An internship report submitted in partial fulfillment of the requirements for the

Degree of Bachelor of Business Administration (BBA)

An Internship Report
On
“Nonperforming Loans & Profitability: The Case of State-Owned
Commercial Banks of Bangladesh”
SUBMITTED TO
Fahad Zeya

Assistant Professor

Department of Finance & Banking

Faculty of Business Studies

Comilla University, Cumilla.

SUBMITTED BY
Mst. Otba

Class ID: 11817053

Registration No: 11817053

Session: 2017-2018

Program: BBA

Department of Finance & Banking

Comilla University, Cumilla

DATE OF SUBMISSION
04 December 2022
Letter of Transmittal

Dated: 04th December, 2022

To

Fahad Zeya

Subject: Submission of Internship Report

Dear Sir,

I am Mst. Otba a student of BBA program, have completed my internship at Sonali Bank Limited
and prepared a report titled “Nonperforming Loans & Profitability: The Case of State-Owned
Commercial Banks of Bangladesh” under the supervision of Fahad Zeya, Assistant Professor,
Comilla University.

I, therefore pray and hope that you will consider my position and oblige thereby.

Sincerely Yours,

------------------------------
Mst. Otba
Class ID: 11817053
Registration No: 11817053
Session: 2017-18
Bachelor of Business Administration
Department of Finance and Banking
Comilla University, Cumilla

i
 Acknowledgement

As a part of the BBA Program, the internship period provides an opportunity to bridge the
gap in real-life experience to enhance analytical competence. This internship report has been
designed to have a practical experience through theoretical understanding. I n the preparation of
this report, first of all, I convey my sincere whole hearted Gratitude to the almighty for giving me
the strength and ability to accomplish my required tasks successfully.

I would like to express my special appreciation and thanks to my advisor Fahad Zeya, a
tremendous mentor to me. His valuable contribution, suggestions, and guideline boosted my
confidence and helped me a lot to give a successful end of my report within the prescribed time.

I express my deep gratefulness to the authority of Sonali Bank Limited, for their kind
permission to allow me 3 months of practical orientation in banks. I acknowledge the
encouragement and assistance given by a number of people from Sonali Bank Limited, Cumilla
Branch.

I wish to express my indebted gratitude and special thanks to Md. Azad, in charge of
Sonali Bank Limited who in spite of being extraordinarily busy with his duties, took time out to
hear, guide, and keep me on the correct path and allowing me to carry out my industrial project
work at their esteemed organization and extended during the training.

I would like to express my gratitude and thank Allah and my parents and all members who
encourage and help me to complete the report.

I am also thankful to all the personnel who really helped me to complete the project.
Because I know it was quite impossible to complete the project without all of you.

Sincerely yours

Mst. Otba
Class ID: 11817053
Session: 2017-18
Department of Finance and Banking
Comilla University, Cumilla

ii
 Student Declaration
Myself, Mst. Otba, student of Bachelor of Business Administration, Department of Finance
and Banking, Comilla University, do hereby declare that the Internship Report on Nonperforming
Loans & Profitability: The Case of State Owned-Commercial Banks of Bangladesh uniquely
prepared by me after the completion of three months working at Sonali Bank Limited.

I also confirm that the report is only prepared for my academic requirement and didn’t submit this
report any other place before. I also assure you that; this report was not submitted for any other
degree.

------------------------------
Mst. Otba
Class ID: 11817053
Registration No: 11817053
Session: 2017-18
Bachelor of Business Administration
Department of Finance and Banking
Comilla University, Cumilla

iii
 Supervisor’s Certificate

This is to certify that Mst. Otba, ID NO- 11817053, a student of the Bachelor of Business
Administration (BBA) Program at Comilla University, has completed the internship report under
my supervision. She has worked at Sonali Bank Limited as an intern and completed the report
entitled ― Nonperforming Loans & Profitability: The Case of State-Owned Commercial Banks as
a partial requirement for obtaining a Bachelor of Business Administration (BBA) Degree. She has
completed the report by herself. She has been permitted to submit the report.

I wish her success.

……………………..

Fahad Zeya

Assistant professor

Department of Finance and Banking

Faculty of Business Studies

Comilla University, Cumilla

iv
Intern Certificate

v
 Executive Summary
By conducting this research based on FY2007 to FY2021, I have found in recent years, non-
performing loans in Bangladesh have been a very frequently raised question. Unfortunately, this
problem has been an evil for the banking sector of Bangladesh, especially for the government-
owned bank. Frequent scam series in the banking industries are surely a red light and unfortunately,
the state commercial banks are highly surrounded by them. This paper has tried to find out the time
series scenario of NPLs, their growth, provisions and, relation with bank profitability by using
some ratios and regression models of the econometric technique. I have found out by the
comparative analysis that almost 50% from FY2007 to FY2021 of the total loan of state-owned
commercial banks of non-performing loans. From the comparison, I also found that privately-
owned commercial banks and other financial companies are in a better position rather than
government-owned commercial banks. From the regression model analysis, I also found that non-
performing loan has a negative relationship to the Return on Asset and an insignificant to influence
to affect the Return on Asset. In the regression model, we use a dependent variable which is the
Return on Asset, and four independent variables which are the nonperforming loan ratio, non-
performing loan growth rate, deposit rate, and provision maintenance ratio. Besides the regression
model, I also conducted some other tests to justify our data and our study. In this study, I have been
able to find out my objective and answer my research question. I found independent variables I
made to perform this study are significant enough to affect the dependent variable and the positive
or negative relationship to the dependent variables. I found my prime independ ent variable on
which actually I focused has a negative relationship to the dependent variable which means if the
non-performing loan ratio increases the return on assets will be decreased.

vi
 Acronyms

BB : Bangladesh Bank

SCBs : State-Owned Commercial Banks

PCBs : Private Commercial Banks

FCBs : Foreign Commercial Banks

ROA : Return on Assets

NPLGR : Nonperforming Loan Growth Rate

NPLR : Nonperforming Loan Ratio

PMR :Provision Maintenance Ratio

DGR : Deposit Growth Rate

vii
 Table of Content

Serial No Contents Page

Letter of Transmittal i
Acknowledgment ii
Student Declaration iii
Supervisor’s Certificate iv
Internship Certificate v
Executive Summary vi
Acronyms vii
Chapter: ONE Introduction
1.1 Introduction 01-03
1.2 Background 04
1.3 Rational of the study 05
1.4 Objectives of the study 06
1.5 Scope of the study 06
1.6 Methodology 07-08
1.6.1 Research design 07
1.6.2 Nature of the study 07
1.6.3 Data collection 07
1.6.4 Data analysis 07
1.6.5 Research Hypothesis 08
1.7 Limitations 09
Chapter: TWO Literature Review 10-14

Chapter: Company Profile 15-21

THREE
Chapter: FOUR Theoretical Framework
4.1 Current status of Nonperforming loans in the Bangladesh 22-23
banking sector
4.2 Definition of Non-performing Loan (NPL) 23-24
4.3 Classification of Loan 25-27
4.4 Causes of Non-performing Loans in Bangladesh 27-30

viii
 4.5 Impact of NPLs on the Economy of Bangladesh 30-31
4.6 Symptoms of Non-Performing Loans 31-32
4.7 Monitoring of Non-Performing Loans 32
4.8 NPL Management: Issues & Challenges 33-34
4.9 The base for Provisioning & accounting Treatment of 34
NPLs
4.10 Measures Taken to Improve the NPL Scenario in 35
Bangladesh
Chapter: FIVE Data Analysis
5.1 Comparative analysis 36-40
5.2 Empirical analysis 40-45
5.2.1 Regression model summary 40-42
5.2.2 Normality Test Data 42-43
5.2.3 Test of Multicollinearity 43-44
5.2.4 Heteroscedasticity Test 44-45
5.2.5 Autocorrelation 45
Chapter: SIX Findings, Conclusion & Recommendations
6.1 Findings 46-47
6.2 Conclusion 47-48
6.3 Recommendations 48
6.4 References 49-50

ix
 Chapter One: Introduction

1.1 Introduction
Non-performing loan is a kind of financial asset from which banks no longer collect interest or
installment that was scheduled before the loan grantor and grantee. It is now a great concern and the
most discussed problematic issue for the banking sector of Bangladesh, especially for the state-owned
banks. It is the most critical issue for the banking sector as it directly affects the liquidity and
profitability of the banks. It is lowering the investor’s confidence and creates the borrower willingly.
It is most alarming and acute for the state-owned commercial bank, especially for the tendency of
fraud, and embezzlement and it has been more acute in recent years for political interference and
illegal interruption of concerns.

As the bank is an intermediary institution, the main source of its profitability is to constitute of loan
to the Borrower. So, a non-performing loan is a major weakness for a bank. This study especially
will cover the scenario of the government-owned commercial bank of the country.

In fact, the quality of the granting of loans in the banking sector has decreased in the last two decades.
But the NPL rate has also increased at an alarming rate in the whole banking sector, especially in the
state-owned bank sector. It assumes for various reasons like improper client selection, and proper
provision of loans, and the most likely cause is the political instability and interference of the country.

In the previous two decades, Bangladesh's banking sector has witnessed major changes in terms of
legislative reforms, the inclusion of new bank information systems, and mergers. During this period,
noticeable variations in asset quality and managerial efficiency have emerged. Comparative
assessments of state-owned and private commercial banks were undertaken in this thesis using a
questionnaire survey and empirical analysis. Through a questionnaire survey and empirical analysis,
this study also looks into the factors of nonperforming loans, as well as the impact of excessive credit
lending and the cost of funds on asset quality in the private banking industry.

Before delving deeper into the history and analysis of loan categorization, it's worth noting a few key
elements of the state of bank loans. We'll start with a definition of non-performing loans, which are
the thesis's core topic and the basis for several aims.

In general, Bangladesh's banking sector has improved the quality of its loans during the previous two
decades. Despite the fall in bad loans, the asset quality of private commercial banks has been a source
of worry in recent years, notably following the stock market meltdown of 2011. The quality of many

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private commercial bank loans has deteriorated to the point where they are now non-performing. The
reasons for these banks' increased nonperforming loans appear to be considerable since 2012. First
and foremost, insufficient and faulty processes in the disbursement of loans to improve consumers
are to blame. In every economy, some non-performing loans are acceptable, but any type of long-
term propensity of non-performing loans may be exceedingly harmful. The rapid rise in NPLs in
Bangladesh has raised concerns about the economy's stability as well as the safety of depositors'
funds.

Each stage in the loan distribution process is critical. However, whether a loan will be successfully
employed or not, the correct decision about the evolution of the loans from the outset carries a lot of
weight. In Bangladesh, the majority of loans are given out based on a reference rather than a thorough
examination. Many bank employees rely largely on references when making loan decisions. This
issue may be prevented if banks conducted thorough evaluations and investigations before granting
loans.

In general, Bangladesh's banking sector has improved the quality of its loans during the previous two
decades. Despite an overall drop in bad loans, the asset quality of private commercial banks has
become a source of worry in the previous six years. Following the 2011 stock market meltdown, the
quality of many private commercial bank loans has deteriorated, and many have become non-
performing. The causes for these banks' growth in non-performing loans since 2012 are several. First
and foremost, insufficient and inappropriate processes in disbursing loans to unsuitable consumers
are to blame.

While it is understandable for some non-performing loans to exist in any economy, any long-term
trend in non-performing loans can be exceedingly harmful. The rapid rise in NPLs in Bangladesh has
raised concerns about the country's economic stability and the safety of depositors' funds. Each stage
in the loan distribution process is equally significant. However, whether a loan will be appropriately
employed or not is heavily influenced by the correct judgment regarding loan appraisal made at the
outset. In Bangladesh, the majority of loans are given out based on a reference rather than a thorough
examination. Many bank employees rely largely on references when making loan decisions. This fear
may be alleviated if banks conducted thorough evaluations and investigations before granting loans.
Furthermore, different forms of management policies and inefficiency can be blamed for political
influences and the bank's bad management. While a lack of review may not always result in bad
loans, the practice of not doing so might enhance the chances of poor loan performance in the long

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term. This takes us to the connection between poor management and political power in obtaining
loans.

Management inefficiency can stem from a variety of factors, including policy, cost management,
fund diversion, and inexperience. When political input occurs in loan selection, management can
become ineffective, eventually leading to a bankrupt financial sector. Political influence has wreaked
havoc on Bangladesh's banking industry, not simply because it exists, but because of its enormous
dominance in determining loan approval. To return to the existing state of non-performing loans in
Bangladesh, it is necessary to observe a specific trend in loan quality before making any assumptions.

Even though non-performing loans as a percentage of total loans have decreased in Bangladesh's
economy over the previous two decades, the banking industry has experienced a caustic phenomenon
since 2012, as noted at the start of Dhaka University Institutional Repository. According to
Bangladesh Bank, the total non-performing loans in Bangladesh's banking industry were Tk. 741.5
billion as of June 2017. Between 2009 and June 2021, Bangladesh's total non-performing loan
increased from Tk. 224.8 billion to Tk. 992.1 billion.

Another aspect associated with Bangladesh's NPL history is the growing trend of bad debt write-offs.
The state-owned commercial banks and private commercial banks have been competing for bad debt
write-offs. The total number of loans written off in 2017 was 157 percent greater than the number of
loans written off in 2010. Up till December 2016, the total amount of bad debts wiped off was Tk.
447.3 billion. The largest contributor to this sum is state-owned commercial banks, which wrote off
over half of all written-off loans between December 2016 and December 2017. In many cases, the
fast-dropping bad loans in figures 2 and 3 may be explained by the banking sector's annual write-
offs.

Bangladesh, in comparison to other nations in South Asia and Europe, is still in a critical position in
terms of dealing with the rise in non-performing loans during the previous five or six years. The
classification of the banking industry will disclose the region on which this study is based since this
study focuses on traditional private commercial banks.

Non-performing loans, according to the Bangladesh Bank, are loans that have defaulted or are on the
verge of defaulting. Non-performing loans are those that no longer generate revenue for the banks.
The term "non-performing loan" refers to a loan that isn't performing NPLs and can be categorized
as a multilayer notion rather than a single-level concept. Various types are typically based on the
length of the past due date. The duration is usually three months or longer. Similarly, a nonperforming

3|Page
loan (NPL) is a loan that is past due. by a period of more than ninety (90) days NPLs, according can
have a significant negative impact on the environment. When borrowers are unable to repay their
loans, the economy suffers.

1.2 Background

Our banking sector is now burdened with a high percentage of Non-Performing Loans(NPLs).
A loan that is in default or close to being default is considered to be a non-performing loan and
a higher amount of non-performing loans indicates the inefficiency of a bank in providing good
loans. The most important task related to the study is to determine the factors that contribute to
NPL ratios in the Bangladeshi banking industry and also show the consequence of this.
According to the record of June 2021, 2.5 % of total loans are classified as Non- performing
Loans (NPLs) in our banking sector. NPLs certainly reduce banks’ profitability, as banks cannot
get interest income from the defaulters and this, in turn, reduce bank loanable funds by stopping
recycling. Banks need to set aside a portion of their income as loan loss reserves to make up bad
debt.

The economy of Bangladesh depends on the intermediary role of commercial banks for
mobilizing internal savings and providing capital to investors. While taking credit, we think of
banks rather than NBFIs for this reason, Banks are becoming more exposed to credit risk and
Non-Performing Loan is becoming a burning issue for our banking industry as well as for our
economy. Commercial banks of Bangladesh are licensed and regulated by its central bank named
Bangladesh Bank. There are currently 59 scheduled banks, 6 of which are State-owned
commercial banks (SOCBs), 3 are specialized banks, 33 are traditional private commercial banks
(PCBs), 8 are PCBs based on Islamic Shariah and 9 are Foreign Commercial Banks (FCB). There
is no single internationally accepted definition of NPL. The International Monetary Fund (IMF)
indicates that a loan is nonperforming when payments of interest and/or principal are past due
by 90 days or more; or interest payments equal to 90 days or more have been capitalized,
refinanced, or delayed by agreement; or payments are less than 90 days overdue.4 NPLs in
Bangladesh are classified as substandard, doubtful, and bad or loss, which is calculated based
on uniform criteria. A loan is substandard if it is overdue for 3 months or more but less than 9
months, doubtful if overdue for 9 months or more but less than 12 months, and bad or a loss if
it is overdue for 12 months or more. NPLs started at the early stage of liberation. During the
1980s and 1990s, Privatization and liberalization of t h e banking sector could not control
NPLs. The rate of NPLs was 41.1% in 1999. Now it is 9.16% in the year 2020.

4|Page
This indicates an alarming situation for the banking sector in the coming days and the sector has
to take efficient preparedness to avoid the burden of NPLs and respond successfully to the new
normal situation. According to a national newspaper, the NPLs of six state-owned banks become
48 thousand 80 cores take which is 31.23% of the total loan amount. The NPLs of private banks
are 6.56% of their total loan distribution. Due to the high competition in the banking industry,
the officer of respected banks are under pressure to fill their target and this leads to selecting the
wrong person who is not applicable to get the loan or there might be some probability of default.

1.3 Rational of the study

To ensure a stable and strong economy, a country mist has a second banking environment and a
smooth banking process. Companies take part in business activities both domestically and
internationally with financial assistance from the banks. Apart from international trade, a country
also consists of domestic infrastructures which are financed and extended by taking loans from the
banks. Here the rationale of this study comes into play. If the banks become unable to collect the loan
amount over time, the risk of non-performing loans becomes stronger. So, the NPL inclines and
creates pressure on the bank, and in turn, it affects the profitability of the bank. This ultimately affects
the economy in general and other performing loans and new loans as well. So, a well-empirical study
is imperative to tackle these issues. Focusing more on the root cause can help alleviate this inclining
problem in our country. In recent years the impact of rising non-performing loans has become severe
because of the falling profit of commercial banks and declining loans.

It is necessary to understand the cause of non-performing loans because of the impact it is having on
our financial system and it will cause our economy to slow down if proper measures are not taken
with the utmost diligence and authority.

Many researchers have used comparative analysis between different bank groups to understand the
effects of different variables on different banks. Here the research of the comparative implies that not
all variables impose the same impact on the credit quality on profitability rather the effect varies with
different banks. For example, bank size may be a problem for some banks and a burden for others
similarly. Some economic parameters may affect a particular type of bank in a particular period.
Whereas some banks may be unaffected by those same economic variables.

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1.4 Objectives of the study
From a comparative analysis and empirical standpoint, this study seeks to do a comparative
comparison between state-owned and private commercial banks in the context of non-performing
loans and whether non-performing loans and some other variables influence the return on assets of
state-owned commercial banks. However, before examining some of the key contrasting elements,
this thesis examines the impact of the excessive non-performing loan on state-owned commercial
banks. Furthermore, the following objectives have been created to determine:

Main Objective: To find out the time series scenario of NPLs, their growth, provisions, and, their
relation with bank profitability by using some ratios and regression models of the econometric
technique.

Objective 1: To determine a significant relationship between NPL and ROA of state-owned

commercial banks.

Objective 2: To determine a significant relationship between the non-performing loan growth rate
and ROA of state-owned commercial banks.

Objective 3: To determine a significant relationship between the deposit rate and ROA of state-
owned commercial banks.

Objective 4: To determine a significant relationship between the provision maintenance ratio and
ROA of state-owned commercial banks.

1.5 Scope of the study

The study and findings of this thesis are crucial to Bangladesh's traditional state-owned banks. The
time range for the comparative study of state-owned banks was 2005 to 2018, whereas the period for
the examination of the drivers of non-performing loans was 2005 to 2018. Bangladesh's state-owned
commercial banks are the only ones included in the report. A field study was conducted to determine
bankers' and borrowers' overall perceptions of the major factors of non-performing loans, with a focus
on the impact of the cost of funds on asset quality. All secondary data were subjected to regression
analysis using a dynamic panel data model with temporal dummies. Controlling for time dummies
improves the chances of obtaining more accurate non-performing loan impacts of bank-specific
factors. Other significant macroeconomic sectors have been added in alternative models to better
explain the influence of particular banks' specific factors in different economic conditions, although
adjusting for macroeconomic variables with time dummies.

6|Page
1.6 Methodology:
1.6.1 Research design

The research is conducted for special purposes to find out the significant level of influence on the
profitability of the state-owned commercial banks of Bangladesh. I have developed four specific
hypotheses to test and some research questions to find out the actual answer of that to the questions.
I have tried to conduct the basic format of presentation of data like comparative analysis and empirical
analysis by developing a regression model.

1.6.2 Nature of the study

This is secondary data-driven research in which two types of analysis are performed: comparison
analysis and statistical analysis. Normally, in a comparative study, I try to compare the status of state-
owned commercial banks to private-owned commercial banks and other financial institutions in terms
of non-performing loans and bank profitability. This research will highlight the sector's usual
performance based on baking performance, as well as a bank-by-bank comparison. It is not empirical
research, but it will show us how banks' non-performing loans affect their total condition. On the
other hand, the statistical analysis will give us a real scenario and significant factor of the influence
of the non-performing loan.

1.6.3 Data collection

Secondary bank data was acquired from all state-owned commercial banks, with 10 years of data
being used. The information was gathered every year. The Bangladesh Bank, the World Bank, and
the International Monetary Fund provided macroeconomic statistics. The total amount of non-
performing loans and the gross NPL to total loan ratio were obtained from Bangladesh Bank's
website. The audited annual report of the public banks was also used for the comparison study. The
comparison included 5 state-owned business entities out of a total of 6, which were chosen at random
for study.

1.6.4 Data analysis

Data has been analyzed into two sections one is the comparative analysis and the other one is the
empirical analysis by the regression model. In the comparative analysis, I tried to find out the
comparative position of the state-owned commercial bank to the privately owned commercial bank
and financial institution of the country. It has shown the comparative position of a state-owned
commercial bank. On the other hand, in the empirical analysis, I developed a regression model to test

7|Page
whether NPLs and the other independent variable affect the net interest income or profitability of the
state-owned banks.

1.6.4 Research hypothesis

In order to perform the research, the following four hypotheses have been tested.

H0 (1): There is no significant impact of non-performing loans on the profitability or return on assets
of the state-owned banks in 15 years.

H1 (1): There is a significant impact of non-performing loans on the profitability or return on assets
of the state-owned commercial banks in 15 years.

H0 (2): There is no significant impact of the deposit rate on the profitability or return on assets of the
state-owned commercial banks in 15 years.

H1 (2): There is a significant impact of the deposit rate on the profitability or return on assets of the
state-owned commercial banks in 15 years.

H0 (3): There is no significant impact of the growth rate of non-performing loans on the profitability
or return on assets of the state-owned commercial banks in 10 years.

H1 (3): There is a significant impact of the growth rate of non-performing loans on the profitability
or return on assets of the state-owned commercial banks in 10 years.

H0 (4): There is no significant impact of the provision maintenance ratio on the profitability or return
on assets of the state-owned commercial banks in 10 years.

H1 (4): There is a significant impact of the provision maintenance ratio to the profitability or return
on assets of the state-owned commercial banks in 10 years.

1.7 Limitations of the study

• All of the banks studied in this study are traditional private commercial banks and state-owned
commercial banks, and knowing the whole picture of the banking sector necessitates
understanding all of the banks' circumstances. As a result, there is potential for future research
to execute a project on all of Bangladesh's rivers.
• Different approaches can be employed to conduct the same research, which may or may not
agree with the findings of this study. Future research might focus on specific sectors such as
agriculture, SME, corporate, and retail, among others.

8|Page
• To identify the variables for this particular sector, most of the annual reports of this bank do
not include sector-specific non-performing loans, which are required to undertake any
industry-specific studies.
• Every bank has its category loan categorization, which may be used to compare the
consequences of non-performing loans on various businesses.
• The annual report does not include loan-by-loan lending rates or even the weighted average
lending rates, which might have shown the specific link between sector-by-sector non-
performing loans and the actual landing rate.

9|Page
 Chapter Two: Literature Review

Literature Review:

Making a decision about whom to lend is very important for a bank’s profitability and performance.
In recent times, the bank is more conscious rather than before to select the customer for avoiding the
bad effect of non-performing loans. This issue of non-performing loans has gathered a lot of attention
in the last few decades. A non-performing loan is alarmingly increasing in developing and
underdeveloped countries as well as developed countries. It is now a great concern of every financial
institution in any country. Bank lending policy could have a significant influence on non-performing
loans. Lazy banking is mostly liable for banking portfolio management and lending policy. (Reddy
and Mohan (2003); Sinkey (1991) & Dash (2010)

The ultimate consequences of default loans are bank collapse and also cause of economic slowdown
in any country. The causes of default loans are mainly the lack of proper monitoring and supervision
of the loan, Lack of effective lenders’ recourse, weaknesses of legal infrastructure, and lack of
effective debt recovery strategy (Adhikary, 2006). There is no legally accepted global standard to
reduce or eradicate non-performing loans at the practical level. Variations exist in terms of
classification systems, scope and contents. These types of problems ultimately add to disorders and
uncertainty in the non-performing loan issues. Default loans have a non-linear negative effect on
bank lending behavior (Hou, 2001).

The recent presence of default loans along with inadequate loan loss provisions becoming an
alarming issue for both national commercial banks and development financial institutions by
diminishing the overall credit quality of Bangladesh. Poor enforcement of laws, and insufficient
credit recovery strategy has also aggravated the financial malaises. (Adhikary, 2007), pre-election
condition is an influencing power in the governing side of the financial sector. The ruling government
and Bangladesh bank appear to be under pressure for this. Later this becomes a guideline of relaxation
by Bangladesh banks on default accessing fresh loans. This is certainly is not so easy to operate in
this kind of environment and proper steps should be taken by the government to prevent this situation
from further deteriorating and undermining the banking sector, (Wallich,2006), NPLs are undergoing
due to lack of proper risk management which threatens the profitability and liquidity of the bank.
These studies confirm that following the guidelines of the central bank can be the best way it gets rid
of this acute problem. (Hanif & Riqz, 2012).

10 | P a g e
The performance of loans is put into connection with macroeconomic indicators like nominal interest
rate, inflation rate, change in real GDP, economic growth, unemployment, and the change in terms
of trade. A problem of such an approach, taking macroeconomic variables as exogenous is that they
are currently affected by the distress in the banking sector (Foglla, 2008).

Non-performing loans are regressed on three terms factors in terms of credit, bank size including risk,
preference, and macroeconomic shocks. The panel regression model said that the terms of credit
variables are significant. The calculated coefficient on changing the cost of credit is because of the
higher positive interest rate expectation. On the other hand, credit maturity horizon, better credit
culture, and favorable macroeconomic and business conditions increase the NPLs (Ranjan & Dhal,
2003), and GDP growth and NPL is inversely related. It suggests that improving the real economy
translated the lower NPLs. It is also found that a bank that charges a higher interest rate and lends
more is relatively producing higher NPLs (Khemra, Saba & Pasha, 1987).

In making lending decisions, banks are assumed to react differently to NPLs ratios above or below a
threshold. NPLs above the threshold have an adverse effect on lending. “Banks’ lending behavior
could restrain economic activity especially in periods of stress when NPLs are high (Tracery 2011)”;
(Sinkey and Greenawal 1991).

Although NPLs are negatively related to banks’ profit efficiency. It is not statistically significant (Fan
and Shalter, 2004). All the selected independent variables (real GDP, per capita, inflation, and total
loans as independent variables) have a significant impact on the dependent variable (NPLs ratio).
However, the value of the coefficient is not much high. Banks should control and amend their credit
advancement policy with respect to mentioned valuables to have a lower NPLs ratio (Saba, Kouser
& Azeen 2012); (Das, 2010).

To-bit simultaneous equation regression results clearly indicate that higher NPLs reduce cost
efficiency and lower cost efficiency increases NPLs. the result also supports the hypothesis of bad
management proposed by (Berger and De Young, 1992) that poor management in banking
institutions results in bad-quality loans and therefore escalates the level of NPLs (Galice, 2012).

An empirical result of an econometric model based on a study on Guyana shows that GDP growth is
inversely related to non-performing loans, suggesting that an improvement in the real economy
translates into lower non-performing loans. We also find that banks which charge relatively higher
interest rates and lend excessively are likely to incur higher levels of non-performing loans (Khemraj
& Pasha, 2006)

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The reviewed past studies presented the relationship of NPLs with banks’ lending policy, credit
quality, horizon of maturity of credit, better credit culture, favorable macro-economic and business
conditions, lack of risk management, GDP growth, and interest rate act. A relationship between NPLs
and overall bank profitability are found and it was not statistically significant (Fan & Shatter, 2004).
But the SCBs of Bangladesh especially suffered from the excessiveness of it and unfortunately, no
specific research are conducted to represent the situation yet. This paper aims to fill the gap with
relevant arguments.

Beck et al. (2013) looked at 75 advanced economies from 2000 to 2010 and discovered that GDP
growth, nominal effective exchange rate (NEER), lending rate, and stock price all had a strong
relationship with non-performing loans. The results of the empirical investigation revealed a
substantial positive link between one-period lagged lending rates and nonperforming loans. They also
discovered that delayed real GDP was positively related to nonperforming loans.

For consumer loans, Louzis et al. (2012) discovered a positive relationship between nonperforming
loans and delayed real lending rates at a 10% significant level. They also looked at the
macroeconomic real lending rate and discovered that when the economic lending rate (inflation-
adjusted) rises, non-performing loans rise as well. Non-performing loans are also negatively related
to one and two-period delayed GDP growth, according to the study.

Akinlo & Emmanuel (2014) applied an error correction model to yearly data from 1981 to 2011 and
discovered a substantial short-term positive link between lending rates and non-performing loans.
Furthermore, their research discovered that economic development has a long-term negative
relationship with non-performing loans.

Economic downturns and macroeconomic volatility, terms of trade deterioration, high interest rates,
excessive reliance on overly high-priced interbank borrowings, insider lending, and risk are all factors
that contribute to the accumulation of non-performing assets, according to Daumont et al. (2004).
The amount of bad loans is also affected by the interest rate, resulting in a fluctuating interest rate.
According to the findings, interest rates have a substantial impact since rising interest rates lead to a
growth in debt and, as a result, a rise in non-performing loans (Bofondi and Ropele, 2011).

Athanasoglou et al. (2006) investigated the factors that influence banking profitability in Greece. The
findings show that equity levels, productivity, inflation, and cyclical production have considerable
positive effects on bank profitability, but loan loss provision and operational expenditures have a
significant negative influence.

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Caprio and Klingebiel (2002) agreed that the number of non-performing assets should be reduced.
(NPAs) are regularly linked to bank failures and financial crises in both developing and developed
countries. nations that have been developed.

According to Kithinji and Waweru (2007), the banking problem began in 1986 and culminated in
bank failures (37 failed banks as of 1998) following the Dhaka University Institutional Repository
crises of 1986 to 1989, 1993/1994, and 1998; they attributed these crises to nonperforming asset s
(NPAs) caused by interest rate spreads.

When the intermediation cost is large, as evidenced by the high-interest rate spread, borrowers may
be unable to repay the loan due to the high cost of such borrowings. As a result, there is a substantial
chance of loan default due to non-performance (Chand, 2002). As a result, they're considered high-
risk borrowers. Due to the significant transaction expenses, such borrowers are paid higher interest
rates.

Furthermore, Brock et al. (2000) found that high operational expenses raise spreads and result in a
high level of non-performing loans, despite the fact that the magnitude of these impacts varies by
country.

In Europe, Fernandez de Lisetet al. (2000) used a panel data set of Spanish commercial and savings
banks from 1985 to 1997 to econometrically identify loan losses due to different banking and
macroeconomic reasons. The study found that the rate of growth in the gross domestic product (GDP)
had a negative impact on categorized loans, confirming that problem loans increase during recessions.

Furthermore, Bhattacharya (2001) claims that rising interest rates force quality borrowers to look for
alternative sources of funding, such as capital markets or internal accruals. Despite the importance
of non-performing assets on the banking crisis, investment and economic growth, and the likelihood
of future banking and financial disasters, a few research on the influence of the interest rate spread
on the amount of non-performing assets in Sub-Saharan Africa have been conducted (Caprio and
Klingebiel, 2002).

Adela and Eulia (2010) conducted a correlation study on the Romanian banking sector from 2006 to
2010 and discovered a negative association between non-performing loans and average deposit and
loan interest rates.

Sheefeni. J. P. (2016) discovered a positive and statistically significant association between interest
spread and non-performing loans in Namibia from 2001 to 2014. Several research has been

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undertaken in this respect, as previously said concerning the probability of a macroeconomic event
causing a shift in bank interest rates.

Using panel data analysis on the banking sector of Ghana from 1998 to 2004, Amidu. M (2006)
discovered that monetary policy has a significant impact on bank lending behavior. Because changes
in the money supply and the rate set by the Bangladesh Dhaka University Institutional Repository
39Bank are proxies for monetary policy, it's critical to figure out how the growing monetary policy
rate would affect the bank's non-performing loans.

In a recent article, Jiménez et al. (2014) examined the impact of monetary policy on credit risk-taking
and discovered that lower overnight interest rates encourage banks to take more risks in their lending.

Apel & Claussen (2012) made a similar discovery, indicating that there is a risk-taking channel via
which weaker monetary policy causes companies to take more risks. They also indicate that
categorized loans or non-performing loans, as well as the risk-weighted assets of banks, may be used
to assess risk.

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 Chapter Three: Company Profile

3.1 Introduction
Bangladesh Bank is the Central Bank of Bangladesh and the principal regulator of the sector. There
are 59 scheduled banks in Bangladesh that operate under the full control and supervision of
Bangladesh Bank which is empowered to do so through the Bangladesh Bank Order, 1972 and Bank
Company Act, 1991. The banking industry initiated its journey with 6 nationalized commercial
banks, 2 state-owned specialized banks, and 9 foreign banks after independence (Bangladesh Bank).
In order to overcome the post-independence structural problems, the major financial reform started
in 1982. The banking reform system promoted private ownership of the banks and the
denationalization of nationalized commercial banks (NCB). These banks were known as first -
generation banks. In 1990, another reform was initiated and a large number of private banks got
licenses during this time, and these banks are known as the 2nd generation banks. In 2013 nine new
third-generation banks were permitted authorization to operate in the country and in 2018 Bangladesh
bank permitted the license of two new commercial banks. At present, there are 59 scheduled banks
in Bangladesh (Bangladesh Bank).

The sector comprises a number of banks in various categories. Considering the ownership, the sector
can be classified into the following categories-

1. State Owned Commercial Banks (SOCBs),

2. State Owned Development Financial Institutions (DFIs),
3. Private Commercial Banks (PCBs) and
4. Foreign Commercial Banks (FCBs)
5. State Owned Commercial Banks (SOCBs
There are 6 (six) State Owned Commercial Banks (SOCBs) which are fully or majorly owned by the
Government of Bangladesh and are operates under full control and supervision of the Bangladesh
Bank Order, 1972 and Bank Company Act, 1991.

1. Agrani Bank Limited

2. Bangladesh Development Bank
3. BASIC Bank Limited
4. Janata Bank Limited
5. Rupali Bank Limited
6. Sonali Bank Limited

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3.2 Overview of Sonali Bank Limited
Soon after the independence of the country, Sonali Bank emerged as the largest and leading
Nationalized Commercial Bank by proclamation of the Banks' Nationalization Order
1972(Presidential Order-26) liquidating the then National Bank of Pakistan, Premier Bank, and Bank
of Bahawalpur. As a fully state-owned institution, the bank had been discharging its nation-building
responsibilities by undertaking government-entrusted different socio-economic schemes as well as
money market activities of its own volition, covering all spheres of the economy. The bank has been
converted to a Public Limited Company with 100% ownership of the government and started
functioning as Sonali Bank Limited on November 15, 2007taking overall assets, liabilities, and
business of Sonali Bank. After corporatization, the management of the bank has been given the
required autonomy to make the bank competitive& to run its business effectively. Sonali Bank
Limited is governed by a Board of Directors consisting of 11 (Eleven)members. The Bank is headed
by the CEO & Managing Director, who is a well-known banker and reputed professional. The
corporate headquarter of the bank is located at Motijheel, Dhaka, Bangladesh, the main commercial
center of the capital.

3.3 Corporate Profile

Name of the Company Sonali Bank Limited
Chairman Mr. Ziaul Hasan Siddiqui
CEO & Managing Director Mr. Md. Ataur Rahman Prodhan
Company Secretary Mr. Tauhidul Islam
Status Public Limited
Company Genesis Emerged as Nationalized Commercial Bank in
1972, following the Bangladesh Bank
(Nationalization) Order No. 1972 (PO No.26
of 1972)
Date of Incorporation 03 June 2007
Date of Vendor's Agreement 15 November 2007
Registered Office 35-42, 44 Motijheel Commercial Area, Dhaka,
Bangladesh
Authorized Capital Taka 6000.00 Crore
Paid-up Capital Taka 4530.00 Crore
Number of Employees 18,167

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 Number of Branches 1224
Phone-PABX 9550426-31, 33, 34, 9552924
FAX 88-02-9561410, 9552007
SWIFT BSONBDDH

3.4 Vision of Sonali Bank

Socially committed leading banking institution with a global presence.

3.5 Mission of Sonali Bank

Dedicated to extend a whole range of quality products that support divergent needs of people aiming
at enriching their lives, creating value for the stakeholders, and contributing towards the socio-
economic development of the country.

3.6 Slogan of Sonali Bank:

Your trusted partner in innovative banking.

3.7 Core Values of Sonali Bank:

Sonali Bank Limited’s (SBL) Core Values proposition consists of ten key elements. The values would
assist the bank in perceiving its employees to work as a team towards the accomplishment of assigned
duties and responsibility for the achievement of desired objectives. Teamwork: Open communication
and discussion interaction amongst the employees would ensure unification actions and efforts
towards achieving the common goal.

Ethics: Everyone must ensure adherence to the ethical practices of banking.

Objective: All persons will have a definite objective in carrying out their tasks.

Integrity: Protection and safeguarding of customers’ interest is a vital element for societal trust

Excellence: Excellence performance and effectiveness are preconditions to ensure quality service
to the large customer base of the bank.

Innovation: New and innovative products are the needs of the time for which continuous action-
oriented research is carried out.

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Commitment: Every employee is committed to working up to the expected level to ensure the
satisfaction of the valued customer.

Self-Reliance: Each employee will have an ownership attitude towards the bank and self-
confidence in his work for the betterment of the bank.

Transparency: Information is to be kept open for all so that stakeholders can have proper ideas
about the bank's activity.

Accountability: All employees are responsible for their activities and will remain accountable to
their respective superiors for the accomplishment of the task.

3.8 Objectives of Sonali Bank Limited

The prime objective of Sonali Bank Limited is to play a vital role in the national economy. To serve
each one promptly and with a sense of dedication and dignity is the motto of Sonali Bank Limited.
Other Objectives of Sonali Bank Limited are as follows-

To provide the best services to each and every client through concentrated and coordinated
efforts and a strict professional approach.
Forging a cordial, deep-rooted, and firm banker-customer relationship by dispensing prompt
and improved clientele service.
To diversify and widen the overall operations and activities.
Ensuring the highest use of the professional workforce through enhancement of their attitude
and competence.
To render innovative, customized, and cost-effective financial solutions to its clients.
Responding to the need of the time by participating in syndicated large loan financing with
like-minded banks of the country, thereby expanding the area of investment of the bank.
Elevating the image of the Bank at home and abroad by the sustained expansion of its
activities.
To establish a strong market presence.
To maintain the integrity and intellectual ingenuity of the highest standard.

3.9 Core Business of Sonali bank:

• Corporate Banking • Remittance • Trade Finance
• Project Finance • Lease Finance • Loan Syndication
• SME Finance • Consumer Credit • Foreign Exchange

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 Dealing Operation • Government
• International Trade • Rural and Treasury Bonds
• NGO-Linkage Loan Microcredit • Locker Service
• Consumer Credit • Capital Market • A.T.M. Card
• Investment Operation • Utility Bills
• Government • Special Small Loan Collection
Treasury Function • Other • Ancillary Services
• Money Market Business/Services: • Merchant Banking

3.10 Islamic Banking Services:

Deposit Products:
• Al-Wadeeah Current Account • Mudaraba Hajj Saving Account
(AWCA) (MHSA)
• Mudaraba Savings Account (MSA) • Mudaraba Sonali Monthly Deposit
• Mudaraba Special Notice Deposit Scheme (SMDS)
Account (MSNDA) • Mudaraba Monthly Profit Scheme
• Mudaraba Term Deposit Accoun (MMPS
t(MTDA)

Investment Products:
• Bai-Murabaha
• Bai-Muajjal
• Bai-Salam
• Bai-Istisna
• Hire Purchase Under Shirkatul Melk
(HPSM)

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3.11 Services of Sonali Bank Limited
ATM Services:

Sonali Bank Limited has introduced ATM services since 2007. The number of ATMs is
increasing day by day. The bank is a member of the Q-Cash Consortium, National Payment
Switch Bangladesh (NPSB), and VISA. Customers are enjoying the clock cash withdrawal
facility from 87+ own ATMs and around 6500+ shared ATM Booths across the country. The
initiative has been taken to set up ATMs at important places like important branches, airports,
railway stations, post offices, university campuses, important public places, etc. To increase
the efficiency of our ATM service, we have taken various steps such as reducing the downtime
of individual ATMs. Also trying to ensure a more ATM-friendly environment through the
uninterrupted transaction.

Sonali Debit Card Facilities:

Sonali Bank Limited is one of the member banks of the Q-Cash and visa Consortium. Card
holders of Sonali Bank Limited can use ATMs of consortium member banks, Dutch-Bangla
bank, and BRAC bank limited.

Credit Card:

Understanding the importance of needed money Sonali Bank Limited has introduced a Credit
Card that gives the maximum benefit with a minimum cost. This is basically one plastic card
that has dual options to make the transaction in multi currencies. Customers can choose the
type of card that matches their requirement. Dual cards can be used in local currency within
Bangladesh and foreign currency in abroad. Local currency and foreign currency limits will be
defined in the system as per the approved credit limit.

Prepaid Card:

Without having any account anyone can get Sonali Bank Prepaid Card from any branch. A
Prepaid Card has a pre-determined monetary value loaded into the card. We offer a Prepaid
Dual Currency Card that can be used at any ATM to withdraw cash and any POS to purchase
of goods & services. The dual card can be used in local currency within Bangladesh and foreign
currency abroad.

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Ancillary Services

Sonali Bank Limited offers multiple special services with its network of branches throughout
the country in addition to its normal banking operations.

Collection: Payment: Social Services:

• Gas bills. • Pension of employees of • Old age allowances.
• Electricity bills. • Government and other • Widows, divorcees, and
• Telephone bills. • Corporate Bodies. • destitute women allowances.
• Water/Sewerage • Bangladesh Bank • Freedom Fighters' allowances.
bills. employee’s pension. • Rehabilitation allowances
• Municipal • Army pension. forced survival of women.
holding tax. • British pension. • Maternal allowances for poor
• Passport fees, • Students' women.
visa fees and stipend/scholarship. • Disability allowances.
• Travel tax. • Govt. & Non-Govt.
• Customs & Teachers' salary.
Excise duties. • Food procurement bill on
• Source tax and behalf of the Govt.
VAT.
• Jakat fund.
• Hajj deposit.
• Land
development tax.
Sale Misc. Services: Locker Service
&Encashment/Purchase • Bank a/c information of • Secured Locker Service
: tax payee client according t is provided in some branches o
• Savings o the demand of NBR. f Sonali Bank Limited.
Certificates. • Local Governance Support • Customers may avail this
• ICB Unit Project. service and secure their
Certificates. • Enlist of Non-Government valuables.
• Prize Bonds. Insurance companies.
• Wage Earner's
Development
Bonds.
• US Dollar
Premium
&Investment
Bond.
• Lottery tickets of

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 different Semi-
Govt. and
Autonomous
Bodies.
• Sanchay patra.
• Public Service
Commission's
application form.
• Judicial Service
Commission's
application form.
• Exchange of
soiled/torn notes.

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 Chapter Four: Theoretical Framework

4.1 Current status of Nonperforming loan in the Bangladesh banking sector

Banks provide short and long-term finances to various organs of the economy. Banks are
also supposed to get back the money with interest as profit as per the repayment schedule.
Due to many reasons, however, banks are unable to get back some of their money in time
from many clients. Banks, as a normal precaution to recover the money, keep some
provision (1.0 percent) against all such advances, considering that due to many reasons
there might be some non-performing loans. If the non-performing loan (NPL) exceeds the
norm, it creates a significant problem in running banking operations. The amounts of loans
that fall under the category of classified loans are called NPL. Loans that are at the stages
of either sub-standard, doubtful, or bad/loss loans are classified loans. In these categories
of loans, the bank fails to collect interest payment or principal amount or both from the
borrower. The country's banking sector is currently undergoing a number of challenges
such as lowering the lending rate to a single digit, bringing down the advance-deposit
ratio, tackling corruption, ensuring good governance, maintaining adequate liquidity,
reviving and retaining depositors' confidence weakened by scams, frustrating deposit
interest rate and rumors of bankruptcy, and recovering gigantic default loans. The biggest
challenge, however, is the recovery of default loans.

According to the reports of Bangladesh Bank, the NPL ratio stood at 2.5 % at the end
of June 2021 at 3.2 % at the end of June 2020, 6.1 ℅ in June 2019, 11.30 % in June 2018,
11.34 percent in June 2017, and 9.23% percent in June 2016. It is observed that the NPL
ratio is growing successively with the passage of time. So, as a credit controlling authority
Bangladesh Bank should give more emphasis on the NPLs of commercial banks.

Non-performing loan

10.3

9.23 9.31 9.32 9.16

2016 2017 2018

NPL 2019 2020

The graphical representation shows the NPL ratio of Bangladesh’s banking sector from

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2016 to2020. The NPL ratio in Bangladesh is higher compared to the international level
which is about 2.0 percent or below. The NPL ratios in Bangladesh were 9.16 percent and
9.32 percent in 2020 and 2019 respectively. The data reached an all-time high of 10.3 %
in 2018 and the low is 9.16. The sector has been burdened with sky-high default loans for
a long. As of December 2019, the total amount of outstanding loans was Tk 10.18 trillion
(Tk 10, 11,828 crores) out of which an amount of Tk 943.31 billion (Tk 94,331 crore) was
classified (non-performing) loans, according to the Bangladesh Bank report. The ratio of
gross non-performing loans (NPL) to the total outstanding loans of the banking sector
stood at 9.16 percent at the end of December 2020.

4.2 Definition of Non-performing Loan (NPL)

Bank earns its profit by giving loans to its customer as assets. Non-performing loans
(NPLs) have been used as a measure of asset quality among lending institutions and are
often associated with failures and financial crises in both the developed and developing
world. All banks need a loan classification or grading system to make it easy the
monitoring and management of credit risk in their loan portfolios. Generally, a Non-
Performing Loan (NPL) is a loan that is in default or close to being in default. In a broader
sense, a Non-Performing Loan (NPL) is a sum of borrowed money upon which the debtor
has not made the scheduled payments for a specified period. Although the exact elements
of NPLs vary, depending onthe specific loan's terms, "no payment" is usually defined as
zero payments of either principal or interest. The term period also varies, depending on the
industry and the type of loan. Generally, however, the period is 90 days or 180 days.

According to IMF, the definition of NPLs is: “A loan is nonperforming when payments
of interest and principal are past due by 90 days or more, or at least 90 days of interest
payments have been capitalized, refinanced or delayed by agreement, or payments are less
than 90 days overdue, but there are other good reasons to doubt that payments will be made
in full”.
According to the Basel definition that the loan is to be considered a non-performing loan
when the borrower is 90 days or more behind on the contractual payments or when the
obligor “is unlikely to pay its credit obligations to the banking group in full, without
recourse by thebank to action such as realizing the security.”

According to European Central Bank, “A bank loan is considered non-performing when

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more than 90 days pass without the borrower paying the agreed installments or interest.
Non- performing loans are also called “bad debt”.

Therefore, loans become NPL when they cannot be recovered within a certain period of
time that is governed by some respective laws.

Finally, from the above definition, we can say that NPL is:

• A loan that is not earning income;

• Full payment of principal and interest is no longer anticipated;
• Principal or interest is 90 days or more delinquent or;
• The maturity date has passed and payment in full has not been made;

4.3 Classification of Loan

In spite of its critical importance, there is no well-recognized international standard for

recognizing and accounting for credit losses by banks. Loans can be classified as
performing and non-performing. A performing loan is a loan in that payment of both
principal and interest charges are up to date as agreed between the creditor and debtor.
Thus, loans that are outstanding in both principal and interest for a long time contrary to
the terms and conditions contained in the loan contract are considered as NPLs.

All banks need a loan classification or grading system to make it easy the monitoring and
management of credit risk in their loan portfolios. A bank’s loan portfolio can be classified
into five major categories namely, pass; special mention; substandard; doubtful; and loss.
Each of these categories has a time element before which a loan is transferred to a lower
category.

4.3.1 Pass

Loans or advances are fully protected by the current financial and paying capacity of the
borrower and are not subject to criticism. Any loan or advance, or portion thereof, which
is fully secured, both as to principal and interest, by cash substitutes, shall be classified
under this category regardless of past due status or other adverse credit factors.

4.3.2 Special Mention

A. Loans and advances classified under this category have the following characteristics;

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 a) Loans or advances with pre-established repayment programs past due 30 days or
more but less than 90 days.
b) Overdraft and loans or advances that don’t have a pre-established prepayment
program, if
c) Loans or advances with pre-established repayment programs past due 30 days or
more but less than 90 days.

B. Overdraft and loans or advances that don’t have a pre-established prepayment program, if
a) The debt remains outstanding for 30 consecutive days or more but less than
90 daysbeyond the scheduled payment or maturity date.

b) The debt exceeds the approved limit and interest due or uncollected outstanding
for 30consecutive days or more but less than 90 days.

c) The overdraft account has been inactive (no debit and credit transaction has been
made) for30 consecutive days or more but less than 90 days.

4.3.3 Substandard
The following non-performing loans and advances at a minimum shall be classified as
substandard:

1. Loans or advances with pre-established repayment programs past due 90 days or

more but less than 180 days.
2. Overdraft and loans or advances that don’t have a pre-established prepayment
program, if

a) The debt remains outstanding for 90 consecutive days or more but less than 180
days beyond the scheduled payment or maturity date.

b) The debt exceeds the approved limit and interest due or uncollected outstanding
for 90 consecutive days or more but less than 180 days. And

c) The overdraft account has been inactive (no debit and credit transaction has been
made) for90 consecutive days or more but less than 180 days.

4.3.4 Doubtful

The following non-performing loans and advances at a minimum shall be classified as doubtful

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 1. Loans or advances with pre-established repayment programs past due 180 days or
more but less than 360 days.

2. Overdraft and loans or advances that don’t have a pre-established prepayment

program, if, a. The debt remains outstanding for 180 consecutive days or more but
less than 360 days beyond the scheduled payment or maturity date.

a) The debt exceeds the approved limit and interest due or uncollected outstanding
for 180 consecutive days or more but less than 360 days.

b) The overdraft account has been inactive (no debit and credit transaction has been
made) for180 consecutive days or more but less than 360 days.

4.3.5 Loss
The following non-performing loans and advances at a minimum shall be classified as a loss:
1. Loans or advances with pre-established repayment programs past due 360 days or more.
2. Overdraft and loans or advances that don’t have a pre-established prepayment program,
if
I. The debt remains outstanding for 360 consecutive days or more.
II. The debt exceeds the approved limit and interest due or uncollected
outstanding for 360 consecutive days or more. And

III. The overdraft account has been inactive (no debit and credit transaction has
been made) for360 consecutive days or more.

4.4 Causes of Non-performing Loans in Bangladesh

Nonperforming loans are one of the most crucial problems in the banking industry. The
volume of NPL is rising every year. After reading some articles on NPL, I have found out
some of the major causes of increasing non-performing loans in Bangladesh. The causes
of NPL are given below:

4.4.1 Entrepreneurs-Related Factors

A. Lack of Business Experience: People without prior business ideas tend to start a
business after their retirement. It may so happen that after retirement from govt. or private
service people who want to establish a business, which is not very relevant to his past

27 | P a g e
experience. Hence when it comes to commencing business properly, these people
sometimes fail and end up not being able to repay the loans they have been sanctioned bym
banks. Ultimately it is leading to non-performing loans.

B. Lack of Business and Lack of Institutional Training Background: Business

experience is somehow related to business background. Her business background means
family business background. Young generations tend to run their family businesses
ultimately. This refers to operating a business without prior experience or training. This
somehow might act as an adverse situation for the business, leading to fail and not being
able to pay back loans

C. Unwillingness to Pay: This has to be one of the most common phenomena in

Bangladesh culture. There are a certain group of people, who are least interested in
returning the money. This might be due to a lack of money in-flow in the business or when
the security of the loan is weak and the individual thinks it’s not a problem if the loan is
not repaid.

D. Lack of Supporting Facilities: Now and then businesses require support from other
sources like government specialists. When the cash stream is inclining and the project is
in a hush, it needs nourishing. Without further nourishing company may become
debilitated and cause misfortune in successive time periods. In our country, most of the
companies do not have the supporting sources with which they can withstand the turmoil
that comes into their business on time.

4.4.2 Business-Related Factors

A. Non-attractive Industry: Nonattractive industries sometimes end up acting as a
primary reason behind loans not being repaid. Due to poor financial performance,
companies might get a low cash inflow, which means the company has lower liquid cash,
resulting in a loan default. Companies operating in non-attractive industries have a higher
probability of performing poorly. For example: suppose in Bangladesh Jute industry is one
of the non – attractive industries. Now any investor who wants to invest in this sector may
be causing loss. So, this investor can’t pay the interest.

B. Strong Competition: Strong competition does not directly lead to a default loan.
They are sometimes an indirect reason. This is because of severe competition from

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different firms

In the same industry. When inefficient firms fail to make enough profit, they somehow
are low on liquid cash, and ultimately fail to repay the loan.

C. Poor Management Capability: If the companies have a lower management

capability, then the chances of a loan default are comparatively higher. Banks usually
check the management body of a firm before sanctioning a loan. If the management
committee is strong, the loan sanction is a success, leading to a lower probability of loan
default.

D. Poor Financial Performance: Definitely poor financial performance is the most

important cause of loan default. Once a company is not solvent, it is unlikely to repay
itsloan. Poor financial performance means low solvency which ultimately leads to a loan
default. Poor financial performance is the key reason behind maximum loan default.

E. Poor Cash Flow: Poor cash flow is the next step after the poor financial performance.
Because of poor cash flow companies mainly default on loans. In that case, the business
does not have enough cash to service loans payment and interest. If there is a lower cash
flow, it ultimately means that the business does not have enough liquid cash in hand. Not
having enough liquid cash means the company not being able to pay the loan. A profitable
business might also suffer from poor cash flow if they sell its goods on credit.

F. Nepotism: Managers tend to sanction loans to personal relationships, be it friends or

someone close to the family. At the same time, political people too sought nepotism from
top-level bank managers.

4.4.3 Lending Related Factors

A. Delayed Assessment of Loan Proposal: Banks in some cases make delays in

surveying credit recommendations of the business firms. When the firm gravely needs
cash, it does not get sufficient reserves because of postponed appraisal by the bank. This
infuses a shortage of cash into their business operations. They hardly manage their day-to-
day business expenses let alone repayment of the loans.

B. Delayed Disbursement of Funds: Indeed, after appraisal of the proposition and

29 | P a g e
taking a positive choice, banks do not dispense funds until security documentation customs
are completed. As a result, business does not get support when it really requires it. A few
of the defaulters complained about subsequent disbursements.

C. Lack of Proper Monitoring: Monitoring the loan that has been sanctioned is a very
important task that has to be done and followed by the bank management. The bank needs
to make sure that the loan has been used for the exact reason why it was taken. If the loan
has use

For some other reason, it might lead to a default loan. The bank expects to get the
installments and interests of the loan from the cash earnings of the business, whereas if
the loan amount has been used for other purposes, then the bank will not get its money
back, leading to a nonperforming or default loan. Banks can generate information about
borrowers from Bangladesh Bank. Then banks can decide how much money the investor
needs and how much money he will be investing.

D. Lack of taking Proper Action: Proper action can only be taken after proper
monitoring has been done. If proper actions are taken, the chances of loan defaults decrease
ultimately. For example, if a firm miss paying a certain installment, the management
should send someone in charge to have a look at the business’s condition.

4.4.4 Macroeconomic Factors

A. Low GDP Growth: It is apparent that companies that deal in customer items are
straightforwardly influenced by the GDP growth of the whole economy. Customary clients
and defaulters have opined that this macro indicator influences the cash generation of a
company and subsequently the reimbursement of the loan.

B. Changes in policy by the Government : The government is considered as the minor

cause of the credit default as per the overview since it has a small effect on the local deals
and conveyance of the items of the companies. Other causes such as defective loaning
practices, the need of investigation of business dangers, need of appropriate valuation of
security or contract property, undue impact by borrowers, outside pressure, loan go Govt.
organization, Govt. arrangement for payment of credit, need of lawful activity.

C. Increasing Crimes : It is revealed that the effect of the increasing crimes in the

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business of the companies. They think that forced subscriptions sometimes make the
profitability of thecompany lower.

4.5 Impact of NPLs on the Economy of Bangladesh

Effects of NPL are such as Stopping Money Cycling, Earning Reduction, Capital Erosion,
Increase in Loan Pricing, Frustration, etc. As a result, the values of security are increased and
the risks of financial recession also see a rise. Amplifications of the effect of NPL are as
follows:

1. NPL can lead to efficiency problems for the banking sector. It is found by a number of
economists that failing banks tend to be located far from the most-efficient frontier,
because banks do not optimize their portfolio decisions by lending less than demanded.

2. There is a negative relationship between non-performing loans and performance

efficiency. So, an increase in NPL affects the performing loan. Most of cases, it arises
when there is an adverse selection. Averse selection is an asymmetric information problem
that occurs before the transaction.
For example, big risk-takers might be the most eager to take out a loan because they know
that they are unlikely to pay it back. As adverse selection increases the chances that a loan
might be made to a bad credit risk, the lender might decide not to make any loans, even
though there are good credit risks in the marketplace.

3. NPL creates a Credit Crunch situation. The Credit crunch is a term that banks ration
loan disbursement and new credit commitments in order to protect but add more risks.
Banks treat loans as an asset. They expect a return from it. If loans become NPLs then
banks lack of funds to loan according to their commitment or banks could give loans at
their previous interest rate. Clients have to pay more. So, loans may default Credit crunch
also increases the rate of NPL.

4. There is a cyclic relation between poor economic conditions and depressed economic
growth as follows:

a. During the crisis moment, in order to restore the credibility among creditors and
depositors, failing financial institutions not only try to expand their equity bases but also
reduce their risk assets or change the composition of the asset portfolio. Because of such
defensive actions, the corporate debtors are always targeted, thus the economic growth is

31 | P a g e
being stalled overall. Banks try to collect loans amount as fast as possible and most of the
banks have huge numbers of corporate clients so they try to recover those loans as early
as possible to reduce risky assets.

b. Money cycling gets stopped due to an increase in NPL. A slow flowing of cash always
has a negative impact on any business.

c. When the NPL is increased, interest-earning gets stopped. But the cost of funds and the
cost of management are not stopped. To run the management cost along with the cost of
funds, the existing lending price has to be increased. A sudden increase of interest rates
makes hard the return of bank money for a new borrower. So, the rate of investment will
be lower.

4.6 Symptoms of Non-Performing Loans

There are some common signs it can be determined beforehand if a loan is going to be
non-performing or not. Here are some of the symptoms that might help to identify a non-
performing loan beforehand-

Warning Signs from Borrowers - Banks always stay in contact with loan borrowers.
When the borrower misses his/her first scheduled payment bank call the borrower to let
him/her know the situation and to know why s/he missed the scheduled payment. If the
borrower doesn’t receive the calls or doesn’t cooperate with the bank this might be a sign
of that loan being non-performing.

Warning Signs from Third Parties- Banks sometimes collect information about
borrowers from third parties. If the borrower is a company, then the bank collects
information from the competitors of them from the same industry. If the borrower is an
individual person bank might collect information from the introducer of that person.

Warning Sign from Other Banks- Every bank collects a CIB report of their clients
who are interested to take loan holders from Bangladesh Bank. If the bank wants it can
check the CIB report of the clients, they want to sanction loans. If the client had taken any
loan before from other banks, his/her CIB report can be checked if there’s any bad
scheduling (SS,DF,B/L) of his/her previous loan. If the report is good, the bank might
sanction a loan to that person/ company.

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4.7 Monitoring of Non-Performing Loans
Any loan which has the tendency of turning into NPL or which is already listed as NPL
needs monitoring very closely by the bank to not be a bad debt. This bank does certain
things to monitor their loans, which are-

Verbal communication- Banks maintain verbal communication with their borrowers

through phone calls. If any borrower misses any scheduled payment bank call the borrower
toremind that fact and try to know why s/he missed the payment date. This communication
helps the bank to know the current situation of the borrower and also helps to maintain
agood relationship with the client.
Formal Letter- If the loan has already been listed as a non-performing loan, the bank
sends a formal letter to the borrower to let him know the situation and also the
consequences he might face for the loan being non-performing, and also to request him to
pay the loan as soon as possible. It is very important.
Physical Visit- If the above factors don’t get responded to by the borrowers; the bank
sends officers to visit that person/ business place to know why they are not repaying the
loans or the situation of the business. The officers try to collect some loan amount in their
physical visit and also let the borrower know about the bad effects of a loan being non-
performing. The officers also try to find out why the person or the company is not paying
the loans properly.

4.8 NPL Management: Issues & Challenges

Non-performing loans (NPLs) have become a major concern for the banking sector of
Bangladesh due to their multiple prolonged adverse impacts on the bank's balance sheet
having the consequential effect of erosion of capital and impairing earnings, profitability,
liquidity, and solvency of the banking industry.
4.8.1Major Issues behind High NPLs in Bangladesh
✓ Absence of due diligence in Borrower Selection.
✓ Deviation from the standard credit risk management procedures prescribed by BB or
enumerated in the bank's own credit policy.

✓ Inadequate collateralization and at the same time, overvaluation of collaterals

cause serious hindrances in the risk mitigation process, sometimes encouraging the
borrowers to default.

33 | P a g e
 ✓ Poor post-disbursement monitoring and follow-up of borrowers.

✓ Diversion of the fund by the borrowers, taken as loans from the banks, from their
business to it for other purposes.

In order to bring down NPLs to a tolerable level, effective management of NPLs is a

crucial matter. The government and the central bank have taken various policy measures
in this regard. Banks have been asked to ensure proper due diligence while disbursing new
loans to prevent the creation of new NPLs and expedite their recovery drive through the
disposal of the long pending lawsuits by increasing monitoring and employing renowned
lawyers and creating the task force at the head office, regional office, and branch level.
However, considerable success was not achieved in the case of classified loan recovery.

4.8.2 Major Challenges in case of Recovery against NPLs

• Banking sector faces a lot of challenges in case of recovering NPL because of

tackling corruption, ensuring good governance, maintaining adequate liquidity,
and reviving and retaining depositors.
• Limitations of the Money Loan Court Act, shortage of full-time judges,
procrastination of legal actions, etc. Besides, the application of 'The Bankruptcy
Act' is also not significant.
• Disbursing credit without proper risk analysis, problems in ownership of mortgaged
assets, non-existence of the mortgaged assets, lower value of mortgaged assets
compared to actual loan, etc. are also responsible for not being able to recover
significant amounts against NPLs by banks.

Bangladesh Bank along with the government is taking necessary initiatives for regulatory
and legal reform to create a suitable environment for existing NPLs recovery. Amendment
of the existing laws is expected to accelerate the defaulted loan recovery process. Besides,
effective practice of corporate governance, transparency and accountability in all aspect,
efficient credit risk management, managerial efficiency, and adaptation of modern
technological changes may improve the overall NPL problem scenario of the banking
sector of Bangladesh.

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4.9 Base for Provisioning & accounting Treatment of NPLs

A balance sheet item represents funds set aside by a company to pay for losses that are
anticipated to occur in the future. The actual losses for the earmarked funds have not yet
occurred, but the general provisions account is counted as an asset on the balance sheet.

The bank managers of Bangladesh deduct the amount of interest suspended and the value
of “eligible securities” from the outstanding amount in order to determine the base for
provisioning to NPLs. For unclassified loans, however, they keep a general provision (1%)
against the outstanding amount and include it in the capital to determine the capital
adequacy of the bank (at present 10%). With regard to income recognition, bank managers
do not consider the amount of interest on substandard and doubtful loans as income for
the bank, but rather keep it separately in an “interest suspense account”. However, if any
amount is received against sub-standard and doubtful loans, the said amount is deducted
from the total interest suspense amount. In the case of a bad/loss loan, the interest on such
loan is also kept in the interest suspense account if a suit is filed in court. Seemingly, with
regard to substandard and doubtful loans, this interest is also excluded from the income of
the bank. These accounting measures have made the banking sector more transparent and
credible than they were in the past.

4.10 Measures Taken to Improve the NPL Scenario in Bangladesh

To curb NPL, Bangladesh should initiate some major restructuring:

• The FIs should start restructuring the overall operation by taking measures like
increasing collateral, receiving additional legal documents, verification and
authenticating of those legal documents.
• Corporate entities should start some restructuring in some elements like capital
structure. The capital structure should be in such a way that the firm must invest
a certain amount of capital, and besides the capital structure of the company,
total assets and management of the organization should be under strict
regulation.
• To overcome the default of the companies, some provisions like merger and
acquisition, and realization of disinvestment transactions should be introduced
overall.
Also, some other measures should be taken in a bid to control the growing default culture:

35 | P a g e
• Additional collateral is required when the value of a loan is increased from
t h e previous financing.
• According to loan policy, banks have specific limits for a specific type of
loan, loan officers should not cross that limit.
• No government subsidies & financial promotion to the firms who are loan
defaulters.
• Government should establish AMCs to settle the non-performing portfolios.
• Applying some restrictions on loan defaulters, such as restrictions on
establishing a new company, purchasing a new flat & house, buying a car, riding
on an airplane, and staying in a five-star hotel.
• FIs should be able to recognize the defaulters so that they could be stopped from
taking
• The borrowers should be publicly shamed so that the tend ency of willful default
of the borrower’s decays.

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 Chapter Five: Presentation and analysis of data

The presentation and analysis of data are constructed in two parts. In the first part, a
comparative analysis has been conducted by the capital adequacy, NPLs, and ROE of state-
owned commercial banks, privately owned commercial banks, and foreign-owned commercial
banks based on 15 years from 20012 to 2021. And the second part is constructed in a statistical
way of state-owned banks based on 15 years from 2007 to 2021.

5.1 Comparative analysis

Figure: 1 Capital to the risk-weighted ratio by type of banks

CAPITAL TO RIS K W EIGHTED RATIO

SCBs PCBs FCBs
28.5
28.4
25.9
25.6

25.4

24.9

24.5
22.7
20.6

20.3

13.7
13.6

13.3
12.8
12.5

12.5

12.5
12.4

12.4
11.4

10.8

10.3

9.6
8.3
8.1

6.8
6.4

5.9

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Bank 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
types
SCBs 8.1 10.8 8.3 6.4 5.9 5 10.3 5 9.6 6.8
PCBs 11.4 12.5 12.5 12.4 12.4 12.5 12.8 13.6 13.7 13.3
FCBs 20.6 20.3 22.7 25.6 25.4 24.9 25.9 24.5 28.4 28.5

37 | P a g e
Source: Banking performance indicators, Appendix-3(Table II), Banking regulation & policy
Department, Bangladesh Bank, (2012-2021)

The most critical issue for banks to survive is the non-performing loan rate. These ratios are
influenced by a variety of things. Some are based on firm-level difficulties, while others are
based on macroeconomic indicators. For the selected 10 years, the capital-to-risk weighted
asset of SCBs is quite low. In the financial year 2012, it was 8.1 percent, which was quite
concerning, but it progressively improved, and in the financial year 2018, it rose to 10.3
percent, reaching 9.6 percent in 2020, but in 2021, it fell to only 6.8 percent, a certain
percentage. When we compare the ratios of SCBS, PCBs, and FCBS, we can quickly get a
sense of the comparative landscape. PCBs and FCBS had the lowest values of 11.4 percent and
12.6 percent, respectively, while SCBs have the highest value of less than 11 percent.

Figure: 2 NPLs to total loan ratio %

N PLS TO TOTAL LOAN RATIO %

SCBs PCBs FCBs
30
26.5
23.9

23.9
25
22.2

21.5

20.9

20.6
19.8

9.6
7.8
7.3

6.5

5.8
5.7
5.5

5.5

5.4
7
4.9
4.9

4.9

4.7
4.6

4.6
4.5

3.9
3.5
3.5

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Bank 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
types
SCBs 23.9 19.8 22.2 21.5 25.0 26.5 30.0 23.9 20.9 20.6
PCBs 4.6 4.5 4.9 4.9 4.6 4.9 5.5 5.8 4.7 5.4
FCBs 3.5 5.5 7.3 7.8 9.6 7.0 6.5 5.7 3.5 3.9
Source: Banking performance indicators, Appendix-3(Table III), Banking regulation &
policy Department, Bangladesh Bank, (2012-2021)

38 | P a g e
NPL is a common banking factor because it is allowed up to a certain point. In this aspect, the
amount of loans that are non-performing each year is a useful metric. The NPLS to total loans
ratio for SCBS during the last 10 years is worrying, with most years having more than 20%
NPLS as par total loans and advances. However, it was at 30% in 2018, which is concerning.
When we compare the three types of banks, we see that PCBs had the highest NPL ratio in
2000, at 22 percent, and that in the most recent years, they have maintained a limit of less than
6 percent. FCBS has once again demonstrated its superior performance in this area by keeping
the NPLS ratio limit within 10% in each of the selected years.

Figure: 3 Comparative positions of NPLs

C O M PARATI VE PO S I TI ON O F
N PL S
Total npls in billion NPLs in SCBs NPLs in PCBs

992.1
943.3
939.2

887.3
743.1
621.8
501.6

491.9
594

441.7
439.9

438.4
427.4

422.7
405.8

403.6
381.4
373.3

487
310.3
272.8
253.3

230.6
227.6
215.2

184.3

294
166.1
143.1
130.4

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Total 427.4 405.8 501.6 594.0 621.8 743.1 939.2 943.3 887.3 992.1
NPLs
in
billion
NPLs 215.2 166.1 227.6 272.8 310.3 373.3 487.0 439.9 422.7 438.4
in
SCBs
NPLs 130.4 143.1 184.3 253.3 230.6 294.0 381.4 441.7 403.6 491.9
in
PCBs
Source: Banking performance indicators, Appendix-3, Banking regulation & policy
Department, Bangladesh Bank, (2012-2021)

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From the above graph, it has been found that is SCBs hold the maximum portion of the total
NPLS in banking from 2018 to 2021, industry data was collected over several years. I n 2021,
the industry tested the most NPLS, with a total value of taka 992.1 billion. There is a persistent
concord in the NPLS level, indicating that those banks have taken very little initiative in
controlling and recovering their assets. The graph below depicts the percentages of NPLS held
by SCBS as a percentage of the overall amount. Except for the financial year 2021, each year
holds more than 45 percent of the total NPLS. As a result, the SCBS has been given a red signal
to minimize the quantity of issue lending as soon as feasible.

Figure: 4 NPL of SCBs as % of total

NPL of SCBs as % of total

51.86
52
50.33 50 50.24
49.9
50
47.63
48 46.63
45.93
45.37
46
44.189
44

42

40
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
NPL 50.33 50 45.37 45.93 49.90 50.24 51.86 46.63 47.63 44.189
of
SCBs
as %
of total
Source: Banking performance indicators, Appendix-3(Table III & IV), Banking regulation &
policy Department, Bangladesh Bank, (2012-2021)

40 | P a g e
 Figure: 5 Comparative scenarios of ROE as %

C O M PARATI VE S C ENARI O O F R O E A S %
SCBs PCBs FCBs

17.7
17.3

16.9

14.6

13.4

13.1
13.1

12.4
11.3

11.2
11.1
10.9

10.8
10.3
10.2

10.2

10.1
12

11
9.8

9.3
3.5

2.9
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
-1.5

-6
-11.9

-13.5

-13.7
-29.6

-29.6
Bank 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
types
SCBs -11.9 10.9 -13.5 -1.5 -6.0 3.5 -29.6 -13.7 -29.6 2.9
PCBs 10.2 9.8 10.3 10.8 11.1 12.0 11.0 11.2 10.2 10.1
FCBs 17.3 16.9 17.7 14.6 13.1 11.3 12.4 13.4 13.1 9.3
Source: Banking performance indicators, Appendix-3(Table III & IV), Banking regulation &
policy Department, Bangladesh Bank, (2012-2021)

The graph can be a useful tool for determining how low SCBS profitability is in our country.
SCBS had the highest negative return on equity of -29.6 percent in 2018 and 2020. However,
this dreadful scenario reversed dramatically in 2013, it was 10.9 percent. Although the
percentage has reduced, it is still acceptable. The return on equity (ROE) growth rate was
likewise inadequate and deteriorated with a negative value in 2012 and subsequent years. If we
try to create a competitive idea, we can see that PCBs have maintained at least a k10% return
on equity in the last 10 years, with the exception of 2013, when they had a large drop, but
FCBS has shown remarkable performance, with an average return on equity of at least 12% in
every year.

5.2 Empirical analysis

5.2.1 Regression model summary

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I have used a multiple linear regression model to assess whether the return on Assets is changed
by the change of the variables like non-performing loan ratio, non-performing loan growth rate,
deposit growth rate, liquidity ratio, and the provision maintenance ratio. Here, return on the
asset has been considered as the dependent variable (Y) and non-performing loan ratio, non-
performing loan growth rate, deposit growth rate, and the provision maintenance ratio are as
independent variables (X, X2, X3,………..n) serially. From this section, I have tried to emerge
P-value, F-statistics, T-statistics, and R-squared and adjusted R-squared of the variables. To
perform this section, the following regression model has been used: Y (Return on Asset) = α+
β1(NPLR) + β2(NPLGR) + β3(DGR) + β4(PMR)+e Using the above model, the test has been
done by the EViews 10 and the result is shown below-

Dependent Variable: ROA

Method: Least Squares
Date: 11/21/22 Time: 00:21
Sample: 2007 2021
Included observations: 15

Variable Coefficient Std. Error t-Statistic Prob.

C 9.603170 5.710653 1.681624 0.1236

NPLGR 0.014103 0.010314 1.367377 0.2015
NPLR -0.221805 0.101999 -2.174578 0.0547
PMR -0.104448 0.056941 -1.834331 0.0965
DGR 0.093226 0.038988 2.391161 0.0379

R-squared 0.814028 Mean dependent var 0.063333

Adjusted R-squared 0.747639 S.D. dependent var 0.798818
S.E. of regression 0.609598 Akaike info criterion 2.109169
Sum squared resid 3.716101 Schwarz criterion 2.345185
Log likelihood -10.81876 Hannan-Quinn criter. 2.106655
F-statistic 3.510017 Durbin-Watson stat 1.224470
Prob(F-statistic) 0.048823

42 | P a g e
5.2.1.1 Significance test based on the above model

Simultaneous Significance Test (F Test)

The purpose of the test is to see if independent factors have a combined or simultaneous
effect on the dependent variable. The value of F count equals 3.510017, and the probability of
F equals 0.048823. The F test is significant when the significance level is set to 5%. It can be
concluded that when all independent factors are present (simultaneously), the dependent
variable is significantly influenced.

Test of the Significance of the Partial test (T-Test)

The T-test is used to determine how much each independent variable influences the dependent
variable. It can be used to conclude the significance of the partial test (T-Test) of data
processing findings, namely:

✓ Data analysis revealed that the variable of non-performing loan growth rate has a T
count of 1.367377 and a probability of 0.2015, i.e. > 0.05, and that the variable value
of non-performing loan ratio for the individual (partial) has a positive effect but not
significant (for statistics) on the variable of ROA.
✓ Data analysis revealed that the variable non-performing loan ratio has a T count of -
2.174578 and a probability of 0.0547, i.e. >= 0.05, indicating that the variable non-
performing loan growth rate has a negative effect (for statistics) but is not significant.
✓ The data analysis revealed that the variable deposit rate for the result has a T count of
2.391161 and a probability of 0.0379, which is less than 0.05, indicating that the
variable has a positive effect (for statistics) and is significant to the variable ROA.
✓ The data analysis revealed that the variable provision maintenance ratio has a T count
of --1.834331 and a probability of 0.0965, i.e., greater than 0.05, implying that the
variable provision maintenance ratio has a negative and statistically no significant effect
on the variable ROA.

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Analysis of the Coefficient of determination

Based on the coefficient of determination (R-squared) of these values, it can be deduced that
the total value of the independent variables influences the dependent variable by 81 percent,
while the remaining 19 percent is influenced by factors other than the variables analyzed.

5.2.2 The Classical Assumption Test

Normality Test Data

The normality test can be used to evaluate if data was acquired from a normal distribution or a
normal population. The most frequent distribution function for independent, randomly
produced data is the normal distribution, commonly known as the Gaussian distribution. From
survey analysis and quality control to resource allocation, the bell-shaped curve is omnipresent
in statistical reports.

5
Series: Residuals
Sample 2007 2021
4 Observations 15

Mean 1.67e-15
3
Median 0.070619
Maximum 0.782400
2 Minimum -0.996130
Std. Dev. 0.515205
Skewness -0.291314
1 Kurtosis 2.365122

Jarque-Bera 0.464079
0 Probability 0.792915
-1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00

The known value of the probability of the statistic J-B is 0.464079, as shown in the figure. The
probability value, which is 0.792915, is higher than the significance level, which is 0.05. This
indicates that the data fits the normalcy assumption, which states that the data is distributed
regularly.

5.2.3 Test of Multicollinearity

To assess whether any need to remedy multicollinearity if one can determine which variables
are affected by it and the degree of the association. Fortunately, the researcher can measure

44 | P a g e
multicollinearity in his regression model using a simple test. The variance inflation factor (VIF)
determines the strength of the association between independent variables.

For each independent variable, statistical software creates a VIF. VIFs have no maximum limit
and start at 1. A value of 1 denotes that there is no relationship between this independent
variable and any other variables. VIFs between 1 to 10 indicate a moderate association, but not
one significant enough to justify corrective action. Critical levels of multicollinearity are
represented by VIFs larger than 10. Reflect crucial levels of multicollinearity in which
coefficients are poorly calculated and p-values are suspect.

Determine the strength of linkages by using VIFs to detect correlations between variables. The
most statistical program can show researchers VIFs. Because observational studies are more
likely to have multicollinearity, assessing VIFs is particularly crucial.

Variance Inflation Factors

Date: 11/21/22 Time: 02:06
Sample: 2007 2021
Included observations: 15

Coefficient Uncentered Centered

Variable Variance VIF VIF

C 32.61156 1316.362 NA
NPLGR 0.000106 2.189002 2.188627
NPLR 0.010404 26.09438 8.242270
PMR 0.003242 1099.155 8.393607
DGR 0.001520 16.78534 2.025455

Based on the multicollinearity test, here the VIFs are less than 10 which means it indicates a
moderate association among the independent variables. We know if this is greater than 10
means there is strong multicollinearity and need to fix it. As I found moderate multicollinearity
means changing one variable will not lead to a change in the other independent variable.

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Here less the VIFs value means it is more independent among themselves according to center
VIFs here deposit growth rate 2.025455 is mostly independent means if PMR is changed the
other independent variables won’t need to change to affect the dependent variables. And we
also see non-performing loan ratio of 8.393607 is less independent or more related among the
independent variables. So, my independent variables are actually independent.

5.2.4 Heteroscedasticity Test

The heteroscedasticity test determines whether a variable regression model's residual is distinct
from the residual of other observations. If the variance of the residuals remains constant, it is
referred to as homoskedatisitas; if the variance varies, it is referred to as heteroskedatisitas.

Heteroskedasticity describes a situation in which the residuals' variance is unequal throughout

a range of measured values. If there is heteroskedasticity in the population employed in the
regression, the results of the analysis may be erroneous. Heteroskedasticity is said to be more
common in models with a large range of values.

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 0.260792 Prob. F(4,10) 0.8965

Obs*R-squared 1.416940 Prob. Chi-Square(4) 0.8412
Scaled explained SS 0.429844 Prob. Chi-Square(4) 0.9800

It may be deduced that the probability value of Chi-Square is greater than the significance level
of 0.05. This means that there is no heteroscedasticity among the independent variables.

5.2.5 Autocorrelation

The degree of correlation of the same variables between two successive time intervals is
referred to as autocorrelation, also known as serial correlation.

R-squared 0.584028 Mean dependent var 0.063333

Adjusted R-squared 0.417639 S.D. dependent var 0.798818

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 S.E. of regression 0.609598 Akaike info criterion 2.109169
Sum squared resid 3.716101 Schwarz criterion 2.345185
Log likelihood -10.81876 Hannan-Quinn criter. 2.106655
F-statistic 3.510017 Durbin-Watson stat 1.224470
Prob(F-statistic) 0.048823

The value of the Durbin-Watson statistic for the model fixed effect is 1.224470, which indicates
that there is positive autocorrelation because the value of the Durbin-Watson statistic is less
than 2.

Chapter Six: Findings, Conclusion & Recommendations

6.1 Findings:
We have found our statistical outcomes according to various tests by the software Eviewes 10.
We have already interpreted those outcomes based on every test but our actual finding
according to our objectives has not been specified yet. So, in this part, we have tried to find out
our actual objectives for what we have conducted in this report. My hypothesis made for this
report also has been checked in this part based on the analysis part of the research. So, this part
is the final solution of my report.

The finding result from the Eviews has been discussed below:

The autocorrelation (p value>5%), heteroskedasticity (p value>5%), multicollinearity (p-

value 5%,) and normal distribution test (p-value are used to find out a good model for
selecting a hypothesis.

All of the above test results says that it is a good fit model.

Objective 1: To determine a significant relationship between the non-performing loan growth

rate and ROA of state-owned commercial banks.

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Data analysis revealed that the non-performing loan growth rate has a probability of 0.2015,
i.e. >= 0.05, and coefficient 0.014103 indicates that the variable non-performing loan growth
rate does not significantly affect the dependent variable and has a positive relation.

Objective 2: To determine a significant relationship between NPL and ROA of state-owned

commercial banks.

Here, the non-performing loan ratio has a probability of 0.0547, i.e. >= 0.05, and coefficient -
0.221805 indicates that the variable non-performing loan ratio does not significantly affect the
dependent variable but has a negative relation.

Objective 3: To determine a significant relationship between the deposit rate and ROA of
state-owned commercial banks.

Here, the variable deposit rate for the result has a probability of 0.0379, which is less than

0.05, and coefficient 0.093226 concluding that the variable has a positive relationship and (for

statistics) is significant to the dependent variable of return on Asset.

Objective 4: To determine a significant relationship between the provision maintenance ratio

and ROA of state-owned commercial banks.

The data analysis revealed that the variable provision maintenance ratio has a probability of
0.0965, i.e., <0.05, and the coefficient is -0.104448 concluding that the variable provision
maintenance ratio has a (partial) negative and statistically does not significantly affect the
variable of return on asset.

6.2 Conclusion
According to the case study's econometric model, NPLs had a substantial negative influence
on SCB profitability throughout the study period, although research by Fan and Shaffer in 2004
found that NPLs are adversely associated with bank profit efficiency, it was also statistically
insignificant. Some qualitative aspects that directly or indirectly impact the bank's performance
and profitability are not included in the model due to the confidentially of the selected
institutions. However, additional research may be done to determine the impact of NPLs on
SCB profitability and performance although research by Fan and Shaffer in 2004 found that
NPLs are adversely associated with SCBs of NPLs in our nation has passed. If the defaults

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persist, the financial sector as a whole may find itself in a humiliating scenario. This document
can assist in comprehending the need of taking steps to keep the SCB of NPLs under control.
It may also be used to conduct additional research on other banks and nonbank financial firms.
It's past time to create suitable lending, credit, and interest rate policies, as well as risk
management strategies, for all banks operating in our country. Other appropriate, as well as
emergency safeguards, can be implemented as quickly as feasible by the authorities to create a
sound environment in Bangladesh's banking business.

6.3 Recommendations
I have some recommendations for state-owned commercial banks based on my report how to
reduce non-performing loans and can increase the overall profit or net interest income. In fact,
I have recommended some qualitative factors that can easily reduce the NPLs of a bank,
especially the, as well as emergency safeguards loan, which should be given to the borrower
by considering

the character, capital, capacity, collateral, and condition of the loan applicant.

➢ Political influence should be under control as loans are granted by political pressure
despite the bad reputation of the borrower.
➢ Bank personnel should be more due diligence to reduce NPLs from state-owned
commercial banks as many of them become preplanned for the notion of some extra
gain.
➢ Guilty persons should be punished severely. Bangladesh Bank ordered investigating
team but actually, no one is punished.
➢ Downed payment should be made to reschedule the loans offered to the defaulter.
➢ Bangladesh Bank guidelines should be strongly followed. And should keep away to
violate those rules.
➢ Boards of directors should work as a guardian and not to be dominated by political
Personnel.

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6.4 Reference
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Realities and Challenges” BIBM, pp. 75-95, viewed November 2012.
• Ahmad, F 2013 “Corruption and Information Sharing as Determinants of Non-
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• Akinlo, O, & Emmanuel, M. 2014, “Determinants of Non-performing Loans in
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• Dash, MK 2010 “The Determinants of Non-Performing Assets in Indian Commercial
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• Kotheri, CR 1985, Research Methodology, 1st edn, New, Delhi, India.
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