The Effect of Non-Performing Loans under Non-Bank Financial Institutions in Bangladesh

Abstract

Bangladesh is a developing economy of South Asia, it continued with positive growth rate in those recent years. Country’s financial system is largely based on the financial system. Non Bank Financial Institutions came in operation in areas where banks failed to operate prudently. Though both banks and NBFIs (Non-Bank Financial Institutions’) operations are very close, there is substantial difference in risk factors for them. Banks usually lend for short-term in traditional manner, where NBFIs finance long-term loan with innovative products. Though lots of studies have been carried out to analyze NPLs (Non-performing loans) of banking system, this study focuses on impacts on profitability. Non-performing loans are those financial assets which do not generate any interest or principal repayment for the lending institutions. NPL has been an important issue for financial institutions and regulators. NPL is one of the significant issues of banking and non-banking financial sector in Bangladesh for most recent couple of decades. These loans negatively impact on a firm’s profitability as loss of interest income. Failure to generate earnings from loan and recovering principal poses threat to firm's long term sustainability. These loans also impact on the level of private investment by increasing required provision and loss accumulation in the financial system. NPL has been an important issue for financial institutions and regulators. The economic and financial costs of these non-performing loans are significant. These loans negatively impact on a firm’s profitability as loss of interest income. Failure to generate earnings from loan and recovering principal poses threat to firm's long term sustainability. These loans also impact on the level of private investment by increasing required provision and loss accumulation in the financial system. These loans also affect private consumption by reducing loan disbursement also known as “credit crunch” caused by erosion of firm’s asset and equity of NPL in NBFIs.