What is Asset Quality?

At the end of the second quarter of 2013, non-performing loans of the banking sector reached from 8 percent in March to nearly 12 percent. Net Non-Performing Loans to total loans are higher in state owned commercial banks (SCBs) and development financial institutions (DFIs). In 2011, net-NPLs
were 0.34 and 16.95 percent in state owned commercial banks (SCBs) and development financial institutions (DFIs) respectively whereas in 2012, the percentages stood too high as 12.82 and 20.4
respectively. Overall net NPLs was 0.70 percent in 2011 which increased to 4.38 percent in 2012.
Increasing of NPLs means the increasing of risk on investment. The new MPS might increase the NPLs and subsequently might be acute for the new banks. High percentage of non-performing loans in the
banks generally causes ‘credit crunch’ i.e. shrinkage in credit flow from the supply side of the bank. At the same time, comparatively poor administration, lack of transparency, week regulations, weak monitoring cell, interest rate spread and rent seeking behaviour of the politician are also noticeable causes for increasing NPLs. NPLs reduce banks’ profitability, as banks cannot take interest income from their classified loans. It also reduces loanable funds by preventing recycling. Higher non-performing loan reduces current revenue, resulting high loss of loss provision and high cost of loan which
causes low investment and decrease of economic growth. Only increased cost of loan is not liable for low investment demand, consecutive contractionary monetary policy taken by Bangladesh Bank and present political turmoil are also liable. It is obvious that NPLs reduce banks’ profitability, as banks
cannot appropriate interest income from their classified loans. NPLs reduce loanable funds by stopping recycling. Banks need to set aside a portion of their income as loan loss reserve to make up bad debt. A bank with a high percentage of NPLs suffers from erosion of the capital. All those adverse impact of NPLs on banks’ financial health such as low profitability and low capital base are clearly reflected in Bangladesh banking sector. Expenditures- incomes ratio (EIR) is the indicator of sound management of banking sector. This are explained below by different types of banks. The reason behind high EI ratio of DFI and SCBs are mainly because of loan loss provision, high administrative, overhead expenses, interest suspense for classified loan and the lack of presence of prudential surveillance of the banking sector. Internal control system and high-quality management contributes to lower the EIR in PCBs; on the other hand, FCBs business is mostly based on important cities and their operating cost is low for which they have low EIR.