NBFIs with lower bad loans

Although most non-bank financial institutions (NBFIs) in Bangladesh are struggling with a high rate of non-performing loans (NPLs), some of them are bucking the trend by maintaining a lower ratio.

While the average NPL ratio in the overall sector rose to 25 percent as of March this year, classified loans in 11 of the 35 NBFIs in the country remain below 10 percent of their outstanding loans.

Furthermore, seven of these 11 NBFIs registered NPL ratios of less than 5 percent.

For example, Strategic Finance showed that its NPL ratio is currently zero. However, it should be mentioned that this is expected given that the company was only just incorporated in 2020.

Of the older NBFIs, the NPL ratio of Alliance Finance PLC (previously known as Lankan Alliance) and DBH Finance stood at 0.2 percent and 0.88 percent respectively, according to Bangladesh Bank data.

Alliance Finance's loan portfolio amounted to Tk 362 crore while that of DBH Finance stood at Tk 4,419 crore by the end of March.

Meanwhile, Agrani SME Financing Company registered an NPL ratio of 3.1 percent while that of United Finance was 4.3 percent.

Similarly, IDLC Finance and IPDC Finance saw NPL ratios of 4.46 percent and 4.73 percent respectively.

"The main attribute for ensuring lower NPL ratio is good borrower selection, proper risk management and rigorous monitoring," said Kanti Kumar Saha, vice chairman of the Bangladesh Leasing and Finance Companies Association.

"This is possible only when the best management practices are being followed as if an NBFI can select good borrowers, its recovery will also be better," he added.

Saha then explained that it is expected for a portion of a lender's loan portfolio to become temporarily "toxic" or "bad" for various reasons, such as sudden changes to the fiscal policy, industry issues, natural calamities and so on.

"But that does not mean the NPL ratio can be allowed to go beyond an acceptable level. Even developed markets are no exception to this but keep their NPL ratio at a lower level through prudent risk management," he said.

"So, the capability of an NBFIs' risk management team is important here. If they cannot assess and identify the risks of the borrower, the NPL ratio will go up," Saha added.

The Saudi Bangladesh Industrial and Agricultural Investment Company registered an NPL ratio of 6.3 percent as of this March while it was 6.9 percent in National Housing.

Likewise, the NPL ratio was 7.3 percent in BD Finance and 8.3 percent in LankaBangla Finance, central bank data shows.