Research Proposal

Topic: An Evaluation of Non-Performing Loans of the Commercial

Banks in Bangladesh
Introduction
Nonperforming loans (NPLs) refer to those financial assets from which banks no longer
receive interest or installment payments as scheduled. They are known as non-performing
because the loan ceases to perform or generate income for the bank. Non-performing loans
can be classified into three different groups usually based on the length of overdue of the
said loans. NPLs create problems for the banking sector's balance sheet on the asset side.
They also create a negative impact on the income statement as a result of provisioning for
loan losses. In the worst scenario, a high level of NPLs in a banking system poses a systemic
risk, inviting a panic run on deposits and sharply limiting financial intermediation, and
subsequently investment and growth. The distinguishing feature of the study is that it
provides a framework for analysis of underlying behavior of borrowers in terms of their loan
repayments in response to lending terms of banks and other macroeconomic indicators.
Rationale of the study
This paper discusses the magnitude of Nonperforming Loans (NPLs) in the banking sector
of Bangladesh and its causes as well as the loan classification and provisioning system in
Bangladesh. The paper reveals that the presence of an alarming amount of NPLs both in the
Nationalized Commercial Banks (NCBs) and in the Development Financial Institutions
(DFIs), along with maintenance of inadequate loan loss provisions. The paper suggests that
the prevention of the flow problem of bad loans accompanied by other resolution measures
might help to sort out the nonperforming loan mess in Bangladesh.
Objective of the study
General objective:
To identify the magnitude and determinants of NPLs of all commercial banks of
Bangladesh.
To evaluate the NPLs & credit management techniques of the banks.
To assess the present situation of non-performing loans in our banking sector.
To show the trend of the loan default problem in Bangladesh.
To identify the causes and effects of non-performing loans.
To raise some issues and observations which need to be looked upon quickly for
ensuring a financially sound banking sector?


Methodology of the study
This report will be both descriptive and quantitative in nature. Secondary data will be used to
conduct the study. Different statistical and financial tools will be employed to analyze the
collected data. From the total 56 banks, those commercial banks currently operating in
Bangladesh would be undertaken as the population and sample to conduct this research.
The study is mainly based on secondary data. The study covered the period from 2000 to
2012. The work will be started with the available data which is collected from different
journals, newspapers, articles and annual reports of different commercial banks and central
bank of Bangladesh. After gathering the data a number of analyses will be conducted from
different aspects.
The methodology of the study has been enumerated below:
a) Sources of Data and Data Collection: Data has been collected from the various
secondary sources like research works of individuals, different publications, journals.

Primary Data:
Collected from selected banks through interviews of issue managers,
employees, investors, and issuers.
Secondary Data:
Annual report of the banks
Web site of the banks
Newspapers

b) Time Preference: The time preference of the study relates to the period covering
the years 2008 to 2012. These 5 years has been taken for different analysis purposes.
c) Data Processing and Analysis: Data processing has been done manually after
checking and editing. Tabular techniques are used to present data in this paper.
Research Design
Data will be presented at first with Descriptive statistics. We will present information through
graph and table. After that, implementation of analysis will be described and findings &
recommendation will be given in this study report. Statistical tools the study intends to use
are as follows:
Year and sector wise ratio analysis will be used as the financial tool to conduct the
study.
The trend analysis will be used to show the variation of NPLs through many years and
sectors.
Regression analysis will be employed in order to observe the significant relationship
between independent and dependent variables.
Literature Review
The study of financial sector stability has become the cornerstone of modern macroeconomic
policy. The recent global financial crisis highlighted the importance of appreciating financial
institutions vulnerabilities in the context of managing credit risk. The key motivation for this
paper is to improve our understanding of the credit risk determinants. However a lot of
research papers can be found regarding the problem or non-performing loan [NPLs]. Many
prudential researchers intend to work on NPLs because it is perceived as the foremost aspect
of banks survival.
Hou [2010] defines the nonperforming loan as a loan that is not generating income: [1] full
payment of principal and interest is no longer knowable, [2] the maturity date has passed and
payment in full has not been made. The issue of nonperforming loans [NPLs] has gained
increasing attentions in the last few decades. The immediate consequence of large amount of
NPLs in the banking system is bank failure. Many researchers on the cause of banking failure
find that asset quality is a statistically significant predictor of insolvency [e.g Dermirgue-kunt
1989, Barr and Siems 1994], and that failing banking institutions always have high level of
nonperforming loans prior to failure. It is argued that the nonperforming loans are one of the
major causes of the economics unproductivity problems. Non-performing loans can lead to
efficiency problem for 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 dont optimize
their portfolio decisions by lending less than demand. Whats more, there are evidences that
even among banks that do not fail, there is a negative relationship between the non-
performing loans and performance efficiency.
Nonperforming loans can be categorized into three different sets usually based on the length
of overdue of the mentioned loans. These categorization norms were first set by a Circular
no-34 of Banking Control Division [BCD] in 1989. At present loans are now classified into
four categories: unclassified, substandard, doubtful and bad loans. This paper also refers to
the circular which is effective from march 31, 2005 that shows us that continuous credit,
demand loan or a term loan which will remain overdue for a period of 90 days or more, will
be put into the special mention account and interest accrue on this loan will be credited to
interest suspense account, instead of crediting the same income account.
Vogias and Nikolaidou [2011], Bourdigia, zeng [2011], Siddique, Malik, Shah [2012],
Taktak and J ellouli [2009], stated the macroeconomic factors as a significant determinant of
nonperforming loans. Vogiazas and Nikolaidou [2011] showed the microeconomic
determinants such as GDP, the unemployment rat4e, the foreign direct investment, the
consumer price index, the investment expenditure and the construction. Degree of openness
to outsider and govt. policy are also considered as macroeconomic determinants [Zeng,
2011]. In addition Ahmed [2006] and Vogiazas and Nilolaidou [2011] argued that financial
factors can pile up NPLs of a bank. Ahmed [2006] and Boudriga, Taktak, J ellouli [2009]
talked for bank specific factors those are responsible for NPLs of the banks. Bank sizes, risk
appetite, terms of credit are considered as bank specific factors [Ahmed, 2006]. Vogiazas and
Nikolaidou [2011] mentioned credit risk and quality of loan portfolio as bank specific factors.
Bodriga, Takaka, and J ellouli [2009] mentioned Capital Asset Ratios higher provision,
private ownership, foreign participation and credit concentration as bank specific factors.