The health of Bangladesh’s banking sector has never been in good shape. During the 15 years since the liberation of the country in 1971, the nationalized banks had a field day. But mismanagement, political interference, and corruption made these banks financially weak. That legacy is still continuing. In some cases, it has even become stronger.
With the country gradually switching over to open economy, private banks had started entering the market from the latter part of the 1980s. And everybody hoped for an improvement in the situation. Their hope was not dashed as the private banks did show promising results.
However, the problem surfaced at the time of granting licenses to a good number of third generation banks. Politics, and, allegedly, money came into play. The quality of sponsors does matter in the operations of banks or financial institutions. Any compromise with this issue does only invite trouble in the future.
Due to regulatory slackness and management problems, the private banks also started showing signs of uneasiness with their classified loans. The size of classified loans bulged, but at rates much below that of state-owned banks.
The crash of the stock market in December 2010 exposed the vulnerability of banks to imprudent investments. For a couple of years, a significant number of private banks reaped a good harvest out of a booming stock market. When the market collapsed, a few of them did suffer substantial loss; they had not publicized the extent of their loss at the time.
Despite the fact that the economy has been growing at a decent rate, private sector investment continues to be sluggish. The private sector credit demand has been fluctuating since 2013 when there was a large drop in demand for bank credit from the private sector—from a high of 20.3% from July 2012 to 10.8% on July 13. The low demand continued until January 15 and after that, it started to pick up albeit slowly. It is now hovering around 16%. The recent rise has been mainly due to the import of capital machinery for some large infrastructure projects by the private sector. Overall the private sector mood is subdued.
Banks have gradually reduced both lending and deposit rates following demand from the businesses to narrow the spread. Nevertheless, in most cases, the spread has remained the same, at an average rate of nearly 5%. However, the demand for funds from businesses has not recorded a notable increase. Thus, the profitability of most banks has declined. The provisioning requirements have been taking a heavy toll on the banks’ profitability. Most banks, both private and public, deliberately hide lots of facts as far as classification of their outstanding credits is concerned. They resort of all types of window-dressing to show their balance sheets relatively clean.
Nonetheless, all these exercises have not been able to stem the rot. The loads of classified loans of banks increased by 28% or Tk 143 billion in the first nine months of the current calendar year. The volume of non-performing loans in the banking sector at the end of September 2016 stood at Tk 657.31 billion that accounted for 10.34% of total outstanding loans of the banking sector. The presence of non-performing loans (NPLs) in the public sector banks is very high compared to that in the private banks. The increase in NPLs is largely attributed to the failure to pay installments against many rescheduled loans by the borrowers.
When the third generation banks were having a tough time, the Ministry of Finance, coming under political pressure, very reluctantly allowed nine more private scheduled banks in 2013. Most of these banks are burdened with a large volume of classified loans. The central bank honchos held a meeting with the chief executives of the nine new banks recently and asked them to stop ‘aggressive’ lending.
The banking sector has lots of weaknesses and deficiencies. The presence of too many banks is one of those. Does Bangladesh need so many banks?
Bangladesh with a nominal GDP of $210 billion has 56 banks while Vietnam having an economy of almost an equivalent size has 26 banks. China, the second-largest economy in the world (GDP size $11.4 trillion) has 128 banks and India (GDP size $2.5 trillion) has 88 banks. Malaysia, an economy of $300 billion, has 48 banks.
There is no denying that still a large part of the population has remained unbanked and banks do need to reach them. But that could be done without allowing more banks in a small market. The old banks could do the job through the expansion of their network.
In fact, the presence of too many banks has given rise to unfair competition among the banks to grab corporate clients in particular. In this competition, the corporate borrowers, of course, enjoy the upper hand. Moreover, Banks are left with no choice other than investing their funds they get from the depositors. When competition is fierce in a small market, it is natural for banks to relax a few conditions to hook the clients. Although, such deliberate relaxations only help the size of classified loans become bigger, thereby deteriorating the quality of banks’ assets.
Unless the banks improve their asset quality with due earnestness, they might find themselves in real trouble as the Basel 3 capital regulations are scheduled to be fully implemented on January 01, 2019.
The state-owned banks do often ask the government to replenish their capital because of continuous erosion of the same due to high provisioning requirement. Even some listed private banks have recently failed to maintain their respective capital adequacy ratio of 10%. The central bank appeared to be a bit lenient on this issue.
The prevailing situation in the country’s banking sector demands a few serious measures on the part of the central bank and the banks themselves. Otherwise, some unpalatable developments might take place. It is difficult to predict time. The deadline for meeting the Basel-3 capital requirement could be a potential time. So, the central bank and the banks might think loudly about the possibility of consolidation through merger and acquisition (M&A). In Bangladesh conditions, sponsors are unlikely to consider such a move. In that case, the central bank might consider using some regulatory power in this context, of course, with support from the government.
The writer is a senior journalist. He can be reached at zahidmar10@gmail.com
