Banking outlook not so bright

The heading of this column is based on an eponymous news report published recently in one of the national English dailies. The subject of this piece, the commercial banks in Bangladesh, both in the public and private sectors, are not in dire straits, but neither are they in good health, not to speak of being robust. The performance of banks in Bangladesh and elsewhere in the world have been under the radar of analysts for quite sometime, particularly after the 2007 financial meltdown in America and Britain.
These leave much to be desired considering their wayward ventures that contributed to the financial collapse according to analysts and regulators. While this assessment is based on the role of banks in the financial crisis of 2007 in most of the developed countries, the weaknesses of banks in Bangladesh have their origin in domestic factors which are not buffeted by global development. Neither is it a ripple effect of the 2007 financial chaos in America and Britain or the debt crisis in the eurozone. The problems riddling the commercial banks in Bangladesh are predominantly homegrown.
In the traditional role of mobilising resources mainly through deposits from savers and lending for sundry purposes including investment in business and industry, the banks in Bangladesh have acquitted well in the former i.e. resource mobilisation. In fact, the banks have been so successful in this that they are flush with money exceeding the demand for loan by borrowers. The Bangladesh Bank has set the ceiling for private sector credit growth at 14.30 per cent for the July-December period of the current fiscal year (2015-16). Though credit growth has increased in recent months, particularly for import payments, the target of increase has not been reached as demand from other sectors are lagging or are not being met by the banks for lack of initiative. Though absence of a favourable investment climate is often cited for the sluggish growth in demand there has been slow but steady improvement in the supply of electricity, one of the major factors for the dynamism in investment activities. Moreover, with no repetition of the political turmoil seen in the first quarter of 2015, confidence of investors has been restored to a large extent. The banks point out that private sector credit demand would grow if different development projects in the pipeline, particularly the infrastructural ones, are implemented quickly.
To help the banks to utilise the deposits lying idle the Bangladesh Bank has recently extended the time limit for investment in the share market for another two years. Because of volatility in the stock market this is a risky investment and the central bank does not want to expose depositors' money to uncertainty indefinitely. Moreover, it has been pursuing a policy of injecting money in the real economy to increase productivity and growth and considers banks' involvement in this sector contrary to that policy.
The auction of reverse repo, a monetary policy instrument with which the central bank mops up excess funds from the market, has remained unchanged at 5.25 per cent since February 2013. It is still higher than the call money rate of 2.0 per cent. In response to the commercial banks' recent bids for reverse repo worth Tk. 367.1 million (36.71 crore) the central bank has resorted to a less costly operation. It is now taking money from banks and non-bank financial institutions through 30-day Bangladesh Bank bill. The bill carries less than 4.0 per cent interest. This rescue operation to help the banks to find a solution to their problem of excess liquidity has been undertaken by the central bank rather reluctantly. The view of the central bank is that banks should invest depositors' money for productive activities and not park it with them. The central bank has formed several committees to help commercial banks find out potential sectors for financing.
The weakness of the commercial banks, particularly in the public sector, is more prevalent in respect of asset quality, poor capitalisation and low profitability. According to London-based BMI Research, a company of Fitch Group, profitability and solvency of the banking sector will remain the major challenges amid weak standards of corporate governance and underdeveloped risk management system. Various efforts have been made to turn around the poorly managed state-owned banks, such as converting them into limited liability companies and appointing new management. But the BMI Research has come to the conclusion that very little progress has come out of these measures. Though it has not been mentioned in the BMI Research report, it is public knowledge that appointment of non-professionals in the boards of directors of state-owned banks has not been helpful in bringing about reforms in management and marking improvement in decision making.
What is more alarming is that assets with poor quality have been growing in volume, particularly in the state-owned banks. The ratio of bad loans to total loans in the state-owned banks stand at 22.2 per cent at present. The performance of private sector commercial banks in this respect is only slightly better. In the 2014 Financial Stability Report of the Bangladesh Bank published in July 2015, non-performing loans (NPL) in the banking sector as a whole stood at 9.7 per cent. More than 80 per cent of the NPLs are in the bad loan category, according to the BMI report. The main cause for the incidence of bad loan is lack of due diligence in approving loan applications. Concentration of loans in a few sectors, giving loans more than justified to the same borrowers again and again and inadequate value of collateral against loans are some of the other reasons behind the growing volume of NPLs.
If risk management by the commercial banks has been poor their record in achieving required capitalisation is not satisfactory either. Under the Basel III framework, banks are required to maintain a capital to risk-weighted assets ratio (CRAR) of at least 10 per cent. Although the banking sector as a whole has been able to maintain its CRAR above the minimum legal requirement, 9 out of 56 banks were non-compliant in this. This can pose great risk to the financial stability in the economy. The BMI Research has revealed that a stress test carried out by the central bank show an increase in NPLs by 3, 9 and 15 per cent would result in the failure of 7, 21 and 29 banks respectively. This may be too pessimistic a view but the problem is real.
Five state-owned banks recently approached the finance ministry seeking immediate replenishment worth Tk. 34.97 billion. Of them two banks have been pressing hard to make up for their capital shortfalls. The state-owned banks need the capital replenishment to meet Basel-III requirements. The private banks are in a slightly better position in this regard but they have no reason to be complacent.
All told, it is evident that the banking outlook does not appear bright. It is not overwhelmed with doom and gloom but is a cause for concern. The Bangladesh Bank as the guardian and regulator of the banks is doing its utmost to restore health to the banks. It needs more power and freedom to oversee their functioning. The malaise the banks suffer from have been identified. What is required now is to gear up the reform measures that have been recommended. In this endeavour time is of the essence.  
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