BB's assessment report speaks volumes for banks

FE Team | Published: November 05, 2023 19:44:35

The observations made by the Bangladesh Bank (BB) in its latest Financial Stability Assessment Report about the state of profitability and asset quality of banks are unlikely to surprise those people who are in the know of the developments in the country's banking industry. Profitability of the sector, according to the Report, declined as return on assets (ROA) and return on equity (ROE) during the first quarter of the current calendar year slid notably over those of the preceding quarter. Besides, some other important indicators, including capital to-risk weighted asset ratio (CRAR), were slightly lower than those of the last quarter of 2022. The central bank's stress test, however, noted that the banking sector would continue to remain 'moderately' resilient to different shock scenarios.
The assessment report does make it clear that the banks' overall state of affairs is not at all comfortable. It does not need any elaboration that one particular factor --- non-performing loan (NPL) --- is behind all the ills. According to the BB's estimate, the NPL share in the total outstanding loans increased to 8.80 per cent at the end of the first quarter (January-March) of 2023 from 8.16 per cent estimated at the end of 2022. The actual increase would be more than the central bank's calculation once the written-off and rescheduled loans are taken into account. The BB could hardly hide its worries about the banks' fragility, in terms of NPL. The latest assessment report, quoting the results of the stress test, said that a 3.0 per cent increase of NPLs or a default by the top three large borrowers 'is likely to affect the banking sector's resilience significantly, leading to the fall of CRAR below the minimum regulatory requirement'.
This statement speaks volumes for the overall situation in the banking sector. None but the big borrowers who enjoy power and clout in society have been largely responsible for creating an unhealthy loan culture in the banking sector. Neither the government nor the central bank has acted decisively and taken any action against the people who literally plundered the depositors' money. Rather, a few of the latter enjoy the liberty of roaming in the corridors of power with great ease. Then again the sector is troubled by the presence of too many operators. Since political connections have played a part in the establishment of many banks, particularly the third and fourth-generation ones, regulator faces some difficulties in dealing with them. The central bank is empowered legally to take necessary steps to deal with both delinquent lenders and borrowers. But its actions are found to be wanting and soft.
Several loan scams, the takeover of the management of some banks through questionable means and other irregularities in recent years have created a crisis of confidence among bank depositors. A few damage-control measures initiated by the central bank have somehow stabilised the situation. But the rot remains gnawing underneath. Industry insiders smell more irregularities that need to be unearthed and dealt with due seriousness by the sector regulator. The fact that the banking industry desperately needs some harsh and deep-rooted reforms will not be contested by anyone other than the beneficiaries of the current state of things. The government should prepare a need-based reform plan that the central bank will execute sans any interference.