Nonbank financial institutions (NBFIs) in Bangladesh are bending under non-performing loans (NPL) buildups which sector-insiders largely attribute to 'massive irregularities' reported in a few.
Official statistics show over threefold rise in the aggregate volume of NPLs in the nonbanks in less than seven years, stoking worry about their financial health as well as of some banks who also heave under NPL deadweight.
As a spillover effect of the growing NPLs, two major profitability-measuring indicators --return on asset (ROA) and return on equity (ROE) - of the sector keep dipping alarmingly, according to the Bangladesh Bank (BB) statistics.
The official data show that the volume of classified loans or lease was 7.3 per cent in 2016. Since then, the NPLs have jumped to 8.9 per cent, 9.2 per cent, 11.9 per cent, 13.29 per cent and 15.39 per cent in 2017, 2018, 2019, 2020 and 2021 respectively.
The quantum had further leapt to 22.99 per cent until June 2022 when Tk 159.36 billion out of total loans amounting to Tk 693.32 billion of the sector was classified as bad loans.
And the result was obvious; both the profitability indices--ROA and ROE - kept shrinking. Even until 2018, the ROA and ROE had been in positive territory but continued declining to reach 9.91 per cent and 0.44 per cent in negative as of June 2022.
Under such uninspiring ambiance, the volume of deposits with the NBFIs declined 3.0 per cent year on year to Tk 415.85 billion in July-September period of 2022. It was Tk 427.90 billion during the same period a year ago.
On a quarterly basis, overall deposits slipped 1.19 per cent from Tk 420.86 billion at the end of June, according to the data.
Sector players blamed various factors like large-scale irregularities in some 10 NBFIs in recent times, lending-rate capping, Covid-induced shocks and current macroeconomic situation of the globe in the wake of Ukraine-Russia war on the current state of the FIs here.
Managing director and CEO or chief operating officer of Strategic Finance & Investments Limited (SFIL) Irteza Ahmed Khan said the growing volume of NPLs emerged as a matter of serious concern for the sector.
"The size of NPLs turned too big because of loan-related wrongdoings by some NBFIs. Now the whole industry is paying for it as people's perception about the NBFIs changed negatively although there are many good institutions having sound governance," he said.
Alongside growing non-performing loans, lending-rate capping, fallout from the Covid-19 pandemic and inflationary pressure on people's living put the sector in serious challenge severely affecting the net interest margin (NIM) of the NBFIs.
"I hope the central bank will review the decision on fixation of interest ceiling at 11 per cent for NBFIs to give some breathing space for the industry," says Mr. Khan, the managing director of SFIL, a new NBFI having a zero-NPL record.
Managing director and CEO of IPDC Finance Mominul Islam finds the NPL situation in the sector deteriorating "alarmingly mainly because of massive-scale of irregularities" by some 8-10 NBFIs in recent times.
Simultaneously, the impact of the pandemic coupled with the ongoing volatility in global macroeconomic situation after the war in Europe put extra pressure on their business that is also contributing to the rise in the number of bad loans to some extent.
"But there are many good NBFIs who maintain good corporate governance in delivering policy and process-driven lending mechanism. Yes, the rising trend in NPL is a reality but it's mainly because of poor governance by some institutions," he said.
Naming IPDC Finance as an instance, he said the NPL size of the institution was 37 per cent in 2007. Since then, it has taken various correctional measures engaging specialised teams in monitoring and recovery stages and it has been helping them to cut the NPL volume significantly.
"Last year, it (NPL) was just over 3.0 per cent and we're hopeful to bring it down further this year," he added.
Mr. Islam, also immediate-past chairman of Bangladesh Leasing and Finance Companies Association (BLFCA), suggests that the authorities should not declare the problematic institutions as dead cases. Instead, these should be revived taking required correctional steps.
"We're hopeful that we will be able to take the NLP at a tolerable level within next five years if we all work together," he said on a note of optimism about turning the corner.
About the lending-rate cap he said banks have many other income- generating activities like fees, commissions and have good volume of demand deposit.
"But NBFIs have very limited revenue option like time or fixed deposit and the ceiling on lending rate makes their survival difficult," he added.
Some other market players said the recent embargo of Bangladesh Bank on NBFIs collecting credits from short-term funding sources, like interbank transaction, will make things more difficult for the struggling financial institutions given the current context of the liquidity situation.
Issuing a circular last Wednesday, the BB said it observed that some NBFIs were engaged in collecting funds from interbank transactions and making long-term investment, which is unexpected.
Instead, the BB asked the NBFIs to opt for long-term investment through issuing bond on the market.