None would dispute the fact that the country's banking institutions are not in a good shape. The rot began in the days following the collapse of the stock market in December 2010. The problem surfaced mainly because of over-exposure of a number of banks to the stock market.
However, problems being encountered by banks in the public and private sectors are not always the same. The public sector banks are in most cases beset with problems arising out of poor management, corruption, frequent interference of the government in management and loan affairs and politicisation of their board of directors. All the problems together helped the banks getting into a few scams that have rocked the country's financial sector recently.
The private sector banks have been experiencing a different sort of problems. These banks have successfully overcome the problem of liquidity shortage and a good number of them have excess liquidity. The increase in liquidity is well manifested in the fall in the deposit rates. The private banks, which were attracting funds at interest rates as high as 14 per cent in 2011, are now offering rates on fixed deposits, ranging between 11.5 per cent and 12 per cent.
In a depressed investment environment, it is obvious that the demand for fund from the investors would be lower than any normal time. A link between the falling demand for banks' funds and the current volatile politics could also be traced. The World Bank in its Bangladesh Development Update has pointed out 1.2 per cent decline in private investment as an unprecedented event in the history of the country.
The current state of the banks' profitability could be well understood from the un-audited financial statements of the private sector banks for the third quarter of the current calendar year. Profit scorecards of some of the banks for the period looked rather unbelievably ugly.
For instance, the largest private sector bank, the Islami Bank Bangladesh Limited (IBBL) made a profit of Tk 2.0 million in July-September period compared to Tk 830 million earned during the same period of last year. The profit earned by the IBBL during the nine-month period of 2013 stood at Tk 1.94 billion as against the corresponding earning of Tk 5.05 billion in the previous year.
The profit earning of another leading private sector bank, the Prime Bank Limited, also took a deep plunge during the first nine months of current year. The profit was one-fifth of the same earned during the corresponding period of last year.
Bankers hold the central bank's new rules relating to provisioning of classified loans responsible for the sharp fall in profit earnings of the banks. However, they do also admit the fact that provisioning requirements have gone up significantly this year since the rate of loans becoming classified has gone up for a variety of reasons.
Banking industry insiders say that the provisioning requirements would have been much higher than what is found in the books of accounts of banks had there been no window-dressing under a much-abused facility known as 'rescheduling'.
There is no denying that monitoring by the central bank has become more disciplined and effective than before. But still there are flaws and lacunas which offer scope for banks to conceal many hard facts about their loans.
When the banks are in the midst of an uncomfortable situation, the growing dependence of the local corporate house on foreign loans would surely come as an ominous development for them.
According to a report published some days back in The Financial Express, an aggregate amount of US$953 million were approved in foreign loans for 60 local corporate houses during the first nine months of the current calendar year. Proposals for similar loans worth about $1.5 billion are now waiting decision from the scrutiny committee at the Board of Investment (BoI). The BoI last year approved foreign loans amounting to $1.5 billion.
The government seems to be lenient towards allowing the private entrepreneurs to avail private loans because of the current 'comfortable' forex reserve position. The corporate houses are also keen on getting foreign private loans which are cheaper and hassle-free. The repayment period in most cases is also longer.
Such borrowing entails risk, no doubt. But lower cost of fund would benefit the entrepreneurs. However, the government needs to be watchful while allowing this kind of loan for development projects. It should encourage loans for infrastructure projects and investment in real sectors of the economy.
The banks, as happened in the case of last year, are likely to disburse unattractive dividends for the current year because of their falling profitability.
Since the listed banks are considered major players in the capital market, their dismal profit-earning picture is likely to cause further erosion in the investors' confidence.
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