Unmasking the economic menace: the rising bad loans

Recently the Bangladesh Bank projected a significant drop in non-performing loans (NPLs) and is hoping that it will decrease by 2.76 percent over the next couple of years. This estimation came in Bangladesh Bank's roadmap on the strategic move to streamline NPL management.

The relentless surge in NPLs has become alarming over the past few years and the given roadmap was long awaited. Beyond mere financial figures, this is a tale of the absence of good governance, ethical lapses, societal impacts, and a call to action for all stakeholders in society.

NPLs obstruct the free flow of capital necessary for entrepreneurial ventures and economic expansion. With a rise in defaults, government resources are diverted towards managing the consequences, creating a domino effect on public services and development projects. The overall disruption in the economic flow has a huge adverse effect.

Due to the adverse effect across the economic sector, good borrowers in face an additional stress and liquidity crunch, limiting their capacity to invest more in innovation. On the other hand, vital public services also suffer as state-owned enterprises struggle with financial instability. Banks and financial institutions suffer as a regular and projected inflow stops.

The increasing burden of NPLs erodes the nation's GDP directly and indirectly, hampering its ability to flourish and compete on the global stage. The creditworthiness as a nation gets stained, affecting its ability to secure favourable terms in international financial markets, affecting the export, import and related manufacturing and trading industries.

The manipulation of loan classification status by different entities is an ethical crime. By doing window dressing, some entities engage in unethical practices, concealing NPLs as performing ones to create a disguise of financial health. This creates additional vulnerability, making it a more decisive loss in the long run. Such practices spook public trust in financial institutions.

The social strain due to the increase of NPLs is also noteworthy. Businesses struggling with NPLs may consider downsizing and laying off, impacting employment rates and aggravating social disparities. Reduced public resources affect essential services like education and healthcare.

As NPLs rise, wealth becomes concentrated in a few hands, deepening the gap between the haves and have-nots. In the days ahead, this disparity may widen and may plant the seeds for social unrest, posing a threat to the stability of the nation.

The situation needs urgent attention. In a positive move, this has been sincerely acknowledged by the recent strategic roadmap declared by the Bangladesh Bank. Financial institutions must prioritise transparency and good governance, comply with regulatory guidelines, and provide accurate information about the true state of loan portfolios.

We have to also remember that for building a responsible financial ecosystem, promoting financial education is essential as it empowers borrowers to make informed decisions, reducing the likelihood of defaults. Government initiatives should encourage businesses to adopt ethical practices since it fosters a sustainable economic environment for the nation.

As the economy advances, the rising trend of NPLs poses a threat not just to financial stability but to society as a whole. Although we stand at this critical stage, we wish to foresee a future where ethical financial practices stand supreme.

We dream of an economy revitalised by good governance, responsible lending, and a society where trust is rebuilt and wealth is distributed equitably. It's a collective effort and it will have to exceed individual interests for the greater good.

The author is a senior banker