Deteriorating credit conditions to drag on Bangladeshi banks

Systemwide non-performing loan ratio surged 10 11.7% last 30 June.

Bangladesh’s credit conditions are expected to weaken and drag on the banking sector, a result of inconsistencies in underwriting standards and high credit concentrations in large domestic corporates, according to Moody’s Investors Service.

Systemwide non-performing loan ratio surged to 11.7% last 30 June from 10.4% in 2018 whilst proportion of performing rescheduled loans climbed more than 10% in 31 December 2018, data from the central bank revealed.

The deteriorating credit conditions is expected to weigh on the banking sector's asset quality as well as their profitability, according to Moody’s.

Banks with elevated levels of problem loans—including rescheduled and stay order loans—and high concentration risks in corporates will be most vulnerable to the rising asset risks: Al-Arafah Islami Bank, Dutch-Bangla Bank, Eastern Bank, Mercantile Bank, and Social Islami Bank.

In contrast, Moody’s has affirmed BRAC Bank Limited due to its strength in small and medium enterprises (SMEs) segment, rendering it less dangerous to credit concentration risks. Likewise, City Bank Limited and NCC Bank were noted to have modest problem loans.

The increasing regulatory forbearance will further mask asset risks and hamper loan recovery, Moody’s said.

“This year, the central bank has deferred the default recognition of term loans, and introduced a one-time package that allows defaulted loans to be declassified and rescheduled on relaxed terms, on top of existing policies that allow the banks to reschedule problematic accounts,” the report noted.