Bangladesh second only to Sri Lanka for bad loans in South Asia

The country was reported to have the second-highest ratio of non-performing loans (NPLs) among South Asian countries, behind only Sri Lanka, as per a recent World Bank report.

In case of non-bank financial institutions (NBFIs), the ratio of NPLs is the highest in Bangladesh, with Sri Lanka coming second, according to the report titled "Expanding Opportunities: Toward Inclusive Growth".

The report said that the latest NPL ratios remain below the 2021 levels and the 10% threshold commonly used to indicate systemic stress in most South Asian countries.

Exceptions are Bangladesh and Sri Lanka, where the NPL ratio reached above the 2021 level: it was 9.4% in Bangladesh and 10.9% in Sri Lanka in September 2022.

As of December 2022, the default loans at banks of Bangladesh increased 16.8% year-on-year to Tk120,656 crore.

The ratio accounted for 8.16% of the outstanding loans given out by banks as of December, up from 7.93% a year ago, according to data from the Bangladesh Bank.

The WB said: "In Bangladesh, the NPL ratio has risen due to higher import costs, poor payment discipline of borrowers, and weak regulatory enforcement. The resumption of lax loan rescheduling and asset classification in mid-2022 has delayed the full recognition of distressed assets."

The NPL ratios among NBFIs are even higher than in the banking sector, reaching over 23% in Bangladesh in June 2022 and 17% in Sri Lanka in September 2022, according to the report.

Bhutan has the third-highest NPL ratio in South Asia, followed by Pakistan, the Maldives and India.

Nepal has the lowest amount of NPL.

In Pakistan, the microfinance sector was hit hard by the inflationary shock and losses due to the floods, with an estimated 1.8 million borrowers from areas affected by the floods in 2022.

Accordingly, the NPL ratio in the country's microfinance sector rose in the third quarter of 2022 compared to 2021.

In the case of private sector credit, the growth has accelerated in Bangladesh, Bhutan, and India, with the highest being observed in the services sector of India.

In Bangladesh, private credit grew in the fourth quarter of 2022 at a similar rate of the third quarter and faster than a year ago, as borrowers took advantage of a lending rate cap and concessionary financing by the central bank, said the WB.

The report also highlighted deposits at banks.

It said the deposit growth has declined in most countries and continues to fall behind credit growth.

In Bangladesh and Bhutan, the average deposit growth in the fourth quarter of 2022 fell below the levels in the previous quarter and in 2021.

High inflation tends to reduce the deposit growth by lowering savings and reducing real deposit rates. A slowdown in remittance growth, which provides an important source of deposits for Bangladesh, has contributed to slow deposit growth, the report added.