Banking sector faces an unsavoury situation

The current state of affairs in a number of banks can be interpreted as unsavoury. The central bank is reported to have identified 15 banks where credit growth rate has hit a negative mark. This situation, as reports quoting a report of Bangladesh (BB) said, has arisen due mainly to unwillingness or indifferent attitude of the investors or potential borrowers, potential and existing, to borrow or invest, due mainly to a severe shortfall of supplies in energy sector (e.g., gas and electricity) and absence of infrastructural facilities.
Sluggish investment activities have otherwise raised fund management expenses of the banks, leading to an increase in their operating costs. Senior bankers fear that if a similar situation continues for some time more, the banking sector will be facing tougher times ahead.
Businesses, as they say, cannot think of setting up new factories in a situation when regular operation of existing mills and factories is becoming increasingly difficult. There, they agree, is no other choice than setting up new industries, in order to achieve industrial growth and generate employment. But, as things stand now, the authorities concerned are not in a position to upgrade and expand existing infrastructural facilities, particularly gas and electricity connections, within a short span of time. As a matter of fact, they are not being able to ensure adequate supplies of gas and electricity to the existing mills and factories. On top of all, a perceived sense of uncertainty about the country's polity has made things all the more difficult. Owing to the present stalemate, many businessmen are not being able to pay their loan instalments and eventually are becoming loan defaulters.      
The BB prepares a monthly report on loans, deposits and other relevant financial indicators of banks. Its latest report, based on figures of last September, reveals that compared to corresponding period of last year, 15 banks had a negative growth rate of credits. This was particularly the case with some Islamic banking branches of a few banks, while few others experienced negative credit growth in both regular banking and Islamic Banking operations.
A situation of depressed credit flow has been continuing for quite some time. Investors are not coming forward with new proposals due to prevailing circumstances and as such, an investment lull prevails, particularly in the industrial sector. On their part, bankers have also become extra cautious and tightened their grip over approval and sanctioning of new loans and justifiably so, following some big loan scams involving a number of banks and a growing volume of their non-performing loans (NPLs).
Meanwhile, one pertinent point for consideration is whether it is entirely rational to depend solely on bank credits for making long-term investments. Banks by nature, as the financial intermediaries, should make long-term credits available from funds kept with them as deposits, most of which are of short-term nature. Here, dependence on capital market through floatation of new share issues or bonds is a better option. But the country's capital market has not yet been developed or is mature enough to do that.
In the meantime, fund management cost is escalating for most entrepreneurs. Many businesses are not also able to service their bank loans because of what those involved in trade and industry say, a kind of recession that the economy is now going through. As a result, the volume of NPLs is on the rise. Due to this, banks are now required to make additional provisions, out of their operational profits. Such provisioning also adds to their cost of funds for which they are hard-pressed to lower their lending rate below a certain level.
Under the given circumstance, the profitability of the banking sector is adversely impacted. There are reports that the profit margin of most banks has gone down below last year's level. This is in no way propitious. This will also have some knock-on effects on government's revenue collection because banks are one of the main sources of its tax receipts. The country's banking sector, according to some bankers, is now in a tight corner. Most of their income comes from lending-related activities. Their profits are actually the differential amount between their lending rate (plus operational cost) and the deposit rate. The amount that is left after meeting their respective operational costs, is available for payment of government taxes and the rest is distributed among shareholders, after cushioning for provisioning, meeting capital adequacy requirements and providing for some reserves.
In a situation where a sort of economic 'recession' or 'depression' or 'slowed-down' activities have been continuing for the last couple of years and businesses are not repaying bank loans, the banks are adopting different techniques to avoid losses. They have to renew many loans, even without receiving proper down-payments. In addition, there is yet no effective safety-value in place to stop fraudulent practices. After a number of loan fraudulence incidents in recent times, the ability of some banks to withstand their shocks has naturally diminishing.
Meanwhile, deposit rates have declined -- and declined in the case of some categories, to a level below the rate of inflation. This implies a real negative interest rate on deposits in such cases. Banks have also lower appetite for taking deposits, because of the excess liquidity that is now lying with many of them. Many depositors are also withdrawing their funds from banks and looking for ways and means through which they can get a higher rate of return on their funds.  
Banks are thus bracing themselves for a difficult situation. Appropriate policy responses by all concerned, not the central bank alone, are needed to enable the country's banking sector to stand on a sound footing on a sustainable basis.
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