhaka office of the World Bank, told the FE that the report correctly identified the vulnerability of Asian economies to growing NPLs in the banking system, both as a cause of possible macroeconomic crisis and as an effect of such crisis, if they arise from other shocks.

"With rising financial integration within Asia, such crisis can spill over into other countries within the region as well," Dr Hussain said, striking a note of caution.

"It is therefore important to develop monitoring and supervision systems at the regional level. Bangladesh is still not that highly integrated with the regional financial systems, but as trade and investment grows, it is likely to become more integrated than it currently is," he added.

He thinks this will increase the country's exposure to the spillover risks. Also, the NPL problem is a major weakness in Bangladesh's banking system, particularly in the state-owned banks.

"The feedback effects highlighted in the report are very much relevant to Bangladesh, too," the World Bank economist said about the ADB observations.

"Containing the growth in NPLs and establishing accountability of both the lenders and the borrowers as part of addressing this problem must be assigned a high priority in financial regulation in Bangladesh," he commented.

Anis A. Khan, chairman of the Association of Bankers, Bangladesh Limited, told the FE that NPL is really a great concern for them as it impacts many banking indicators.

"Higher NPL means it affects our profitability and we give lower dividend to the shareholders," said Mr Khan, also Managing Director at Mutual Trust Bank.

He however said this is hardly correlated with cross-country banks.

Country's banking sector witnessed a worrisome rise in classified loans, amounting to Tk. 741.5 billion, as of June 30 last.

Central bank's quarterly report mentioned the ratio of gross NPL to total outstanding loans for state-owned commercial banks, private commercial banks, foreign commercial banks, and specialised banks at 26.8 per cent, 5.8 per cent, 7.9 per cent and 23.8 per cent respectively at the end-June 2017.

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