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A Research Report
On
The Causes and Effect of Non-performing Loans in Banking Sector of Bangladesh

Supervised by:

Sujan Chandra Paul

Assistant Professor

Department of Accounting & Information Systems,

University of Barishal.

Submitted By:

Md. Hafizul Islam

Accounting and Information Systems

Session: 2015 – 2016

ID: 16 AIS 017

Department of Accounting & Information Systems,

University of Barishal.

Date of Submission: 20th January, 2021.

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Contents

Executive Summary 3
Introduction 3
Objective of the Study 4
Methodology of Study: 4
Limitations of the study: 4
Literature Review 4
Definition of Nonperforming Loans 6
Classified Loan 6
Nonperforming Loan in Bangladesh: 7
Base for provisioning and accounting treatment of NPLs: 8
Trend of the Loan Default Problem in Bangladesh 8
Emergence of Default Loans 8
Post liberation period 8
The Present status of Loan Defaults Culture in Bangladesh 9
Present Status of Non-performing Loans: 10
Causes of Nonperforming Loans 11
Effect of NPLs 15
Recommendation 16
Conclusion 16
References 17
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Executive Summary
Nonperforming credits is normal wonders for banking industry in Bangladesh. A Non-
performing credit is an advance that is in default or near being in default. Numerous advances
become non-performing subsequent to being in default for 90 days, however this can rely
upon the agreement terms. NPLs began at the beginning phase of freedom. During 1980s and
1990s, Privatization and advancement of banking area couldn't handle NPLs. Pace of NPLs
was 41.1% in 1999. There are numerous purposes for the NPLs in Bangladesh. First
explanation is business visionaries related. Borrower might be have absence of involvement,
absence of business and absence of institutional preparing foundation or absence of
supporting office. At some point borrowers do it deliberately. Business people age
additionally a significant factor. Second explanation is business related. At some point banks
offer advance to organizations which are not alluring. Solid rivalry is another business related
reason. Borrower becomes defaulter if there is helpless administration ability, poor monetary
execution, and helpless income. Business could be defaulter due to low piece of the overall
industry. Low piece of the pie mean low income with the goal that business can't pay the
interest installment. Third explanation is driving related. It is fundamentally Bank's
shortcoming. Advance could be default if Bank deferred evaluation of credit proposition,
postponed dispensing of asset, absence of legitimate observing, absence of making an
appropriate move. Last explanation is macroeconomic variables. Low Gross domestic
product development, expanding wrongdoings, hartals and continuous strategy change impact
credit. Thus advances become default credit. Impacts of NPL are, for example, Halting Cash
Cycling, Acquiring Decrease, Capital Disintegration, Expansion in Advance evaluating, and
Dissatisfaction and so on subsequently, the estimations of security are expanded and the
dangers of monetary downturn likewise see an ascent.

Introduction
Smooth and productive progression of saving-venture measure is an essential for the financial
improvement of a nation. Bangladesh, being an agricultural nation and with an immature
capital market, mostly relies upon the delegate part of business banks for activating inner
saving and giving cash-flow to the financial specialist. Hence, it is important extraordinarily
how well our monetary area is working. Taking a gander at the presentation of our monetary
area for the most recent decade or somewhere in the vicinity, we see that our financial area is
intensely troubled with a high level of non-performing credits (NPLs).
Clearly NPLs decrease banks' benefit, as banks can't fitting revenue pay from their arranged
credits. NPLs decrease advance capable assets by halting reusing. Banks need to put aside a
segment of their pay as credit misfortune save to make up terrible obligation. A keep money
with a high level of NPLs experiences disintegration of the capital if there is no arrangement
(expect). Every one of those unfavorable effect of NPLs on banks' monetary wellbeing, for
example, low productivity and low capital base are unmistakably reflected in Bangladesh
banking area.
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The proportion of NPL to add up to advances of the relative multitude of banks had indicated
a by and large declining pattern from its pinnacle 34.9% percent to 10 percent in December
2012.The proportion additionally expanded to 11.9 percent toward the finish of June 2013.

Objective of the Study

The destinations of this paper are

i. To survey the current circumstance of non-performing advances in our financial area.

ii. To show the pattern of the "advance default issue'' in Bangladesh.

iii. To inspect the advance default status of business banks.

iv. To talk about lawful viewpoint to recuperate credits from the defaulters.

v. To recognize the causes and cures of non-performing credits and.

vi. To raise a few issues and perceptions which should be viewed rapidly for
guaranteeing a monetarily solid financial area.

Methodology of Study:
The examination system of the investigation has been listed beneath: Wellsprings of
Information and Information Assortment:
Information has been gathered from the different auxiliary sources like examination works of
people, various distributions, and diary of various foundations, Bangladesh Bank Credit
Danger Evaluating manual, Bangladesh Bank yearly report and so forth.

Limitations of the study:

The constraints of the examination are
i. This study didn't cover essential and unpublished information.
ii. The serious issue confronted while leading the exploration was inaccessibility of
pertinent information.
iii. Time requirement.

Literature Review
Non-performing advance emerges from different sources. Banks ought to recognize them and
take the vital strides to dispense with the NPL from the business. Anyway exact
investigations show that there is an unfavorable impact of NPL on the benefit of banks in
everywhere on the world. Following are a few statements from the article identified with
NPL.
Adhikary (2007) on his examination paper found that the financial area of our nation
enormously influenced by the huge measure of NPL which consistently impacts the monetary
turn of events. As per him, the fundamental variables liable for the enormous development of
NPL are absence of viable observing and oversight, political pressing factor, feeble lawful
framework, and incapable NPL recuperation procedures are lack of effective monitoring &
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supervision, political pressure, weak legal infrastructure, and ineffective NPL recovery
strategies.
Khemraj & Pasha (2009) conducted an econometric model based study about NPL in Guyana
that reflects an inverse relationship of GDP with the volume of NPL. The study results
recommended that a progress in country’s GDP contribute to decreasing the NPL.
Karim et al. (2010) in their study shows the relationship between NPL and bank efficiency in
Malaysia and Singapore by using the Tobit regression model. The outcome stated that higher
NPL reduces cost efficiency and also the lower cost efficiency increases NPL and
profitability.
Podder (2012) found NPL, Advance/Deposit ratio, Total Asset, Equity/Total Asset ratio as
some prominent determinants of profitability of banks during the period 2001 -2010 observed
on 30 PCBs in Bangladesh.
Adebisi & Matthew (2015) confirm that the first model of their study revealed there is no
significant association between the NPL and ROA of the Banks in Nigeria. The shareholder’s
return is affected as the second model showed that there is a connection between the NPL and
Return on Equity (ROE) of Banks in Nigeria. Hussain & Ahamed (2015) in their study based
on data for the period of 2012-2016 on top 15 conventional PCBs in Bangladesh and
applying fixed effect panel data regression analysis explores that NPL, TIN, NII, OPEX,
CAP, SIZE, DPST variables are significant to explain ROA.
Bhattarai (2016) has examined the effect of NPL on the profitability of Nepalese commercial
banks and found that the NPL ratio has a negative effect on ROA whereas NPL ratio has a
positive effect on ROE.
Chimkono et al. (2016) investigated the effect of NPLR and other determinants on the
financial performance of commercial banks in the Malawian. The study concludes that
NPLR, cost efficiency ratios, and average lending interest rate had a significant effect on the
performance of banks.
Akter and Roy (2017) found the negative impact of NPL on profitability (Net Interest
Margin). Moreover, Net Profit Margin found also negatively influenced by the
NPL as well while considering 30 banks data of Bangladesh for the year 2008 to 2013.
Balango & Rao K. (2017) investigated that there is a significant association between
profitability and the amount of NPL. The results of the analysis stated that NPL has a
negative and significant effect on ROA while CAR has a positive and relatively insignificant
effect on ROA of commercial banks in Ethiopia.
Kingu et al. (2018) in their study examined the impact of NPL on bank’s profitability using
information asymmetry theory and bad management hypothesis. The study establishes that
occurrence of NPL is negatively related to the level of profitability in commercial banks of
Tanzania.
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Definition of Nonperforming Loans

A Non-performing credit is an advance that is in default or near being in default. Numerous
credits become non-performing subsequent to being in default for 90 days, however this can
rely upon the agreement terms.
As indicated by IMF, meaning of NPLs is
"A credit is nonperforming when installments of interest and chief are past due by 90 days or
more, or possibly 90 days of interest installments have been promoted, renegotiated or
deferred by understanding, or installments are under 90 days late, yet there are other valid
justifications to question that installments will be made in full" (Wikipedia, meaning of
NPLs)
By bank administrative definition non-performing credits comprise of:
● loans that are 90 days or more past due and as yet accumulating interest, and
● Loans which have been set on nonaccrual (i.e., credits for which premium is not, at
this point accumulated and presented on the pay explanation).
Advance may likewise be non-performing in the event that it is utilized in an unexpected
manner in comparison to that for which it has been taken. According to Segment 5 (cc) of
Bank Organization Act 1991, 'defaulting borrower' signifies any individual or foundation
presented with advance, advance conceded for him or an establishment including revenue or
any bit thereof, or any premium which has been late for a half year as per the meaning of
Bangladesh Bank. Non-performing credits are likewise called non-performing resources
(NPA), which are advances, grouped by a bank or a monetary establishment, at the guidance
of the administrative position, on which reimbursements or premium installments are not
being made on booked time. An advance is a resource for a bank as the premium installments
and the reimbursement of the chief make a surge of money inflows. Premium money inflow
is overabundance cash overhead, which is called benefit.
A Banks typically treat resources as non-performing, in the event that they are not overhauled
in booked time. In the event that installments are late for a brief timeframe, an advance is
delegated past due. When an installment turns out to be late (normally 60 days), the advance
is delegated non-performing.
NPL is a total both of the acquired cash whereupon the account holder has not made his/her
booked installments, which is in default or near being in default. When an advance is non-
playing out, the chances that it will be reimbursed in full are viewed as considerably lower.
On the off chance that the indebted person begins making installments against a non-
performing advance, it turns into a performing credit.

Classified Loan
An ordered advance is the term utilized for any advance that a bank inspector has considered
to be at risk for defaulting. The borrower doesn't really have to miss installments request for a
bank to name the record thusly. A borrower can have what the bank calls a grouped credit for
various reasons. This is just a safety measure that monetary organizations take to plan for a
potential misfortune and to forestall any further danger.
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The Bangladesh Bank characterizes a 8-level advance ordering framework, for example,
Prevalent, Great, Worthy, Minimal, Uncommon Notice, Unsatisfactory (SS), Suspicious (DF)
and Awful/Misfortune (BL). This is really the key danger reviewing framework to gauge the
resources' quality. This reviewing should be utilized to check resource quality occasionally.
Downsizing of any office ought to be educated in Early Alarm Revealing (EAR) for dynamic
specialists.
The credits are normally ordered by the loaning bank, at whatever point the bank has
motivations to accept that the borrower would not have the option to reimburse the advance
whether or not the advance is past due or not. Advances reached out by a bank are grouped
into the accompanying three classes.
a) Substandard: Advances which seem generous level of danger to bank by reason of
negative record or other inadmissible qualities.
b) Doubtful: Advances a definitive acknowledgment of which is dicey and in which a
generous misfortune is plausible.
c) Bad/Misfortune: Advances which may not be recoverable at all and whole misfortune
is likely.
Nonperforming Loan in Bangladesh:
The issue of nonperforming advances in Bangladesh is certifiably not another wonder.
Indeed, the seeds were developed during the beginning phase of the freedom time frame
(1972-1981), by the public authority's "extension of credit" arrangements from one viewpoint
and a weak and in firm banking framework joined with an incompetent work power on the
other. The extension of credit strategy during the beginning phase of freedom, which was
coordinated to dispensing of credit on generally simpler terms, did really extend credit in the
economy on ostensible footing. In any case, it likewise produced an enormous number of
stiff-necked defaulters in the foundation who, later on, reduced the monetary soundness of
banks through the "debilitated industry disorder". Notwithstanding the changing and
privatizing of the financial areas during the 1980s with the end goal of expanding proficiency
and rivalry, the strength of the credit climate weakened further as a result of the absence of
viable loan specialists' plan of action on borrowers. Government bearing towards nationalized
business banks to loan to unrewarding state possessed ventures, restricted approach rules
(banks were permitted to arrange their resources at their own decisions) with respect to
"advance characterization and provisioning", and the utilization of accumulation strategies of
representing recording revenue pay of NPLs brought about arrangements of the credit control
of the nation till the finish of 1989.
During the 1990s, be that as it may, a wide based monetary measure was attempted for the
sake of FSRP, enrolling the assistance of World Bank to reestablish financial order to the
nation. From that point forward, the financial area has received "prudential standards" for
credit characterization and provisioning. Different laws, guidelines and instruments, for
example, credit record account, loaning hazard examination manual, execution arranging
framework, financing cost liberation, the Cash Advance Court Act 1990 have additionally
been authorized to advance sound, powerful and tough financial practice. Shockingly, even
after such countless measures, the financial arrangement of Bangladesh is yet to liberate itself
from the hold of the NPL failure. The current examination has focused on the above issues
principally with the end goal of helping policymakers to define solid measures in regards to
sound administration of NPLs in Bangladesh.
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Base for provisioning and accounting treatment of NPLs:

A monetary record thing speaking to reserves put aside by an organization to pay for
misfortunes that are foreseen to happen later on. The real misfortunes for the reserved assets
have not yet happened, however the overall arrangements account is considered a resource on
the monetary record.
The bank supervisors of Bangladesh deduct the measure of revenue suspended and the
estimation of "qualified protections" from the extraordinary sum to decide the base for
provisioning to NPLs. For unclassified advances, in any case, they keep an overall
arrangement (1%) against the remarkable sum and remember it for the cash-flow to decide
the capital sufficiency of the bank (at present 10%). Concerning pay acknowledgment, bank
supervisors don't think about the measure of revenue on inadequate and dubious credits as
pay for the bank, but instead keep it independently in a "premium tension record". Be that as
it may, if any sum is gotten against unsatisfactory and far-fetched credits, the said sum is
deducted from the complete interest tension sum. On account of a terrible/misfortune
advance, the interest on such advance is additionally kept in the interest anticipation account
if a suit is documented in the court. Apparently, concerning inadequate and far-fetched
advances, this premium is likewise prohibited from the pay of the bank. These bookkeeping
measures have made the financial area more straightforward and sound than they were in the
past. (Marge with arrangement).
Trend of the Loan Default Problem in Bangladesh
Emergence of Default Loans
As banking remains the principle mediator vehicle of saddling investible capital for
quickening the development of the profitable areas in Bangladesh, the proceeding with
emergency of collection of non-performing and defaulted banks advances has arisen as quite
possibly the most genuine imperatives in the way of financial improvement of our nation.
Presently we will examine how the advance default issue has arisen in our nation by year-
wise.
Post liberation period
After the freedom of Bangladesh, the Awami Alliance Government's choice to nationalize the
banks and insurance agencies working in Bangladesh ought to be viewed as a coherent
advance yet the assignment of re-association of the nationalized banks in the riotous, war-
attacked and emergency ridden post-freedom years and an extremely quick development of
banking network in rustic Bangladesh made a few issues for the financial area. There was no
time after nationalization as the most bad, wayward, over monitored and fumbled concerns
buried in ocean of intermittent misfortunes in the background of the political and regulatory
naiveté of the post freedom system.
In this situation, the nationalized banks were engaged with two kinds of pressing factor
circumstances, right off the bat, the practically unquenchable interest for credit from the
misfortune making state-possessed endeavors held the banks under steady tension because of
a lack of sufficient liquidity and also the recently arising supposed "folder case finance
manager" with association with governmental issues and lawmakers, top administrators and
top financiers, and resigned military and common civil servants were continually throwing
for admittance to bank credit and in the process were vitiating the work air in the banks by
charming a segment of the broker to enjoy defilement and acts of neglect. Today is currently
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generally perceived that is moguls of Bangladesh came generally from the Positions of those
"satchel financial specialist" and the gatherings referenced, who could effectively set up and
keep up this kinds of benefactor customers relationship with the brokers and in the process
made a large group of tycoons from among those investors themselves, who had effectively
schemed and reaped the unlawful edges in return of the kindnesses apportioned out to those
lucky loaners.
The political changes of 1975 introduced a time of political culture, where in defilement bit
by bit got systematized; the financial matters of lease looking for took firm roots in the body
politic of Bangladesh. Simultaneously, endorsing of bank advances got one of the superb
casualties of the purchasing and selling measure distressing the ideological group alliance
measure, and a mainstream component for giving out monetary kindnesses to party pioneers
just as political frameworks. This politicization of the financial practices has genuinely
hampered the institutional orders of the banks, where proficient skill, trustworthiness and
moral qualities have become exemptions for some degree as opposed to rules. Ex-investor
arose as agents as the recently coasted private banks, however there was no instrument to
make them responsible or to think about the wellsprings of their money. Defaulters of bank
credits taken from nationalized banks or state-claimed advancement account organizations
expand the position of overseers of the recently settled private banks, however no one
mediated for the advance giving banks trapped in the center with defaulted advances. The
laws, rules and guidelines identifying with banking remained generally in the books; and the
legal cycle absolutely neglected to berate the stubborn defaulters, consequently making the
cycle of moneylender's response on borrowers right around a joke in Bangladesh. Thusly, we
deduce that behind every one of these discomforts, the idea of the satiate and of legislative
issues assumed the genuine detestable part by disparaging and building up a class of
'comprador bourgeoisie' in Bangladesh, made, breast fed and continually supported by state-
support, and in this nursing cycle, bank advances were wildly utilized as rewarding gives.
In the eighties, the fast advancement of Bangladesh's import system has made the purported
'wiped out industry condition', which gave a strong reason to a few, and made certified
difficulties with respect to reimbursement of bank credits for the other. The homegrown
businesses have been enduring the worst part of this evil consciously too fast speed of
advancement of Bangladesh's worldwide exchange without proper preliminary approach
measures. The political dejection of the last part of the eighties gave extra reasons to these
growing gatherings of defaulters. The BNP legislature of 1991-96 attempted to stem the
decay in this field in the underlying long stretches of its term. They rehashed the goofs of its
archetype of giving sumptuous consolation to bank administrations to ease and assist the
cycle of term loaning, particularly as indicated by its own political exigencies at the later
expressed of its standard, which added a gigantic measure of fuel to the fire of the purported
'default-culture. Furthermore, prior loaning binges keeps on frequenting the financial segment
even today be supporting the force of the development of the defaulted credits of the previous
twenty years.
The Present status of Loan Defaults Culture in Bangladesh
As loans comprise the most important asset as well as the primary source of earning for the
banking financial institutions and on the other hand also the major source of risk for the bank
management so a prudent bank management should always try to make an appropriate
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balance between its return and risk involved with the loan portfolio. But Banking sectors
recent involving activities, guidelines and their concentration in that is not satisfactory.
The prudential guidelines also call for making adequate “provisions” against classified loans
in order to protect the financial health of the banks are prepared but which is meaningless as
by making provision the number of willful defaulters increasing day by day. The economic
implications of the non-performing/default loans are not only stoppage of creating new loans
but also the erosion of banks profitability, liquidity and solvency, which might sometimes
leader towards collapse of the baking financial system. It has therefore become sine qua non
for policy makers to study the loan default scenario of the banking sector of routine basis for
estimating classified loan, making appropriate provisioning, adopting effective recovery
strategy and thus ensuring soundness and efficiency of the banking sector.
Before privatization and liberalization this banking activities were thus directed to disburse
credit, according to the government’s economic priority, and hence little attention was placed
to identify the problem loans and making provisions thereon, although there was significant
amount of hidden default loans. After 1982, the banking sector of Bangladesh underwent a
rapid denationalization and privatization process. The out of six nationalized commercial
bank Uttara Bank and Pubali Bank were denationalized in 1983 and 1984 respectively with a
view to increasing the efficiency of the banking sector. Henceforward, private bank were
allowed to conduct banking operations in order to increase, competition, reasons, the
efficiency and productivity of the banking sector. But due the various reasons, the efficiency
of the banking sector did not increase rather the credit discipline was further eroded.
The very frequent and fashionable style of loan defaulting story in banking sector of
Bangladesh is loan scam. Recently a series of scams has started threatening the banking
sector in a great way. Last year, Sonali Bank loan scam started the episode and is continuing
with Bismillah loan scam, Basic Bank loan scam and so on in a large scale. The story of all
episodes is almost same and follows a cycle.
According to Anti-Corruption Commission, 41 reputed commercial banks in Bangladesh
were involved actively in Sonali bank scam of Tk.3665 crore with Hallmark (The Financial
Express). Over 100 branches of seven state-run banks, 29 private banks and five foreign
banks patronized that loan scam according to them.
In 2009, Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangsta were merged due to
huge amount of NPL in both of them. The operational activities of BSRS came to a halt,
when its classified loans reached up to 85 to 90 percent of its total portfolio. The situation
was almost same for BSB although it tried to expand its deposit collection on its own rather
than rescheduling the previous non-performing loans. It had about Tk 250 crore classified
loans on the eve of being merged, according to media reports.
Present Status of Non-performing Loans:
Source: Bangladesh Bank
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Causes of Nonperforming Loans

A. ENTREPRENEURS RELATED
A1: Lack of business experience.
Some of the time individuals without earlier business experience need to accomplish
something. It might so happen that after retirement from govt. or on the other hand private
help individuals need to set up a business, which isn't pertinent to his past experience. Other
than his own value they search for bank money. Ordinarily banks don't fund in the
undertakings where the key staff need more foundation in that specific business. At the point
when banks money in the ventures here the key faculty need important business experience, it
gets dangerous for the bank. Likelihood of disappointment in such activities will in general
be higher.
A2: Lack of Business and Lack of Institutional Training Background.
Business experience is by one way or another identified with business foundation. Her
business foundation implies privately-owned company foundation. Despite the fact that
privately-run company has a part in enterprising direction, there is no immediate connection
between business foundation and business execution of credit reimbursement. The facts
demonstrate that adolescents coming from business foundation know about business and
banking yet there are alternate approaches to get arranged with the equivalent, not really one
needs to come from business family.
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A3: Unwillingness to Pay

We as a whole realize this is quite possibly the most well-known explanations for default
culture in Bangladesh. It can occur in certain circumstances like when security-backing credit
is feeble; client feels that defaulting the advance won't hurt him much. All things considered
he will in general default. In different cases like when income from the business isn't great,
individuals are reluctant reimburse the advances.
A4: Lack of Supporting Facilities
Now and again business need uphold from different sources like government authority. At the
point when income is lean and the venture is in respite, it needs taking care of. Minus any
additional taking care of organization may get debilitated and bring about misfortune in back
to back time spans. In our nation the majority of the organizations don't have the supporting
sources with which they can withstand the strife that comes in to their business occasionally.
B: BUSINESS RELATED
B1: Non-attractive Industry
At times non-appealing industry goes about as essential driver of advance default.
Organizations working in non-appealing businesses have higher likelihood of performing
poor. In view of poor monetary execution, organization's income gets influenced. Due to
income the organization turns out to be less fluid which contributes in defaulting bank credit.
Not really that all the organizations no non-appealing industry perform poor. For instance:
assume in Bangladesh Jute industry is one of the non – alluring enterprises. Presently any
speculator need to put resources into this area might be cause misfortune. So this financial
specialist can't pay the interest.
B2: Strong Competition
Solid rivalry doesn't straightforwardly contribute in defaulting advance. Solid rivalry happens
when numerous organizations go into an industry where the business can't oblige such
countless organizations. In solid rivalry just productive players endure. So the wasteful
organizations think that it’s hard to make benefit and deal their item. When they neglect to
make benefit, the organization is probably going to default its advance portion in the bank.
B3: Poor Management capability
Prior to endorsing a credit banks investigate the issue that how the administration of the
organization is. On the off chance that the bank feels that the administration is adequately
competent to effectively maintain the business and use bank account, at that point bank
consent to back in any case not. Indeed, even now and then banks sets conditions like a
portion of the key work force should not stop the association before reimbursement of the
advance. Administrative ability assumes essential job in reimbursing bank credit. The more
expert the administration is, the less is the likelihood of defaulting advance.
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B4: Poor Financial Performance

Unquestionably poor monetary execution is the main source of credit default. When an
organization isn't dissolvable, it is probably not going to reimburse its advance. Poor
monetary execution is the vital explanation for greatest advance default. Poor monetary
execution can be emerged from numerous different reasons portrayed previously.
B5: Poor Cash Flow
By and large helpless income is the result of poor monetary execution. Due to helpless
income organizations predominantly default advance. On account of unpredictable income,
business gets unsteady and illiquid. All things considered business needs more money to
support credits installment and premium. Regardless of whether an organization is beneficial,
the organization may default due to income. Now and again, a business may sell the greater
part of its completed merchandise using a loan. So it might not have enough money to help
the credit and different obligations. So it might cause default.
B6: Low Market Share
Low piece of the pie might be an explanation of advance default yet not a solitary respondent
referenced it as one reason of their credit default. Low piece of the overall industry implies
low deals, low deals mean low benefit and low benefit results default. Working in a specialty
market, having a low piece of the overall industry a firm can be adequately productive to
reimburse its whole advance commitment just as hold sizable procuring. In any case, working
in specialty item in a market which isn't appropriate or have less clients that it expected then
it can't be productive. So it can't pay its advantage installment.
C: LENDING RELATED
C1: Delayed Assessment of Loan Proposal
Banks sometimes make delay in assessing loan proposals of the business firms. When the
firm badly needs money, it does not get enough funds because of delayed assessment by the
bank.
This infuses shortage of cash in their business operations. They hardly manage their day-to-
day business expenses let alone repayment of the loans.
C2: Delayed Disbursement of Fund
Even after assessment of the proposal and taking positive decision, banks do not disburse
funds until security documentation formalities are completed. As a result business do not get
fund when actually it requires it. Some of the defaulters complained about subsequent
disbursements.
C3: Lack of Proper Monitoring
Monitoring is one of the most important parts for financial institutions. Through monitoring
lenders come to know that whether their fund is being used for the desired purpose or not.
Sometimes disbursed money is used for purposes other than the specific areas. In that case
risk of loan default gets higher. Banks sanction loan on the basis of feasibility of the project.
Bank as a lender expect that the loan will be serviced by the cash flow generated from that
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particular business. But if credit is used in some other areas desired cash flow may not come
from the business and chance of loan default gets high. Therefore banks monitor activities of
the borrower whether the fund is being properly utilized or business is generating enough
cash flow or not. Banks use specialized formats for loan monitoring. Bank periodically
review the performance of the borrower and based on that bank decides whether to renew the
facilities or not. The tools used for monitoring are portfolio reviews, profitability analysis etc.
before diverse loan, Banks can check the credit rating of the organization. Banks can generate
information about borrowers from Bangladesh Bank. Then banks can decide how much
money investor needs and how much money he will be invested. Valuation culture of the
security or collateral is absent in many of banks.
C4: Lack of taking Proper Action
Action comes after loan monitoring. Monitoring is done for identifying deviations or
exceptions. If there is any exception then corrective action needs to be taken. If corrective
actions are taken on time chance of default loan reduces. When Customer misses one
installment, concerned officer of the bank must visit the customer and understand where the
problem lies. If proper action is taken, probability of loan default is reduced
D: MACROECONOMIC FACTORS
D1: Low GDP Growth
It is clear that organizations which bargain in buyer items are straightforwardly influenced by
the GDP development of the whole economy. Standard clients and defaulters have believed
that this full scale pointer impacts the money age of an organization and consequently the
reimbursement of the credit.
D2: Increasing Crimes
It is revealed that the effect of the increasing crimes in the business of the companies. They
think that forced subscription sometimes make the profitability of the company lower.
D3: Hartals by the Political Parties
Political instability of the country hampers the production and the distribution of the products
in a smooth way and the political turmoil is considered one of the other causes of the loan
default in our country.
D4: Frequent polity Changed by the Government
Government is considered as the minor reason for the advance default according to the study
since it little affects the neighborhood deals and dispersion of the results of the organizations.
For instance: in this spending government increment charge on cell phones which are
imported from unfamiliar nation, so cell phone shipper may not produce anticipated income.
So merchant couldn't standard their advantage installment. So they could be defaulter.
Without these are different causes, for example, blemished loaning practice, absence of
investigation of business chances, absence of appropriate valuation of security or home loan
property, excessive impact by borrowers, outside pressing factor, credit go Govt. association,
Govt. strategy for payment of credit, absence of lawful activity.
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Effect of NPLs
Impacts of NPL are, for example, Stopping Money Cycling, Earning Reduction, Capital
Erosion, Increase in Loan Pricing, Frustration and so forth subsequently, the estimations of
security are expanded and the dangers of monetary downturn additionally see an ascent.
Intensifications of the impact of NPL are as per the following:
1. NPL can prompt proficiency issue for the financial area. It is found by various financial
analysts that faltering banks will in general be situated a long way from the most-
effective wildernesses, since banks don't advance their portfolio choices by loaning not
exactly requested.
2. There is a negative connection between the non-performing advances and execution
proficiency. In this way, increment in NPL hampers the performing advance. A large
portion of the cases, it happens when there is an unfriendly determination. Disinclined
determination is lopsided data issue that happens before the exchange. For instance:
huge daring people or altogether convicts may be the most anxious to apply for a new
line of credit since they realize that they are probably not going to take care of it. Since
antagonistic determination expands the odds that an advance may be made to a terrible
credit hazard, bank may choose not to make any advances, despite the fact that there are
acceptable credit chances in the commercial center.
3. NPL makes the Credit Crunch circumstance. Credit crunch is a marvel that banks
apportion advance payment and new credit responsibilities to ensure, however add more
dangers. Banks treat credit as a resource. They anticipate get back from it. In the event
that advances become NPLs, at that point banks have absence of asset to give credit
concurring their responsibility or banks could give advances at their past loan fee.
Customers need to pay more. So advances might be defaulted. Credit crunch likewise
expands the pace of NPL.
4. There is a cyclic connection between poor financial condition and the discouraged
monetary development as follows:
5. During the emergency second, to reestablish the validity among leasers and investors,
bombing monetary establishments attempt to extend their value bases, yet in addition
decrease their danger resources or change the structure of the resource portfolio. Due to
such guarded activities, the corporate account holders are constantly focused on, along
these lines the financial development is being slowed down generally speaking. Banks
attempt to gather advances sum as quick as could reasonably be expected and the vast
majority of the banks have gigantic number of corporate customers so they attempt to
recuperate those advances as right on time as conceivable to decrease unsafe resources.
6. Money cycling gets halted because of expansion in NPL. Slow streaming of money
consistently has negative effect on any business.
7. When the NPL is expanded, premium procuring gets halted. However, the expense of
asset and the expense of the executives are not halted. To run the administration cost
alongside the expense of asset, the current loaning cost must be expanded. Unexpectedly
expanded pace of revenue makes hard the arrival of bank cash for another borrower. So
pace of speculation will be lower.
8. NPL influences opening of LC (Letter of Credit). Worldwide shippers consistently pick
sound state of the exporter's bank. More terrible medical issue of the bank influences the
kickoff of new LCs. Low pace of LCs makes low bank acquiring.
9. NPL exists as a characteristic result of loaning conduct. At the point when banks re-
balance their portfolio, they settle on the level of dangers they will endure for a given
degree of expected return as indicated by their danger inclination since banks need to
keep 10% of their danger weight resource as capital or 400 centers. Banks regards
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advances as a hazardous resource. On the off chance that the danger is high, banks will
anticipate exceptional yield. At the point when the degree of non-performing advances
goes past a specific point banks can't acknowledge, and afterward it influences bank's re-
adjusting activities. Thus, when NPLs cross the limit of the above edge, they begin to
produce negative consequences for additionally loaning.
10. NPL has a positive relationship with loan cost. At the point when NPL expands, advance
which is stepped as resource turns out to be more dangerous. With the goal that the pace
of interest additionally increments to get adequate retune from the credit to cover the
danger.
Recommendation
1. No trade off with due ingenuity in the authorizing cycle. Remembering "avoidance is
superior to cure."Banks should take high security. In the event that a borrower defaults
on a credit, the moneylender can sell the guarantee and go through the returns to make
for the misfortune. The security or insurance gave should be esteemed by legitimate
organization or set up on a standard 'imprint to showcase' valuation measure.
2. Action arrangement for possible NPLs. Banks ought to have some progression to gather
the NPLs advance. Toward the end banks should go to Artha Rin Adalat.
3. Identification of profoundly hazard delicate borrowers in the credit portfolio. Banks
should take data about the customers prior to giving advances. Banks could go
Bangladesh Bank to gather the data and check the fiscal report cautiously from
dependable sources to distinguish the hazardous borrowers.
4. Identification of geological zone insightful danger affectability. Banks ought to
distinguish the customers agreeing territory savvy that is mean in Bangladesh, there is a
few spots where development rate is low or pace of reimburse rate is low.
5. Targeting high worth end NPL accounts (having openness of Tk. 5.00 crore or more)
6. Prompt activity using a loan reports
7. Capacity structure of officials and heads in the recuperation office. Banks should give
appropriate preparing to worker. So they can deal with advances appropriately. On the
off chance that there is shy of involvement worker, bank should enroll experience
representative for recuperation division.
8. A hearty danger the executive’s culture, with a 'very much expressed' hazard the board
strategy can assist the establishments with keeping away from such advance default.
Conclusion
Our financial area is described by low benefit and deficient capital base in light of the fact
that there are loads of banks in Bangladesh. Banks income comes from spread (Lending rate
– acquiring rate).But there is immense rivalry among banks. So the benefit is minimum. The
core of the issue lies in the gathering of high level of non-performing credits throughout an
extensive stretch of time. The issue is generally serious for NCBs and DFIs.
Notwithstanding, beginning from a high pace of 41.1% in 1999 it descended continuously to
11.90% in 2013 as indicated by most recent distributed information. All things considered, it
is high by any norm. Except if it tends to be brought down generously we will lose serious
edge in the flood of globalization of the financial help that is occurring all through the
world. We have had a two-long term insight in managing the NPLs issue and much is
thought about the causes and cures of the issue. Lamentably, the financial framework is as
yet troubled with a disturbing measure of NPLs and lingers a long ways behind the
neighboring nations of India and Sri Lanka. Despite the fact that Bangladesh has to an
enormous degree embraced worldwide principles of credit classification and provisioning,
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the administration of NPLs is discovered incapable, as the framework has neglected to

capture new NPLs significantly. It should be referenced that administration of NPLs should
be multi-pronged, with various methodologies sought after at the various stages through
which a credit office passes. Measures ought to be set up for both counteraction and goal.
Concerning preventive measures, accentuation should be set on layaway screening, advance
observation and credit audit functionaries both at singular bank levels and in the national
bank of the nation. Goal estimates should be joined by legitimate measures, for example
improving the effectiveness of the lawful and the legal framework and creating other out of
the court settlement estimates like trade off settlement plans, motivation bundling,
development of resource the board organizations, calculating, and resource securitization,
etc. Lamentably, Bangladesh is discovered to be frail from the above perspective, and
carefully talking, it has essentially focused on a couple of legitimate estimates that have
likewise been discovered to be insufficient. Hence, this examination has featured a few
difficulties, demonstrated as follows, for improving the obligation recuperation climate and
tackling the NPL issues of the nation too.

References
1. Bangladesh Bank Annual Report 2012-2018
2. Adhikary, B. K. (2008), “Nonperforming Loans in the Banking Sector of
Bangladesh: Realities and Challenges”, Ritsumeikan Journal of Asia Pacific
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3. Bhattarai, Y.R. (2016), “Effect of Non-Performing Loan on the Profitability of
Commercial Banks in Nepal”, International Journal of Business & Management,
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4. Kingu, P.S., Macha, D.S. & Gwahula, D.R. (2018), “Impact of Non-Performing
Loans on Bank’s Profitability: Empirical Evidence from Commercial Banks in
Tanzania”, International Journal of Scientific Research and Management, Volume
6 Issue 1, pp (71 -78).
5. Banking Sector : Current Status Bangladesh Economic Update December 2018.
6. http://en.wikipedia.org/wiki/Non-performing_loan
7. Www. yahoo.com
8. Islam, M.A. & Rana, R.H. (2017), “Determinants of Bank Profitability for the
Selected Private Commercial Banks in Bangladesh: A Panel Data Analysis”, Banks
and Bank Systems, Volume 12 Issue 3, pp (179-192).
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Dorling Kindersley(India) PVT. Ltd.
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Profitability: An Empirical Study on Banking Sector of Dhaka Stock Exchange”,
International Journal of Economics and Finance, Volume 9, Issue 3, pp (126-132).