EFFECTIVENESS OF LOAN RESCHEDULING ON PERFORMANCE OF COMMERCIAL BANKS IN BANGLADESH

Abstract

A competitive banking system is a crucial element in fostering a sound financial system that supports economic development. It promotes efficiency, innovation, and accountability while facilitating the allocation of capital to productive uses. A sound financial system is required for economic development and a competitive banking system is the prerequisite for ensuring the efficiency of the financial system (Wilson, 2014). The highest task of the financial process is to utilize public savings through allocation in different sectors of the economy which is known as the process of capital formation in the economy (Mittal and Suneja, 2017). Commercial banks are integral part to the functioning of the modern financial system and play a significant role in supporting economic activities by facilitating the efficient allocation of capital and providing essential financial services to individuals and businesses. Commercial banks often offer a wide range of financial services beyond basic deposit and lending functions. These services may include wealth management, investment advisory, foreign exchange, trade finance, and many more, depending on the specific bank and its capabilities. Sehrish et al. (2012) emphasized that the banking system is a significant element for decision-making for prospective investors, savers, potential borrowers, and policymakers. Like any economy, the banking sector of Bangladesh has been reached today with significant changes in policies and activities from its independence in 1971. The banks of this sector play a vital role in the economic development of the country. However, the question of Non-Performing Loans (NPL) has become the headache of the banking sector. The recent literature and practical experience show the worse situation of NPLs and their impact on credit growth in the context of Bangladesh's banking sector. These imply the importance of policy considerations, risk management strategies, and regulatory measures to address and mitigate the challenges associated with the terrible condition of the NPLs problem. The government of Bangladesh has adopted a significant number of strategies to manage NPLs. xxii The loan rescheduling is a commonly practiced policy to reduce the NPLs. Successful rescheduling can contribute to the improvement of asset quality of the banks allowing the bank to avoid adverse classification of the disbursed loans. The implication of the loan rescheduling on bank performance involves consideration of various financial and operational aspects with the expectation of research to find out the real productiveness of the banking sector. The broad objective of this study is to evaluate the effectiveness of loan rescheduling on performance of commercial banks in Bangladesh with four specific objectives i) to analyze elaborately the loan rescheduling process adopted by the banks and its trend; ii) to investigate the short and long-run impact of the rescheduled loan on performance; iii) to track the rescheduling loan to determine their ultimate recovery rate; and iv) to identify whether any differences among type-wise banks in their loan recovery through rescheduling. A mixed-methods approach combining both qualitative and quantitative methodologies has been used through descriptive statistics, dynamic models like Vector Autoregressive (VAR) and Vector Error Correction Model (VECM) integrating time series data, and case studies from both the primary and secondary sources of data. The experts’ opinion has been investigated to validate the outcomes of the analysis through semi-structured questionnaires. There has been a continuous increase in the number or proportion of non-performing loans and rescheduled loans in the banking sector of Bangladesh over the specified period from 1997 to 2021. The results of the VECM and VAR model suggest that rescheduled loans have a long-run expected impact only on asset quality but a negative impact on earnings. Additionally, capital adequacy, management efficiency, and liquidity do not have a long-run impact on rescheduled loans but interestingly all of the performance indicators; both individually and collectively have a short-run impact on rescheduled loans. By systematically analysing the recovery data for accounts rescheduled first-time in 2016 and tracking their outcomes until 2019, it is observed that smaller accounts, particularly those with loan sizes less than 1 million, have a higher repayment performance compared to larger accounts. xxiii Comparing the percentage of accounts classified with the percentage of unrecovered amounts implies that a relatively small number of larger loans contribute to a significant portion of unrecovered amounts, and the concentration of classified accounts in the more than a billion categories highlights potential risk concentration in larger loans. The accounts that are regular through second and third-time rescheduling have a real income reduction which is associated with a decrease in risk-weighted assets, earnings, management efficiency, and liquidity validating the VECM/VAR model results. From the semi-structured questionnaire of 60 experts, 42% of them, the largest group believe that loan rescheduling has no positive impact on bank performance but 38% of experts believe in a positive impact whereas 20% of experts believe that a partial positive impact provides a nuanced perspective. The majority of the experts believe that loan rescheduling reduces productivity which leads to skill loss emphasizing the potential negative impact on the efficiency and skills of the banking sector. The alignment among the negativist perspective and the outcomes of the dynamic model and case study, particularly regarding the non-impact of rescheduling on risk weighted assets, management efficiency, and liquidity, validated the consistency of the findings. This research not only enriches previous research in several ways but also paves the way for future investigations in related areas contributing to the advancement of knowledge in the field and providing practical insights for industry practitioners and policymakers. Combining multiple methodologies, this research contributes to the academic literature by offering a comprehensive analysis of the effectiveness of loan rescheduling. This can be valuable for researchers interested in similar topics by overcoming the limitations of the data and other factors. The research outcomes can serve as practical guidance for commercial banks. Policy-makers can bring into play the insights to get rid of impurity strategies of distressed loan management and improve overall financial performance. Strategies for supervision of the impact of rescheduling on various financial metrics may need to be refined based on the observed outcomes. By exploring alternative strategies, researchers can expand a deeper perspective of the complexities close to rescheduled loans and efforts towards developing solutions that promote financial strength and sustainable lending practices in the banking sector.