Fourteen non-bank financial institutions (NBFIs) out of a total of 35 were in the red zone last year as per the stress test report of the central bank. 

This was an increase from 12 seen in 2021, according to the Bangladesh Bank Stability Report 2022.

Last year, seven NBFIs were in the yellow zone and 14 in the green zone.

The NBFIs that possess sound financial health belong to the green zone, while those with moderate health conditions are in the yellow zone and those with weak conditions are grouped in the red zone.

The BB said that 21 NBFIs would remain resilient under stress scenarios, but 14 are vulnerable to different types of credit risks mainly to a rise in non-performing loans (NPLs).

14 non-banks were in the red zone in 2022, up from 12 in the previous year

The report did not cite the name of the NBFIs.

Since 2020, the number of NBFIs in sound shape has continued to fall while the number of those with weaker health has kept rising.

The number of NBFIs with sound health was 18 in 2020 and it dropped to 16 in 2021 and 14 in 2022. On the other hand, the number of weak financial institutions was 13 in 2020 and 12 in 2021.

The BB report blamed the default of large borrowers for the spike in the NPLs.

The highest 19 percent of the loans and leases of NBFIs were concentrated in the power, gas, water and sanitary service sectors while 14 percent was in the garment sector and 11.44 percent in the textile sector.

In March, NPLs stood at Tk 17,855 crore in the NBFI sector, up more than 25 per cent from Tk 14,232 crore a year ago, BB data showed. The bad loans represented about a quarter of the total credits disbursed.

"The growing default loans are the main reason behind the weak situation of 14 NBFIs," said Md Golam Sarwar Bhuiyan, chairman of the Bangladesh Leasing and Finance Companies Association.

Borrowers enjoyed a deferral facility to pay back loans in 2020 and 2021 due to the Covid-19 pandemic. The withdrawal of the facility last year pushed up the volume of bad loans, he said.

As of March, the highest defaulted loan of Tk 3,755 crore was held by International Leasing and Financial Services.

It was Tk 1,649 crore for FAS Finance, Tk 1,013 crore for Uttara Finance, Tk 907 crore for People's Leasing, Tk 967 crore for Phoenix Finance, Tk 886 crore for Fareast Finance, Tk 848 crore for Infrastructure Development Company Ltd, Tk 835 crore for First Finance, Tk 798 crore for Aviva Finance, and Tk 755 crore for Bangladesh Industrial Finance Company, according to central bank data.

A central bank inspection team in 2020 unearthed huge irregularities and scams at a dozen of NBFIs, including People's Leasing, International Leasing, Premier Leasing, Uttara Finance, and First Finance.

The NPLs of the NBFIs have increased in recent years, said a senior official of the central bank.

A lack of corporate governance has also worsened the condition of the NBFIs, said Bhuiyan, also the managing director of Industrial and Infrastructure Development Finance Company Ltd.

In Bangladesh, the NBFIs have long been facing an image crisis due to loan irregularities and scams in a few companies.

Another blow stems from the fund crisis as depositors' trust in the sector has taken a hit.

Muinul Islam, a former economics professor at the University of Chittagong, said the situation in the NBFI sector is worsening day by day.

"The situation will deteriorate further if the actual scenario is swept under the carpet by the sector. But they can't hide it for long."

Islam warns that the fragile state of the sector will not improve if the central bank does not take strict measures against the perpetrators responsible.