Why local banks can’t keep NPL in check as foreign ones

When almost all of the local banks in Bangladesh are grappling with higher non-performing loans (NPLs), most foreign lenders have been able to keep the default rate in check. Due diligence, independence of the credit department and corporate governance have been behind their stellar success for their lower bad loan ratio. The average NPL ratio of nine foreign banks was 4.91 per cent in 2022. For the state-run banks, the average NPL ratio was 20.28 per cent and for the specialised banks, it was 12.8 per cent. The NPL averaged 5.13 per cent for the private commercial banks.
At local banks, the board approves loans and this system is flawed. The board should not be involved in the process in any way. Some local banks are following good corporate governance and their NPL ratio is much lower than others. The foreign banks are good at managing risks for which they have an excellent policy framework, supported by robust processes managed by an effective organisation structure. Experts said state-run banks are influenced politically while private banks are influenced by board members. Officials of foreign banks enjoy full independence when it comes to approving loans. In 2022, nine banks had an NPL ratio that was lower than 3 per cent. They are Standard Chartered, HSBC, Citibank, Bank Al-Falah, Woori Bank, State Bank of India, Commercial Bank of Ceylon, Eastern Bank, and Pubali Bank.
Multinational banks’ NPL ratio ranges from 0.35 per cent to 2.63 per cent, except for two Pakistani banks: National Bank of Pakistan and Habib Bank. State-run banks witnessed the highest NPL ratio in the banking sector in Bangladesh, ranging from 14 per cent to 36 per cent. Currently, Bangladesh’s banking sector has the second-highest NPL ratio in South Asia, with Sri Lanka topping the list.
Experts recommended raising the skills of local bankers so that they are well-equipped to deal with bad loans. Bankers at foreign lenders have to complete several courses to level up their skills. Prof Shah Md Ahsan Habib of Bangladesh Institute of Bank Management said the government has brought about some changes to the Bank Company Act, giving the definition of willful defaulters for the first time.