1

Recent Trend of NPL in Banking Sector: An Emprical Evidence from

Bangladesh.
ABID HASAN
Department of Accounting & Information Systems, Bangabandhu Sheikh Mujibur Rahman
Science & Technology University, Student, Bachelor of Business Administration final Year.

Abstract: The banking sector constancy be influenced by, in large part on the size of
non-performing loans (NPLs). Hence, the elements which enlighten the problem loans
are very useful information for banks. Remarkably, studies in this regard with respect to
the small developing countries’ banking sector like Bangladesh have acknowledged
fewer responsiveness. Therefore, this study aims to examine the recent trends of NPLs in
Banking Sector of Bangladesh. The balanced sample consists of the entire banking sector
of Bangladesh. NPL has negative impact on the performance & Sustainability of the
bank. Non-performing loan in Bangladesh has become a very frequently raised question
in recent years. The balanced sample consists of the entire banking sector of Bangladesh
and this study focuses on the time series data of 2009 to 2018. This study is completed on
the basis of Secondary data from different journal, Publication, website, annual report,
News etc. This study reveals that State owned commercial Banks holds more 45% of
total NPL in the banking industry. Every year the amount of NPL is larger than in the
past that is total NPL of 2016 was 621.8 billion which is amplified in 2017 by 743
billion. The NPL ratio by types of bank is increased every year, NPL ratio at 2016 was
9.3% which is amplified at the end of June 2018 by 10.4%. The amount as well as the
ratio of NPL by types of bank is in upward trends that means every to year NPL is
increased. This study reveals that the country has been suffered from a large amount of
nonperforming loans in the banking industry due to proper selection of borrowers,
unrealistic terms, condition and repayment schedule, Loan Concentration, waivers to loan
defaulter, political meddling to approving loan etc. The paper highlights the specific
factors of High NPL in banking industry which helps policy maker to reduce the
percentage of NPL.

Introduction
Financial Institution like banking firm provide financial service to the customer, they received
money as a deposit and provide this money to the interested person as a loan, by which bank
circulated the idle money to the market and bank received interest with installment which is
considered as the main sources of banking firm profit and profit is considered as the financial
performance of the bank. Banking industry of Bangladesh consist of state Owned commercial
bank, private commercial bank, foreign commercial banks and development financial institution.
Banks which is fully or majorly owned and fully controlled by the government of Bangladesh
and running under the Bangladesh bank order, 1972 & Bank company act 1991 that is identified
as state owned commercial banks and banks which are majorly owned by individuals/the private
entities identified as a private commercial banks. Foreign Commercial banks are operating their
business in Bangladesh under the branches of their banks which are incorporated in abroad and
 2

development finance institution (DFI) also known as a development bank is a financial

institution that offers loan for economic development projects of the country.
Loan is the most significant asset along with the primary foundations of earning and also major
bases of risk for the banking Organization. Though there is a risk of becoming uncollectible of
the loan of banks but loans & advance are the major components in the asset composition of
banks. The banks will be distorted if the banks will fail to recover the amount of loan.
According to section 5 of Bank company act-1991, ‘defaulting debtors’ means any person or
institution served with advance, loan granted in favor of him or an institution involving interest
or any portion thereof or any interest, which has been overdue for six months in accordance with
the definition of Bangladesh Bank.
Aziz et al., (2009) stated that the rising of nonperforming loans (NPLs) has an effect to the
financial institution: they tightened their lending and switched their attentions to rehabilitating
the nonperforming loans (NPLs) in their books. This prevented feasible business from gaining
capitals from the bank to driving profitable activities to earn profit.
Shafiqul Alam et al., (2015: 1207) acknowledged that, non-performing loan has impact on
employment prospect. Heavy NPLs in banking sector affected the growth of the banks so that
bank can’t expands their activities throughout the country which decreased the new employment
opportunities in the financial institution of Bangladesh. On the other hands, due to high
percentage of NPL, bank tighten their lending policy in that case many viable business and small
business don’t get funds from bank to expands their business that result in loosing huge
employment opportunities in different sectors.
Non-performing loans denote to those monetary assets from which banks no longer obtain
interest or payments as planned. Esther Laryea Matthew Ntow-Gyamfi Angela Azumah Alu
(2016) said that, they are recognized loan as a non-performing when loan can’t perform revenue
for the bank. Nonperforming loans generally refer to loans which do not generate income for a
relatively long period of time; that is the principal with interest on these loans has been left
unpaid for at least 90 days. Chowdhury et al. (2002, 21-54) showed that banking sector of
Bangladesh form capital by receiving deposit from the person who has idle money in his hands
with exchange of interest which is liabilities for the bank, bank invest this fund to the interested
person and recover this investment with interest which is considered as the profit of the bank.
They stated that loan loss is the total loss of time, money and an effort.
The Present condition of total non-performing loan hit the highest point. At the end of 2018, total
NPLs in banking & financial institution is increased by 43 thousands 210 crore. At this time loan
defaulter increased 58 thousands 436 and the total number of Loan defaulter 1 lakh 70 thousands
3 Hundred 90. At the end of 2018, the total amount of NPLs is 1 lakh 2 thousands 315 crore
which was 22 thousands 481 crore at the very beginning of 2009. Non-performing loan fourfold
increase in last ten years which is alarming for our economy. According to CIB Database of
Bangladesh Bank, top three hundred loan defaulter hold fifty one thousands crore of the total
default loan which is almost 50% of total default loan. Bangladesh Bank proposed new system of
identifying classified loan that is if loan installment with interest is unpaid within six month that
 3

is classified as a substandard, Installment is unpaid within nine month this loan classified as a
standard loan and finally if loan installment is unpaid within twelve month that loan classified as
a bad debts which may lead high non-performing loan in future.
The causes of growing NPLs in banking sector are stated to lack of proper selection of
borrowers, unrealistic terms, condition and repayment schedule, Loan Concentration, waivers to
loan defaulter, political meddling in approving of loans which patronage the loan to defaulting.
The causes of non-performing loans are generally accredited to lack of Proper management of
lending policy, absence of proper recovery strategy and feebleness of approved infrastructure.
Government instruction to state owned commercial bank to invest in unprofitable state owned
enterprise also responsible for the causes of non-performing loan. Chowdhury et al., (1999: 57)
find that government forced the state owned commercial banks to invest their fund in the state
owned enterprise which may be profitable or not that leads NPL in the State Owned commercial
Banks. They also point out that limited policy guidelines of lending and banks own judgment
procedure of loan classification and provisioning results high NPL in the banking industry.
Business extension lead banks to offer credit to businesses or client though they have low credit
quality& fragile credit history. This loan may not perform smoothly in times business
retrenchment that creates Nonperforming loan. Lack of employment opportunity and high
interest rate of loan leads high amount of NPL in the financial institution.
Global recession and internal political uncertainty of 2007-2008 leads huge loss in the potential
business enterprise and growing industry since they could not run their business smoothly which
driving high classified loan in the banking sector. That means in this time they are unable to
repay their loan amount as well as interest. Non-performing loan in the Banking sector increased
due to political & board of directors’ interference in loan disbursement, appointment of tarnished
employees in bank, weak monitoring in loan disbursement, lack of harmonization between
associated parties. The performance of banking industry is not only important for their
shareholders also important for the entire economic system since bank is the driver of the money
circulation in the market and bank is considered as the brain of the entire economic system.
Greuning and Bratanovic (2003), argue that, banking industry play a serious role to develop
economies where most borrowers don’t have access to the capital markets.
Adhikery,(2006) stated that, NPLs decreased the investors’ confidence to invest in the banking
industry, piling up unproductive economic resources even though depreciations are taken care of,
and hampering there source apportionment method.
Well-organized banking industry can drive high economic growth of the country while poor-
organized banking industry can hindrance the economic progress and exaggerate poverty
(Khan& Snehadji, 2001). Non-performing loan has the disastrous effect on financial structures.
NPLs reduce the net profit and capital of the bank, which may lead to high loan loss provision,
high loan price and truncated rate of investment. Assessment of bank performance is significant
for all related parties like depositor, stockholders, bank managers and regulators. The
performance of the banking division is a focus that has acknowledged a lot of devotion in current
years. The performance of the bank is evaluated on the basis of Profitability ratio, liquidity ratio,
Solvency ratio, net profit margin, better quality management, expense management, return on
 4

investment, ROA (return on asset), ROE (return on equity) etc. The financial performance
indicators can be divided into three main group: profitability ratios which gauge a company's
operating success over a given period of time; liquidity ratios which measure the short-term
ability of a company to pay its debt and to meet unexpected cash needs; and solvency ratios
which indicate a company's ability to meet long term commitments on a continuing basis (Alam
et al., 2015).The speedy upturn of non-performing loan has destructive effect on the performance
of the bank. Due to heavy NPL, Banks try to tighten their investment policy and focus on to
recover the already incurred non-performing loan. Due to tight investment policy, so many
potential businesses can’t take loan that hinder to expand their business as well as that lead to the
economy to be immobile.
Keywords: NPLs, Banking Sector, Performance, SCBs, DFIs, PCBs, FCBs.

Literature Review
Meka& Nazaj(2012) states that , The upswing trend of NPLs in the banking sector is generating
huge amount of banks loan loss provisions, decreasing banks working capital and by this way,
dropping the banks loaning ability to the economy.
Alam et al., (2015) Illustrated that, there is a large amount of nonperforming loan in the banking
industry of Bangladesh due to fund diversion, internal & External interferance, political
instability, engrossment of tainted bankers, aggressive banking, subsiding in real estate business,
weak observing lack of coordination among related parties. They also stated that, oversize
defaulters has been run-away from jurisdiction under law by using political power that result bad
impression on good borrowers.
Islam et. Al (2005) argued that, if the nonperforming loan is created by the borrowers willingly
and left unsetteled, that might identified as a transmissible financial disease which driving good
borrowers out of the market. Bad borrowers can create negative impact on the good borrowers if
NPLs are not identified accurately & timely. If there is a large number of loan defaulter in the
banking sector then the banks tries to secure their capital by changing and tightened the loan
distribution strategy which is harmful for the potential business which is actually harmful for the
entire economy. Weak inforcement of law and lack of adequate information about customer are
liable for this situation. Proper selection of bad defaulter is possible du to lack of adequate
information about customer.
Sufian and Habibullah (2009), The experimental results of their study suggest that bank specific
characteristics, in particular loans intensity, credit risk, and cost have positive and signifi cant
impacts on bank performance, while non-interest income exhibits negative relationship with
bank profitability.
According to Adhikary (2007), The presence of an alarming amount of NPLs both in the State
Owned Commercial Banks (SCBs) and in the Development Financial Institutions (DFIs), along
with maintenance of insufficient loan loss provisions, reduces the credit quality of the overall
banking industry. Poor enforcement of laws relating to settlement of NPLs, followed by
 5

insufficient debt recovery measurement in the banking sector, has also heightened influence on
the financial illness.
Guy (2011) recommend that, non performing loans are the tools of measuring asset quality of
the lending bodies and are involved with the financial crisis and failurs in the both developed &
developing countries like Bangladesh.
Peterson K. Ozili (2019) states that, bank efficiency, loan loss coverage ratio, banking system
stability inversely related with the NPLs while NPLs are positively associate with the banking
crisis & concentration and NPLs are negatively associate with regulatory capital and bank
liquidity.
On July 27, 2012, Royal Bank Zimbabwe Limited surrendered its banking license to the RBZ.
Onsite inspection by the RBZ determined that the bank was critically undercapitalized, faced
chronic liquidity challenges and liabilities to the RTGS system, had high non-performing insider
loans, and had been misrepresenting information to the RBZ.
There are quite a lot of reason behind nonperforming loan and the origins of NPLs be different
from country to country. Cargill et. Al (2004: 125-147) have Identified, Sustained economic
inactivity and depression in the economy since the early 1990s is the reason behind japan’s
NPLs.
In spain, Fernandez, jorge and saurina, (2000) poin out that, despite the central bank authority
can identified banking crisis which is directly involved with scanty credit risk management and it
is difficult for the central bank authority to track bank managers to go after more careful credit
guidelines during economic expression.
Central Banks of different countries suggest different techniques and tools to make progress the
nonperforming loan position of the banks & Financial Institution. Waweru & Kalani (2009),
Kenya’s banking sector swing away from securitiy based lending concetration and considered
customer ability to pay installment with interest while disbursement of loan.
In January 2012, the govornor of the reserve bank of Zimbabwe, Dr. Gideon gono suggest
banking sector to highlighting on credit assessment, origination, administration, monitoring and
Control standards to develop their credit risk management system.
Muniappan (2002:25-26) argues that a bank is required to incure carrying cost on non-income
yeilding asset when they have high level of NPLs in their institution that slowdown the
productivity as well as capital adequecy of the bank & in consequences so that bank faces
difficulties in boosting capital resources.
 6

Methodology
In this Paper some financial factors are identified that are directly or indirectly related to trend of
NPL. Time frame of the analysis is 10 consecutive years, that is, in this study data has been used
from 2009 to 2018. To have scenario of recent trends of NPL, trends of amount of NPLs by types
of banks, trends of NPL ratio by types of banks, ratio of net NPL to total loans by type of banks,
comparative positions of NPLs etc. are used. The number of Sample of the study is 57
commercial banks of the Bangladesh.
This is a conceptual Paper & aims to evaluating the recent trends of nonperforming loan in the
bank of Bangladesh. The researchers collect secondary data for steering the study. The main part
of the research was built on secondary data which were collected from different journals,
publications of Bangladesh Bank, annual reports of different Bangladeshi banks, newspapers,
website of Ministry of Finance of Bangladesh, Bangladesh Bureau of Statistics and different
websites. The researchers discovered the recent trends of nonperforming loan after analyzing the
secondary data of different banks.

Result & Discussion

The Banking Sector of Bangladesh comprises of four categories of Scheduled banks and these
are State owned Commercial Banks (SCBs), State owned Development Financial Institutions
(DFIs), Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs). Bangladeshi
banking sector running their activities with different suspect of increasing loan amount as well as
growing uncollectible amount of loan due to different causes, which is harmful banking
sustainability. From the early stage of birth, Bangladesh faces the problem of non-performing
loan. Islam et al., (1999: 35-37) states that issuing of non-performing loan is not a new
phenomenon in Bangladesh. In fact, the seeds were cultured during the early stage of liberation
period (1972-1981), by the governments “expansion of credit” policies to the one hand and a
feeble and infirm banking infrastructure combined with an unskilled workforce.

Table 1.1 Trends of Amount of NPLs by Types of Banks

Billion BDT
Types 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
of End
Bank June
SCBs 117.5 107.6 91.7 215.2 166.1 227.6 272.8 310.3 373.3 428.5
DFIs 42.1 49.7 56.5 73.3 83.6 72.6 49.7 56.8 54.3 52.4
PCBs 61.7 64.3 72.00 130.4 143.1 184.3 253.3 230.6 294.0 389.8
FCBs 3.5 5.5 6.3 8.5 13.0 17.1 18.2 24.1 21.5 22.7
Total 224.8 227.1 226.4 427.3 405.8 501.6 594.1 621.8 743.0 893.4
Source: Department of Off-site Supervision (DOS), Bangladesh Bank
 7

Chart 1.1 Trends of Amount of NPLs by Types of Banks

1000
900
800
700
600 SCBs
500
400 DFIs
300 PCBs
200
100 FCBs
0
June Total

End
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 1.2: Trend of NPL in Banking Sector

2000
1800
1600
1400
1200
1000
800
600
400
200
0
June
End
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

SCBs DFIs PCBs FCBs Total

Table 1.1 and chart 1.1 & 1.2 shows the amount of NPLs of the four types of banks since 2009 to
end of June 2018. Here we see that amount of NPLs of State owned commercial banks (SCBs) in
2009 was BDT 117.5 billion which is increased in BDT 428.5 billion in 2018. The amount of
NPLs of Private commercial Banks stood at BDT 389.8 billion in the mid of 2018 which was
increased from BDT 61.7 billion in 2009. At the end of 2009, amount of NPLs of State owned
development financial banks was BDT 42.1 which is increased at BDT 52.4 billion at the mid of
2018. By this way, foreign commercial banks NPLs amount also increased in BDT 22.7 billion
from BDT 3.5 billion at the end of 2009. Total loan also increased every year, at the end of 2009,
the total amount of NPLs of all banks was BDT 224.8 billion which is increased by BDT 893.4
billion in 2018.
 8

Table 1.2 Trends of NPL Ratio by types of Banks

Percent (Roundup)
Types 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
of End
Bank June
SCBs 25.4 15.7 11.3 23.9 19.8 22.23 21.5 25.1 26.5 28.2
DFIs 25.5 24.2 24.6 26.8 26.8 32.81 23.2 26.0 23.4 21.7
PCBs 4.4 3.2 2.9 4.6 4.5 4.98 4.9 4.6 4.9 6.0
FCBs 1.9 3.0 3.0 3.5 5.5 7.30 7.8 9.6 7.0 6.7
Total 10.8 7.3 6.1 10.0 8.9 9.7 8.8 9.2 9.3 10.4
Source: Department of Off-site Supervision (DOS), Bangladesh Bank

C H A RT: 1 . 3 T R E N D S O F N P L R AT I O B Y T Y P E S O F
BANKS
12

10

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total 10.8 7.3 6.1 10 8.9 9.7 8.8 9.2 9.3 10.4

Chart 1.4 NPL Ratio by Types of Banks

10.4 10.8
9.3 7.3
6.1
9.2
10
8.8
9.7 8.9

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

At the end of December 2017, the gross NPL of the banking sector stood at 9.31 percent. Table
1.2 and Chart 1.3 & 1.4 shows that PCBs had the lowest and SCBs had the highest gross NPLs.
PCBs' gross NPLs was 4.87 percent, whereas those of SCBs, FCBs and DFIs were 26.52, 7.04
 9

and 23.39 percent respectively at the end of December 2017. The ratio of gross NPLs to total
loans indicates a mixed trend in the banking system during 2009 to 2018. It declined in 2010 &
2011 and increased in 2012 at 10 percent. Again declined at 8.9 percent and at the end June 2018
this percentage stood at 10.4%. But the ratio shows an upward trend in recent years mainly due
to increase in total classified loans, defaulted outstanding and non-recovery of loans. The high
level of NPLs in SCBs and DFIs continued due to substantial loans disbursed by them was on
considerations other than commercial criteria. Poor assessment and inadequate follow-up and
supervision of the loans disbursed by the SCBs and DFIs eventually consequence the current
situation of poor quality assets. However, BB took various measures (i.e. loan classification, loan
rescheduling, provisioning and write-off) to recovery the loan. Besides, BB has also taken steps
with regard to internal restructuring of these banks to strengthen their loan recovery mechanism
and write-off measures in recent years.
Table 1.3 Ratio of Net NPL to Total Loans by Type of Banks
(In Percent)
Types 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
of End
Bank June
SCBs 1.9 1.9 -0.3 12.8 1.7 6.1 9.2 11.1 11.2 11.7
DFIs 18.3 16.0 17.0 20.4 19.7 25.5 6.9 10.5 9.7 7.4
PCBs 0.5 00.0 0.2 0.9 0.6 0.8 0.6 0.1 0.2 0.8
FCBs -2.3 -1.7 -1.8 -0.9 -0.4 -0.9 -0.2 1.9 0.7 0.8
Total 1.7 1.3 0.7 4.4 2.0 2.7 2.3 2.3 2.2 2.7
Source: Department of Off-site Supervision (DOS), Bangladesh Bank
Chart 1.5 Ratio of Net NPL to Total Loans by Type of Banks

30

25

20
SCBs
15
DFIs
10
PCBs
5 FCBs
0 Total
June
-5
End
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
 10

Ratio of Net NPL to Total Loans by Type of Banks

SCBs DFIs PCBs FCBs Total

30
25
20
15
10
5
0
JUNE
-5
END
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 1.3 and chart 1.5 shows that the ratio of net NPLs (net of provisions and interest suspense)
to net total loans (net of provisions and interest suspense) was 2.2 percent in 2017 for the
banking sector and it was 11.2 percent for SCBs. The table demonstrates that SCBs' and PCBs’
non-performing portfolios increased in 2017 as compared to that of the previous year. The net
NPLs were 11.2, 9.7, 0.2 and 0.7 percent for the SCBs, DFIs, PCBs and FCBs respectively at the
end of December 2017. Net NPL of the industry was 2.7 percent at the end of June 2018 and at
this stage NPL for SCBs, DFIs, PCBs, FCBs are 11.7, 7.4, 0.8 and 0.8 respectively. Net NPL
ration show upward trends every year.
Table 1.4 Comparative Positions of NPLs
In Billion
2010 2011 2012 2013 2014 2015 2016 2017 2018
Total NPL 227.1 226.4 427.3 405.8 501.6 594.1 621.8 743.0 893.4
SCBs 107.6 91.7 215.2 166.1 227.6 272.8 310.3 373.3 428.5
% on total 47.38 40.50 50.36 40.93 45.37 45.92 49.90 50.24 47.96
NPL

Chart 1.6 Comparative Positions of NPLs

1000
800
600
Total NPL
400
SCBs
200
0
2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Banking Performance Indicators, Banking Regulation & Policy Department, Bangladesh Bank (2010-
2018).
 11

SCBs NPL % on total

2010 2011 2012 2013 2014 2015 2016 2017
50.24% 47.38%
40.5%
49.9%

50.36%
45.92%
40.93%
45.37%

From the above graph it has been found that, SCBs hold the majority portion of the total NPLs in
banking industry over the selected years from 2010 to 2017. Among them in 2018, the industry
meet highest amount of NPLs that was tk 893.4 billion. The amount of NPLs of State owned
commercial banks increased consistently in every year which proved that there is very poor
initiative in controlling and recovery process of those banks. The Graphical Presentation of SCBs
% on total NPL shows that almost more than 45% of NPL holds by the state owned commercial
banks which are alarming for banking industries sustainability.
 12

Conclusion
The performance of the banks not only important for their shareholders it also important for the
entire economy of a country like Bangladesh where everybody can’t enter the secondary market.
Banks circulate the idle money of the people to the economy that means bank considered as the
driver of the money. Bank also considered as the brain of the economic system of a country.
Non-performing loan is the portion of loan disburses to the loan taker which is not repaid and
which unable to generate profit for the bank. NPL has negative impact on the banks as well as
entire economy. Because of high volume of NPL in the banking industry, many banks can’t
expand their business for which many unemployed don’t get job. On the other hands, Due to
heavy NPL, Banks tightened their loan disbursement policy for which many potential businesses
don’t get loan from the bank to start their business; this is also increase unemployment problem.
There are different causes of NPL and causes differ from country to country. The main causes of
NPL in Bangladesh proper selection of borrowers, unrealistic terms, condition and repayment
schedule, Loan Concentration, waivers to loan defaulter, political meddling to approving loan.
The main limitation of the study is not including qualitative and macroeconomics factors in the
model correlated with the recent trend of NPL. There are some qualitative factors that directly or
indirectly affect the NPL trend of bank is not included in the study due to privacy of the bank. If
the default loan series continues then it may put the entire banking sector in an embarrassing
situation. This paper can help to identify the recent trends of NPL in the banking sector. It’s time
to formulate appropriate rules on lending policy, credit policy, interest rate adjustment, risk
management strategy etc. on all commercial banks operating in our country. Some other relevant
as well emergency precautions can be initiated by the authority as soon as possible to ensure a
sound environment in banking industry in Bangladesh.
 13

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