Muhid Hasan :
The past four decades have witnessed a flourishing epoch for Bangladesh’s 34 non-banking financial institutions (NBFIs) including GSP Finance which is advancing forward braving some strong headwinds.
These institutions have blossomed in number, boasting a wider array of financial instruments, and experiencing a surge in the volume of assets they manage.
However, this impressive growth has not been without its thorns. The NBFI sector now contends with a formidable set of challenges, including unethical practices, flawed borrower selection processes, and an alarming rise in non-performing loans (NPLs) alongside an uptick in fraudulent activities.
As of the end of June 2023, the NPL ratio for NBFIs stood at 27.65 per cent.
This figure increased by over three per cent, reaching a record high of 30 percent by January 2024, highlighting the sector’s growing difficulties.
In response to these challenges, a significant number of NBFIs are now taking proactive measures to maintain a quality portfolio and enhance their NPL monitoring processes.
These measures include realising investments as efforts are being made to recover outstanding loans through stringent monitoring and effective realisation strategies.
Legal steps as NBFIs are seeking legal recourse to expedite the recovery process. The liquidation of guaranteed assets so that it can be pursued to recover the outstanding amounts.
The government, recognising the impact of defaulted loans on the economy, is keen to reduce the volume of bad loans.
A key strategy in this effort is the expeditious disposal of cases pending in money loan courts, which is seen as a vital step towards mitigating the sector’s challenges and restoring financial stability.
Industry insiders reveal that the entire money market is grappling with a high rate of non-performing loans (NPLs), which have surged more than fourfold in the last 12 years since 2012.
The total volume of NPLs soared to Tk 1,82,295 crore by the end of March 2024, up from Tk 42,725 crore in June 2012.
Non-banking financial institutions (NBFIs) are particularly affected as they provide long-term loans with short-term funds. Unlike banks, NBFIs globally benefit from long-term funding sources like pensions and insurance, aligning with their long-term lending.
The NBFI sector faces intense competition with banks amidst liquidity pressures. Additionally, the sector’s image has been tarnished, and borrowers are finding it increasingly difficult to run their businesses.
Despite these challenges, classified loans for about one-third of the NBFIs in the country remain below 10 per cent of their outstanding loans.
A senior official of a reputed leasing company— wishing to remain anonymous— stated, “Many NBFI clients didn’t bother about repayment despite most of the facilities ending in March. There are also willful defaulters.”
“However,” he added, “things are now changing. Most of the FIs are trying hard to recover outstanding loans as the central bank has asked the NBFIs to file cases against defaulters and closely monitor bad loans to boost chances of recovery.”
Remarkably, seven of these 11 NBFIs have registered NPL ratios of less than five percent. Leading among them are Strategic Finance & Investments Limited, Alliance Finance Limited, DBH Finance PLC, Agrani SME Financing Company Limited, United Finance Limited, IDLC Finance Limited, and IPDC Finance Limited.
GSP Finance Company (Bangladesh) Ltd, a 17-year-old publicly listed non-bank financial institution (NBFI), is actively working to recover its past glory by addressing non-performing loans and boosting capital market investments. Its subsidiary, GSP Investments Limited, is primarily dependent on the capital market.
Listed on the Dhaka Stock Exchange (DSE) in 2012, GSP Finance’s main businesses include lease financing, term finance, acceptance of term deposits, working capital finance, syndication finance, and money market operations.
An anonymous official at the company revealed that the GSP Finance’s net interest income was negative Tk 12.37 crore in the first nine months of last year, compared to a positive Tk 31.03 crore during the same period in 2022. However, from 2019 to 2021, the net profit (after tax) of the NBFI stood at nearly Tk 20 crore.
“In recent times, GSP Finance has closely monitored bad loans to enhance recovery chances. They proactively engage with clients by visiting their offices or workstations, aiming to improve client relationships despite limited income from the capital market.
The institution maintains the highest corporate governance standards to achieve sustainable growth. In many cases, GSP Finance is taking legal steps and liquidating guaranteed assets to recover outstanding loans,” the official added.
According to the latest data from the central bank, the total deposits in 34 NBFIs amount to Tk 44,830 crore, while the loans and advances total Tk 73,759 crore as of December 2023. The contribution of NBFIs to the country’s financial assets is approximately five percent.
Data from the Bangladesh Bank’s ‘NBFIs Statistics Quarterly: October-December 2023’ indicates that the majority of NBFI disbursements (45.60 percent) are allocated to industries, followed by trade and commerce (25.99 per cent) and consumer finance (14.22 per cent).
Moreover, Mustafa K. Mujeri, Executive Director of the Institute for Inclusive Finance and Development (InM), and former Chief Economist of Bangladesh Bank and Director-General of the Bangladesh Institute of Development Studies (BIDS), emphasised the urgent necessity for a comprehensive overhaul and highlighted the critical need for a robust regulatory mechanism to effectively supervise the activities of Non-Bank Financial Institutions (NBFIs).
To ensure optimal performance, he further stressed the importance of bolstering governance practices. NBFIs have played a crucial role in shaping Bangladesh’s economic landscape, acting as essential sources of lending and borrowing for the past four decades.