Macroeconomic Shocks and Bad Debt Vulnerability of Weak Banks in Bangladesh

Abstract

The resilient of banking sector in Bangladesh has come under increasingly serious challenge from the rising NPL and ongoing macroeconomic instability, such as the frequent of inflationary pressures, interest-rate shifts, exchange rate depreciation, GDP growth decrease, unemployment shocks have all crippled structurally weak banks; making them more susceptible to the accumulation of bad debt; but empirical studies are still scarce in Bangladeshi context about it. The objective of this study was to investigate the effects of adverse macroeconomic shocks, namely, inflation, interest rate, exchange rate, GDP, and unemployment shocks, on the bad debt vulnerability of weak banks in Bangladesh and assess the moderating role of risk management practices on the relationship. A quantitative cross-sectional design was used, and 350 employees of state-owned, private, and Islamic banks were approached in order to obtain primary data using a structured Likert-scale questionnaire followed by descriptive statistics and inferential test. The findings revealed that all the macroeconomic shock chocks have positive and significant impact on the nonperforming loan vulnerability, while weak governance, low capital adequacy and credit appraisal exacerbated its effect. Results indicated weak banks were more exposed to the growth of NPLs and rescheduling, as well as had a higher burden of provisioning under economic instability, while good risk management practices helped mitigate vulnerability. The study recommends that strengthening governance arrangements, capital cushions, and risk management systems will be crucial in defusing macro-shock-induced bad debt vulnerability to sustain stable banking sector stability in Bangladesh.