Rising NPLs disrupt loan recycling, squeeze banks’ lending capacity: Mahbub Ullah

The rising trend of non-performing loans (NPLs), which now account for more than 32% of total loans in Bangladesh’s banking sector, is disrupting the normal cycle of loan recovery and reinvestment, National Professor Dr Mahbub Ullah has said.

The situation is putting pressure on banks’ liquidity, profitability and capital adequacy while restricting fresh lending to businesses and industries, he said.

Mahbub Ullah, former professor and chairman of the Department of Development Studies at the University of Dhaka, made the remarks while delivering the 23rd Nurul Matin Memorial Lecture on “Ethics in Banking”, organised by the Bangladesh Institute of Bank Management (BIBM) in Dhaka on Saturday.

Bangladesh Bank Governor and Chairman of the BIBM Governing Board Md Mostaqur Rahman presided over the programme. BIBM Director General Dr Md Ezazul Islam delivered the welcome address, while Professor and Director (Research, Development and Consultancy) Md Shihab Uddin Khan delivered the vote of thanks.

In his lecture, Mahbub Ullah said the core driving force of banking is the continuous recycling of loan funds within the economy.

Banks collect deposits from customers and disburse the funds as loans. When borrowers repay instalments and interest, the recovered funds are again lent to new borrowers, creating a continuous cycle of financing economic activities.

But the growing volume of defaulted loans is disrupting this cycle, he said.

“A significant portion of depositors’ funds, once disbursed as loans, is not returning to banks on time,” he noted, adding that this is putting pressure on banks’ liquidity and their capacity to extend new credit.

At the same time, banks are becoming increasingly cautious about approving fresh loans because of the heightened credit risks, he said.

Mahbub Ullah said prolonged losses and rising defaulted loans are also making it difficult for some banks to maintain the capital reserves required under Basel-II standards.

This is further limiting their capacity to extend fresh credit, while even financially stronger banks are adopting a cautious approach to lending to minimise risks.

As a result, eligible entrepreneurs and industrial enterprises are facing difficulties in obtaining working capital and investment financing, which could affect production, employment and overall economic activity, he said.

He warned that risks in the banking sector could rise further unless effective and sustainable measures are taken to contain defaulted loans.

He stressed the need for good governance, accountability, ethics and sound risk management in loan approval and recovery.

Restoring confidence in the banking sector, recovering defaulted loans, strengthening banks’ capital base and ensuring a normal flow of credit to eligible businesses require coordinated and effective measures, he added.

Trust is the core strength of banks: Governor

Bangladesh Bank Governor Md Mostaqur Rahman placed emphasis on ethics, good governance, accountability and professionalism in the banking sector.

He said the strength of a bank does not depend only on its capital, technology or liquidity, but also on the trust of depositors, borrowers, investors and the broader economy.

According to him, trust is the most important foundation of the banking system, and bankers must maintain the highest professional and ethical standards to preserve it.

Ethical decisions crucial in lending

BIBM Director General Dr Md Ezazul Islam said banking is different from many other businesses because banks manage public deposits and channel those funds into productive economic activities.

Therefore, decisions made by bankers affect not only individual banks or customers but also various sectors of the economy, he said.

He said a competent banker should have expertise in accounting, economics, credit analysis and other technical areas, but professional competence alone is not enough.

Honesty, responsibility, ethics and accountability are particularly important in areas such as loan approval, rescheduling, asset valuation, customer selection and risk management, he added.

Ezazul Islam also highlighted the role of bank boards and top management in establishing an ethical culture within financial institutions.

“If integrity, transparency and accountability begin at the top level of an institution, they will gradually be reflected throughout the organisation,” he said.