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Management of Non-Performing Loans (NPLs)

of Banks in Bangladesh -An Evaluative study

Article in Journal of Economics and Finance September 2013

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 International Academic Research
Journal of Economics and Finance
Vol.No.1,Issue No.3, Page no.1-15. ISSN Number : 2227-6254 (Print)

Management of Non- Performing Loans

(NPLs) of Banks in Bangladesh
-An Evaluative study
Firoja Akter khanam Kamrul Hasan A.H.M. Rakibul Mawla Assistant Rehnuma Sultana Khan
Assistant Professor Assistant Professor Department Professor Department of Lecturer
Department of Finance & of Business Administration Statistics University of Department of Business
Banking Southern University Bangladesh Chittagong Administration
University of Chittagong e-mail: kamrul6205@yahoo.com Southern University Bangladesh
e-mail: rehnukhan@yahoo.com
E-mail: fa.khanam@yahoo.com

ABSTRACT

This paper discusses the magnitude of Non-performing Loans (NPLs) in the banking sector of
Bangladesh. The paper reveals that the presence of an alarming amount of NPLs both in
Nationalized Commercial Banks (NCBs) and in the development Financial Institutions (DFIs), along
with maintenance of inadequate loan loss provisions , diminishes the overall credit quality of
Bangladesh. The study investigated the different causes of Non- performing loans. Using a sample
of 30 managers selected from the ten largest banks, the study found that influence of politicians
was perceived as the most important external factors. Diversion of fund by customer, failure to
disclose vital information during the loan application process were considered to be the main
customer specific factor. The study further found that lack of aggressive credit collection policy
was perceived as the main bank specific factor, contributing to the nonperforming loan problem in
Bangladesh. The study reveals that some actions that are taken by the managers for reducing NPLs.

Key words: Non performing loans, Bank specific factors, Client specific factors, external factors.

PRELUDE multiclass concept which means that NPLs can be

In recent decades a large number of banks have
experienced financial distress of varying degrees
of severity and some have suffered repeated bouts
of distress. (Hardy, 1998). According to kroszner
(2002), non-performing loans are closely related
with banking distress. Sultana (2002) also links
Japanese financial crises to non performing loans.
Kenya has experienced banking problems since
1986 culminating in major bank failures (37 failed
banks at 1998).The crises were mainly attributed
to NPls (Waweru, etal.2007).
Non performing loans (NPLs) refer to those financial
assets from which banks no longer receive interest
or installment payments as scheduled. They are
known as non performing because the loan ceases
to perform or generate income for the bank.
Chowdhury, etal (2002) states that the non
performing loan is not a uni class but rather
classified in to different varieties usually based on
the length of overdue of the said loans. NPLs are
viewed as a typical by product of financial crisis,
they are not a main product of the lending function
but rather an accidental occurrence of the lending
process , one that has enormous potential to
deeper the severity and duration of financial crisis
and to complicate macro economic management.
(Woo,2000).
Non-performing loans can be treated as
undesirable outputs or costs to a loaning bank,
which decrease the banks performance (Chang,
2001). Prudent risk assessment and creation of
adequate provisions for bad and doubtful debts
can cushion the bank risk. However, when the
level of non-performing loans (NPls) is very high,
the provisions are not adequate protection.
Carse (2002), stated that high level of non
performing loans severely damages the
 2 International Academic Research Journal of Economics And Finance
confidence in the banking system. If bank lose
public confidence, it will lose domestic deposits and
will find itself unable to rollover short term external
borrowing. With the shrinkage of deposits and
impaired the capital and liquidity, the banks are in
no position to lend and this lead to the
phenomenon of the credit crutch and it results the
shrinkage of the real economy. Research scholars
suggested that banks have to extent credit wisely,
objectively and impartially and it will ensure
economic stabilization.
The issue of nonperforming loans in Bangladesh is
not a new phenomenon. In fact, the seeds were
cultivated during the early stage of the liberation
period (1972-1981) by the governments expansion
of credit policies on the one hand and a feeble and
infirm banking infrastructure combined with an un
skilled work force on the other
(Islam,etal.1999).Moaral etal.(2000) argue that the
expansion of credit policy during the early stage of
liberation which was directed to disbursement of
credit on relatively easier terms, did actually expand
credit in the economy on nominal terms. However
it is also generated a large number of willful
defaulters in the background who, later on
,diminished the financial health of banks through
the sick industry syndrome. Government has been
taking various reform programs since 1991.
As a result, volume of non-performing loans has
been decreasing from 2000. At the end of 2008,
average non-performing loans of all commercial
banks reached at 13.15 percent, still it is much
higher than the internationally acceptable tolerable
range, thus is a threat to our banking sector. The
decrease of non-performing loans during this period
is mainly attributed to the write offs made by some
banks to clean their balance sheet (Mahmud, 2005).
The present research sought to document the
causes of non-performing loans in Bangladesh and
the relative importance of these causes with the
help of questionnaires send to bank officials. The
research also put on record the level of success of
the steps taken by the bank management to
improve the management of non- performing loans.
September
REVIEW OF RELATED
LITERATURE
According to a study by Brown Bridge (1998),
most of the bank failures were caused by non-
performing loans. Many of the bad debts were
attributable to moral hazard; the adverse
incentives on bank owners to adopt imprudent
lending strategies in particular insider lending and
lending at high interest rates to borrowers in the
most risky segments of the credit markets. Goulet
and David (1996) suggest that there are several
measures that can significantly reduce the
incident of each of the factors underlying banking
crises for example, greater macroeconomic
stability, a larger role for foreign owned banks,
the wider use of market-based hedging
instrument and higher levels of bank capital would
help to make the consequences for the domestic
banking system less damaging.
Gold stein and Turner (1996), opined that strict
asset classification and provisioning practices
could reduce the increases of bad loans and
protection against loan losses. According to the
Bank of Japan (2003), the remedies to the
problem of Non-Performing loans can be grouped
in to three broad categories, all of which work
towards enhancing the banks earning power
Firstly, is to further improve efficiency through
cost reduction. Secondly is to pursue a new
lending strategy backed by appropriate credit risk
evaluation and third is to provide new financial
services to increase fee income.
Reddy (2002) said that appropriate provisioning
for non-performing assets up to 50% of gross
non-performing assets has been successfully
used to cushion banks agents the debilitating
effects of non-performing loans.
Siddique (2008) has conducted a research on
Nonperforming Loans in Bangladesh Banking
sector: Some issues and observations. He
examined the status of NPLs for the period
 2012 Firoja Akter khanam, Kamrul Hasan, A.H.M. Rakibul Mawla and Rehnuma Sultana Khan
1997-2007. He also analyzed the classification of
nonperforming loans in a category of banks. In a
conclusion he pointed out some suggestions to
deal with the NPL problem. Uddin (2006) has
conducted a study on Non Performing loans of
Banking Sector in Bangladesh: The Anatomy of a
crisis. In his study, he measured the NPL in
absolute and relative terms in Bangladesh vis--vis
some selected countries of the world. He also
reviewed the past and present policies on loan
classification and provisioning system. He also
pointed out some remedial actions for reducing
NPLs in Bangladesh. But No extensive study has
been done on Management of Non-performing
loans in Bangladesh. Against this back drop, the
present study has been under taken to reduce the
research gap.
OBJECTIVES OF THE STUDY
The objectives of the study are as follows:
1. To examine the present loan
classification system in Bangladesh
2. To examine the present status of Non-
Performing loans in Bangladesh.
3. To examine the causes of Non-Performing
loans.
4. To find out the problems arises from Non
performing Loans.
5. To examine the steps / actions taken by the
bank manager for reducing NPLs.
RESEARCH METHODOLOGY
Both primary and secondary data were used in the
study. Primary data were collected through
questionnaires prepared by the researchers which
was given out to the Bank officers . For this purpose
10 private commercial banks, 2 public sector banks
and 2 foreign banks are selected purposively. The
questionnaire was developed from an extensive
review of literature and was designed on the basis
of research objectives. Completed questionnaires
were collected directly from the respondents. Data
were analyzed using the SPSS software packages.
Secondary data were collected from relevant Govt.
3
publications, published books, articles in journal,
newspapers, scheduled bank statistics, Annual
Report of Bangladesh Bank. Simple regression
analysis was used to test the relationship between
the perceived success of actions taken by
managers (dependent variable) and the
independent variable, (actions taken by
managers). The model is shown below:
Y=A+Bxi
Where, Y is the dependent variable, are the total
scores of success of each of the actions taken by
the managers.
A- is the constant, B- is the independent
variable.
Xi- are the observed number of managers
who said yes to each action
FINDINGS AND THEIR ANALYSIS
Loan Classification and provision systems
used in Bangladesh
Since 1989, Bangladesh follows both Overdue
criteria and qualitative criteria to deem a loan
classified or un classified. According to overdue
criteria as suggested by Bangladesh Bank, Bank
managers usually divide all loans in to five
categories (continuous loan, demand loan, term
loan payable within five years, term loan payable
in more than five years and short term agricultural
/Micro credit) and then observe period elapsed
for repayments. All troubled loans are t h e n
further reclassified as special mention account
(SMA). Further in order to keep the management
up to date about the status of loans , bank
manager review the loan quality on a quarterly
basis. With some exceptions the banking sector
at presents follows a norm of six months overdue
For deeming loan non-performing. The rate of
provision on classified loans follows norms of 5%,
20%, 50% and 100%.against special mention
accounts, substandard , doubtful and bad/loss
loans respectively. The current loan classification
and provisioning system (in a summary form) in
use in Bangladesh is shown in Table-1.
 4 International Academic Research Journal of Economics And Finance
According to the qualitative judgment criteria s ,
bank managers classify of recovery of the loan due
to the following reasons:
a. Credit extended without approval of
competent authority or without any logical
basis (under pressure)
b. Incomplete documentation
c. Insufficient security or drastic fall in the
value of security
d. Borrower sustains heavy loss in capital due
to natural calamity or business condition.
e. Frequent overdraw of limit.
f. Rescheduling terms are not maintained.
g. Borrower cannot be traced or death of the
borrower.
h. Filing a suit against the borrower
for recovery of credit.
International Standard of loan classification and
the status of Bangladesh:
Being a member of the world bank , Bangladesh
needs to compare its loan classification and
provisioning system with the international standard.
In order to facilitate the same , the standard
international system of loan classification and
provisioning is shown in the table-2.
In comparison to the international Standard of loan
classification and provisioning , it is found that
banking system of Bangladesh follows a 4 stages
(SMA, sub standard, doubtful, and bad/loss) to
define the status of a classified loan, as opposed
to three stages (sub-standard, doubtful and
bad/loss) used in the international standard while
the international standard provides the norm of 3
months ,overdue for terming a loan sub-standard,
this period is used in Bangladesh as the norm of for
terming a loan a special mention account. In
addition , Bangladesh shows more flexibility than
the international standard in the classification of
long term loans. How ever , in the case of provision
and frequency of classification , Bangladesh follows
the international standard to a great extent. In the
final analysis, it can be concluded that the present
loan classification and provisioning system in use
September
in Bangladesh is similar to a great extent to the
international standard.
Problems of Nonperforming Loans: In a bank-
centered financial system, NPLs can thwart
economic recovery by shrinking operating margin
and eroding the capital base of the banks to
advance new loans. This is sometimes referred
to as credit crunch (Bernanke et al., 1991). In
addition, NPLs, if created by the borrowers
willingly and left unresolved, might act as a
contagious financial malaise by driving good
borrowers out of the financial market. Further,
Muniappan (2002) argues that a bank with high
level of NPLs is forced to incur carrying costs on
non-income yielding assets that not only strike at
profitability but also at the capital adequacy of a
bank, and in consequence, the bank faces
difficulties in augmenting capital resources. Bonin
and Huang (2001) also state that the probability
of banking crises increases if financial risk is not
eliminated quickly.
Such crises not only lower living standards but
can also eliminate many of the achievements of
economic reform overnight. The above figure
illustrates the catastrophic effect of NPLs in a
bank-centered financial system. Having such a
system, Bangladesh needs to study the condition
of NPLs on a routine basis in order to augment
investible capital in the productive sectors as well
as to ensure sustainable economic growth.
Examination o f non-performing loans in
Bangladesh:
Non- performing loans is one of the burning
problems of banking sector in Bangladesh owing
to its multifarious adverse impact on so many
banking variables in general and on profitability
and solvency position in particular. The assets
composition of all commercial banks shows the
concentration of loans and advances in total
assets. The high concentration of loans and
advances indicates vulnerability of assets to
credit risk, especially since the portion of
nonperforming assets is significant. A huge
 2012 Firoja Akter khanam, Kamrul Hasan, A.H.M. Rakibul Mawla and Rehnuma Sultana Khan
infected loan portfolio has been the major
predicament of banks particularly of the state
owned banks. In such a context it is worthwhile to
look into the position of NPLs in banking sector and
the share of NPL by types of banks. The table -2
(see in Appendix-1)shows the present status of
NPls in Bangladesh.
Table-2 shows the comparative and percentage of
NPls to total loans of all banks in Bangladesh from
1999 to 2008. From table, it is revealed that the
trend of NPls was increased from 1999 to 2001 and
decreased from 2002 to 2008. In the year 2001, it
was highest (41.91%) and in 2008 it was lowest
13.23%. It is also observed that NCBs occupies the
highest NPls during the study period followed by
DFIs, PCBs and FCBs. The consistent decline of
the of Nonperforming loans is the result of
strengthened loan recovery mechanism by the
commercial banks, write off measures recently
introduced in the banking sector and other
measures taken by the banks.
Examination of loan scheduling policy
Bangladesh Bank, (BB) as the central Bank, time
to time takes various policies for loan re-scheduling
to maintain the credit quality and to ensure smooth
recovery of it. On December, 11, 1995, BB via its
circular (BCD Circular No. 18) formulated a policy
guideline of loan rescheduling. This re-scheduling
policy contained the following rules:
1. Application should have been properly
considered and approved by proper authority.
2. Borrower has to pay a minimum 10% of
overdue amount with application
rescheduling.
On January, 13, 2003, BB changes the previous
re-scheduling rules and issued a new guideline via
its circular (BRPD circular, No. 01). The new
guidelines were as follows:
a. Bank should audit the causes of loan default.
During audit, if it is deemed that diversion of fund
5
b. Bank should evaluate the repayment ability of
borrower by examining the loans of borrower
to other Banks.
c. Bank should analyze the cash flow statement,
audited balance sheet, income statement and
other financial statements in order to judge
the repayment capacity of borrower.
d. Bank officer should inspect the borrowers
business in order to ensure that borrower would
be able to repay the loan after rescheduling.
e. The effect of rescheduling on bank income and
its implications there of should be submitted
to board of directors.
Bangladesh bank also set some rules of
rescheduling. The rules are presented in the
table-3.
Examination of the causes of Non-Performing
loans:
To identify which causes are mostly responsible
for NPls in Bangladesh. The researcher studied
existing literature, took bank officials and clients
responses and identified various causes of
problem. Respondents were asked to pass their
opinions to what extent they are agreed with
these causes. In the opinion survey, the study
used 5 points scale. The scale ranges from
strongly agree to strongly disagree where
strongly agree was awarded 5 points, agree
was awarded 4 points, indifferent was awarded 3
points, disagree was awarded 2 points and
strongly disagree was awarded 1 point. By
adding together respondents score, ranking are
made to identify which causes are mostly
responsible for bad loans in Bangladesh. The
total causes of NPls are divided in to three factors
of viz, General factors, Bank specific factors and
clients specific factors. The survey results are
presented in the table - 4.
Table-4 summarizes the general factors
perceived to have contributed to the increase in
no-performing loans. General factors are
described as those considered to be outside the
direct scope of the bank management. According
to the result, political influence was ranked first
 6 International Academic Research Journal of Economics And Finance
(135), followed by national economic down turn
(133), poor industry analysis (130), reduced
consumer buying ability (124) and legal issues
(124). Seventeen respondents (66.67%) strongly
agreed that influence of politicians was a major
cause of NPLs. The remaining 33.33% agreed that
this was a major factor. Further all the respondents
agreed/strongly agreed that national economic
down turn was also an important factors. Forty three
percent strongly agreed while the remaining fifty
seven percent agreed. According to the results,
most of the respondents (64%) agreed that legal
issues contributed to the increase in levels of NPls.
Twenty six point seven percent (26.7%) strongly
agreed and 10% neutral.
Now, the following table-4 summarized the bank
specific factors that were considered to have led to
the deterioration in the asset quality in the banks
surveyed. These factors are described as those
considered to be within the direct scope of the bank
management.
According to the findings, lack of aggressive credit
collection policy was rated the most important factor
(119) while the poor credit risk assessment and
untrained personnel was ranked second (117)
followed by the speedy process in granting loans
(116), Bank negligence in monitoring loans (100)
and insider lending (99). Sixty percent respondents
agreed that poor credit assessment and untrained
personnel contributed to the high NPls. While fifty
six percent respondents opined that lack of
aggressive credit collection methods was a major
factor for NPls. Fifty percent of the respondents
agreed that bank negligence in monitoring loans
and insider lending have contributed to the problem
of NPls. Now, the following table-6 summarizes the
borrowers specific factors perceived by the
respondents as having increased borrowers default
rate.
Table-6 depicts that the inappropriate use of loan
or diversions of fund by the clients was ranked first
(125) for NPls, followed by failure of debtor to
disclose vital information in their loan application,
(124), clients start new business without experience
September
(118) was ranked third followed by insufficient
collateral (110) .Eighty three percent of the
respondents (83%) agreed that diversion of fund
by borrowers is the major factor for high NPls.
While the fifty four percent (54%) felt that bank
clients started new business without having no
experience. Forty percent respondents felt that
debtors conceal some vital data in their
applications and this was a cause of Npls. The
table-7 shows the major factors that causes
Non-Performing loans of Banks in Bangladesh.
Table-7 shows that the major six factors were
found out from different tables that causes NPls
considering the respondents opinion. The result
depicts that influence of politicians was ranked
first (135), National economic down turn ranked
2nd (133), poor industry analyses ranked 3rd
(130). Diversion of fund ranked fourth (125),
Debtors conceal vital data in loan application
ranked fifth and the lack of aggressive credit
collection method ranked sixth (119). We may
conclude that general factors and clients specific
factors are perceived to be the main causes of
non-performing loans in Bangladesh.
Examination of actions taken by bank
managers
The study examined how many techniques credit
officers are used in handling bad loans. The
following table summarizes thirteen different
actions that banks have adopted over time in
order to reduce the default rate in their respective
banks.
It is revealed from table-8 that, increased credit
information during loan application and
rescheduling of loans were ranked first with 30
respondents (100%) agreeing that these were the
best actions that had been taken by the banks.
The majority of the managers surveyed (96.4%)
felt that waiver of interest is another important
actions. Most of the respondents (90%) felt that
emphasis on credit worthiness of borrowers and
use of procedures for mgt of problem loans were
the significant actions for reducing NPLs.
 2012 Firoja Akter khanam, Kamrul Hasan, A.H.M. Rakibul Mawla and Rehnuma Sultana Khan
The result shows that majority (93.3%) of the
respondents opined that there had been
improvement in training of loan officials. The
majority of the managers surveyed (76.4%) felt that
the banks were not involved enough in
government policy formulation. Only 24% said that
banks were involved. Use of specific limits and
ration in the evaluation process is widely used as
a way of reducing the risk of default according to
the 90% of the respondents 83.3% of the
respondents felt that emphasis on forecasts and
feasibility studies was a method used by their
respective banks to manage lending risk. Further 8
respondents (26.67%) felt that increased use of
credit reference bureaus was another action that
may reduce NPLs.
There is a significant difference between the
managers who are taking above specified actions
those who were not (t=5.768, p=0.0015) Further
more, 79.58% of the respondents supported the
above specified measures. We may there fore
conclude that the taking actions specified above
would reduce the problem of non-performing loans
in Bangladesh.
Examination the level of success of the actions
of managers
As to the factors considered while determining the
level of success achieved by the actions of
managers in attempting to reduce bad loans in the
bank, the concerned managers were requested to
give their opinions on basis of 5 point scale. Their
responses have been summarized in the table - 9.
The table-9 reveals that 83.3% of the respondents
felt that the success achieved in controlling NPLs
through rescheduling of loans was very good.
66.67% of the respondents felt that the success
achieved through waiver of interest was very good
while the remaining 33.3% felt that it was average.
The results indicate that information sharing among
banks about borrowers was a success. 66.67% of
respondents opined that it was very successful
action while only 6.7% thought that it was not
successful.
7
Managers were divided as to the level of success
of their involvement in government policy on fiscal
and economic matters. The majority (60%),
however, agreed that it was average and above,
Thirty percent said it was poor while 10% felt that
it was very poor.
The success in giving emphasis on forecast and
feasibility studies by banks was generally
considered good. Majority (76.67%) felt that it was
good and 23.3% felt that it was very good. All of
the respondents evaluated the success of
emphasis on credit worthiness of borrowers as
average and above. All respondents considered
the success of emphasis on the use of specific
limits ratios based on cash flows used by their
banks in the evaluation process as average and
above.
Statistical Analysis
We used regression analysis to test for a
significant relationship between the specific
actions that had been taken by the managers
(number of respondents who said yes) and the
perceived success of the actions (total score of
each factor). The results indicate a significant
relationship. Therefore we may conclude that the
actions ,taken by the managers, have been
successful in reducing the non performing loans
in Bangladesh.
CONCLUSIONS
The study examined the present status of NPLs
in Bangladesh, causes of non-performing loans,
the actions that have been taken by managers to
try and solve this problem and the perceived level
of success of such actions. The result indicates
that the unfavorable economic environment was
perceived as the most important external factor.
Specifically, political influence and national
economic down turn were found as the most
important factors. Bank specific factors affecting
non-performing loans include the lack of
aggressive credit collection procedure and the
procedures used in banks for credit risk
assessment particularly the lack of proper skills
 8 International Academic Research Journal of Economics And Finance September

amongst loan officials. Other factors include the of Accounting and Finance Studies
speedy process of evaluating loans mainly due to Journal. pp:27.
external pressure, the high interest rate charged,
insider lending. The study further reveals that banks Chang, M. (2001), Information Sharing lending
have taken different actions to reduce NPLs. Among and defaults, cross country Evidence,
these, rescheduling of loans and waiver were the Journal of Banking and Finance.pp:39
most important actions to deal with NPLs as
perceived by the bank manager. The current study Carse,K. (2002), A Comparative Study on
also showed that there is emphasis on credit NPLs in India in the Global Context
worthiness of borrowers, forecasts and feasibility Available:http://www.crisil.com/Young
studies, specific lending procedures for project Thought Leader/winners/2002.
appraisal. The study also revealed that there was
emphasis on sharing of information among banks Brown , B.M. (1998), The Causes of
about borrowers and the use of specific limits and Financial Distress in Local Banks in
ratios based on cash flows in the evaluation process. Africa and Implication for Prudential
Policy, UNCTAD OSG/DP/132.
Std
Error
Adjusted Goulet, M., & Daviel, W., (1996),Classifying
Model R R Square of the
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Table - 1
Loan classification and provisioning system used in Bangladesh
Type of loan Period overdue Status classification Rate of provision
Less than 6 Un classified 1% (exceptsSE&CF
months 2% for SE & CF
3 months or SMA 5%
Continuous loan morebut not less
(OD/CC, DC, LIM, than 6 month
LTRetc) 6 months or more
Overdue period will be but less than 9 Sub standard 20%
counted from the day months
following the date of 9 months or more
expiry of such loan. but less than 12 Doubtful 50%
months
More than 12
months. Bad/loss 100%
Un classified 1%(except SE &CF)
Less than 6
2% (for SE &CF)
months
SMA 5%
Demand loan 3 months or more
(Forced LIM. /PAD, but less than 6
IBP,FBP etc.) months
Sub standard 20%
Over due period will 6 months or more
be counted from the but less than 9
day following the date months
Doubtful 50%
of expiry of such 9 months or more
loan. but less than 12
months
More than 12
Bad/loss 100%
months
10 International Academic Research Journal of Economics And Finance September

Table - 1 Continue..
Loan classification and provisioning system used in Bangladesh
Status
Type of loan Period overdue Rate of provision
classification
Less than 6 months 1%(except SE &
If the default amount CF)
Unclassified
of installment is 2% (for SE&CF)
equal to or more 5%
SMA
than the installment
Term loan payable payable in 3 months
within 5 If the default amount
years(Overdue of installment is
period will be equal to the
counted from the day installment payable 20%
Sub-standard
following the expiry in 6 months
of the due date of If the default amount
payment of of installment
installment of such payable in 12
loan months 50%
Doubtful
If the default amount
of installment is
equal to the
Bad/loss
installment payable 100%
in 18 months.
Term loan payable Less than 12
in More than 5 months Un classified 5%
years overdue will 12 months or more
be counted from six but less than 36 Sub standard 5%
(6) months following months
the expiry of the due 36 months or more Doubtful 5%
date of payment of than 60 months
the installment of More than 60 Bad/loss 100%
such loan months
Micro credit overdue Less than 12 Unclassified 5%
period will be months
counted from six (6) 12 months or more Sub standard 5%
months following but less than 36
the expiry of the due months
date of payment of 36 months or more Doubtful 5%
the installment of but less than 60
such loan months 100%
More than 60 Bad/loss
months
Source: Baking Regulation and Policy Department circular no.34.16.9 and 14.
Financial Sector Review ,May 2006, Bangladesh Bank, SE & CF=Small Enterprises and
Consumer Financing
 2012 Firoja Akter khanam, Kamrul Hasan, A.H.M. Rakibul Mawla and Rehnuma Sultana Khan 11

Table - 2
Status of Rate of Frequency of
Period overdue
classification provision classification
At least quarterly usually
Less than 3 months Unclassified 1%-5%
monthly
Loans overdue for 3
months but less than 6 Sub standard 10%-25% Do
months
Loans overdue for 3
months but less than 9 Doubtful 50%-75% Do
months
Loans overdue for 9
Bad/loss 100% Do
months or more
Source :Studies in Bangladesh Banking: Series1

Table-3 : Re-scheduling rules of Bangladesh Bank.

Type of loan Rescheduling Rules
Borrower has to pay 15%of
For Term loan First time rescheduling overdue loan or 10% of total
outstanding whichever is lower.
30% of overdue loan or 20% of
For Term loan Second time rescheduling total outstanding whichever is
lower.
50% of overdue loan or 30% of
For Term loan More than two times total outstanding whichever is
lower.
For demand or
Up to Tk 1crore 15% of loan amount.
continuous loan
10% of loan amount but not less
Other loans 1 crores or 5 crores
than Tk 15 lacs.
5% of loan amount but not less
Other loans More than 5 crores
than Tk 50 lacs.
Source: BRPD circular No. 01 January, 13, 2003.

Table-4 : General Factors

Strongly Strongly Total
Factor Disagree Neutral Agree
Disagree Agree Scores

National Economic
0 0 0 17 13 133
down turn

Influence of
0 0 0 13 17 135
politicians
Poor industry
0 0 3 10 17 130
analysis

Reduced consumer
0 0 8 10 12 124
buying ability

Legal issues 0 0 3 19 8 124

Source: Field Investigation
12 International Academic Research Journal of Economics And Finance September

Table-5 : Bank specific factors

Strongly Strongly
Factor Disagree Neutral Agree Total Scores
Disagree Agree
Bank negligence in
0 7 7 15 1 100
monitoring loans
Lack of aggressive
credit collection 0 7 17 6 119
method

Lax credit risk

assessment and 0 3 3 18 6 117
untrained personnel

Dishonesty of credit
0 12 6 12 0 90
officer

The speedy process

1 1 2 23 3 116
in granting loans

Insider lending 0 1 4 15 5 99
Source : Field Investigation

Table-6 : Client specific factors

Strongly Strongly
Factor Disagree Neutral Agree Total Scores
Disagree Agree
The inappropriate
use of the
0 0 0 25 5 125
loan/Diversion of
fund
Clients start new
business without 0 1 6 16 7 118
experience
The simultaneous
operation of
0 0 7 23 0 113
many kinds of
business
Debtors conceal
vital data in their 0 0 2 16 14 124
applications
Insufficient
0 1 9 19 1 110
collateral
Source: Field Study
2012 Firoja Akter khanam, Kamrul Hasan, A.H.M. Rakibul Mawla and Rehnuma Sultana Khan 13

Table-7 : Six major factors that causes NPls

Factor Total Score Rank
Influence of politicians 135 First
National economic down turn 133 Second
Diversion of fund 125 Fourth
Debtors conceal vital data in their
124 Fifth
applications
Poor industry analysis 130 Third
Lack of aggressive credit collection
119 Sixth
method
Source: Table 3, 4 &5

Table-8 : Specific actions of managers

Actions Yes No % yes

Involvement of Bank in Govt. fiscal policy
7 23 23.70%
formulation
Improved credit information during loan
30 0 100%
application
Emphasis on credit worthiness of borrowers 27 2 93.30%

Increased training of loan officials 27 2 93.50%

Increased use of credit reference bureaus 8 22 26.67%

Information sharing among banks about
20 10 66.67%
borrowers
Use specific limits, ratios in the evaluation
27 3 90%
process
Emphasis on forecasts and feasibility studies 25 5 83.33%
Use of specific lending and project appraisal
24 6 76.70%
techniques
Waiver of interest 29 1 96.40%

Rescheduling of loans 30 0 100%

The use of procedures for mgt of problem loans 27 3 90%

Std loan process from enquiry to lending
26 4 86.67%
decision
Total 337 83 79.58%

Mean 24.4 5.55 T=5.768

Source: Field survey.
14 International Academic Research Journal of Economics And Finance September

Table-9 - Importance of factors considered in determining the level of success.

Very Very Total
Factors Good 4 Average 3 Poor 2
good 5 poor1 score

Involvement of Bank
in Govt. fiscal policy 0 2 16 9 3 73
formulation

Improved credit
information during 1 26 1 2 1 114
loan application
Emphasis on credit
worthiness of 5 25 0 0 0 125
borrowers
Increased training of
5 20 5 0 0 120
loan officials
Increased use of
credit reference 4 15 6 5 0 108
bureaus

Information sharing
among banks about 20 7 0 3 0 132
borrowers

Use specific limits,

ratios in the 0 25 5 0 0 115
evaluation process
Emphasis on
forecasts and 7 23 0 0 0 127
feasibility studies

Use of specific
lending and project 10 15 5 0 0 125
appraisal techniques

Waiver of interest 20 10 0 0 0 140

The use of
procedures for mgt 7 15 8 0 0 119
of problem loans
Std loan process
from enquiry to 5 20 5 0 0 120
lending decision
Rescheduling of
25 5 0 0 0 145
loans
Source: Field Investigation
 2012 Firoja Akter khanam, Kamrul Hasan, A.H.M. Rakibul Mawla and Rehnuma Sultana Khan 15

Nonperforming
loan(NPL)

Erosion Financial
Loss of High loan
of crisis
current loss
bank
revenue provision

Low
High Low rate economic
High risk of
loan growth
premium investment
price

Source: NPL in the Banking sector of Bangladesh-Bishnu Kumar ADHIKARY

Figure : 1

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