Three non-banks weigh down entire sector

Three non-bank financial institutions' reckless lending has pushed up the overall industry's nonperforming loans.

The NBFIs are: First Finance, BIFC and People's Leasing and Financial Services. If Reliance Finance is included, the situation will get even worse, according to industry insiders.

The Bangladesh Bank in its recently launched financial stability report also focused on the issue.

The sector's non-performing loans compared to total loans rose 3.6 percentage points year-on-year to 8.9 percent in 2015. The high non-performing asset ratio of the industry is attributed to the high level of non-performing assets of three NBFIs, according to the report.

As part of intensive monitoring, the BB assigned observers to the institutions and instructed them to reconstruct their boards, it added.

Also, the three NBFIs' inability to maintain the required loan loss provision is making it seem that the entire industry has failed to meet the regulatory requirement.

In 2015, loan loss provision amounting to Tk 1,420 crore was maintained by NBFIs against the requirement of Tk 1,980 crore.

It represents a coverage ratio of only 35.5 percent of non-performing loans and leases, down 20 percentage points from what was made a year earlier.

“Indeed, three financial institutions with high level of non-performing assets were not able to maintain the required provision, which in turn led to the provision shortfall in the industry,” said the report.

The capital adequacy ratio, as per Basel II accord, also came down to 18.7 percent at the end of December 2015, from 21.2 percent a year ago.

The BB report found that one NBFI was not able to maintain the regulatory minimum requirement, while another suffered from negative reserves and retained earnings.

A total of 32 NBFIs are operating their business across the country.

Of them, three are government-owned, 19 privately-owned and the remaining 10 are joint ventures with foreign companies. The NBFIs have 211 branches throughout the country.

The major funding sources of NBFIs are capital, term deposits, credit facilities from banks and other NBFIs, call money borrowing, and securitisation.

Presently, deposits of individuals and institutions are the major source of funds for the NBFIs. But lacklustre performance, including insider lending, has made the deposits vulnerable.

The bad performance of a few NBFIs is affecting the industry as a whole, said Mafizuddin Sarker, chairman of Bangladesh Leasing and Finance Companies' Association.

“The industry's overall NPL will be around 6 percent instead of 9 percent without these three companies,” said Sarker, also the managing director of BD Finance.

Below-par performance of the three NBFIs compelled the  bank to appoint observers in the boards last year.

“We are trying to improve the conditions, but it takes time,” said a senior official of People's Leasing and Financial Services, requesting not to be named.

People's NPL soared to 25 percent at the end of 2015, according to a BB official concerned.

On the other hand, BIFC and First Finance's NPL stood at whooping 32 percent and 52 percent respectively.

The companies' revenue, profits and earnings per share were negative, which is affecting investors in the capital market. 

The NPL of the fourth troubled NBFI, Reliance Finance, which had been aggressively lending for the last several years, stood at Tk 347 crore at the end of 2015, up from Tk 58 crore a year earlier. “Our NPL has come down to 8 percent from 10 percent a year ago. We are lending very cautiously now,” said Jalal Uddin, managing director of Reliance Finance.