Bringing down classified loans to reasonable level

Global banking is expected to have a better business and regulatory environment in 2015. Several recent reports foresee a better business environment in the new year due to proactive reforms in the recent time aiming to reduce the complexity and cost of complying with business regulation and strengthening legal institutions. The world economy would be on the road to self-sustaining recovery as predicted by the Guardian. The banking sectors in the US, the EU and other developed countries are expected to enter a new phase in its post-crisis journey with a much sharper focus on profitability boost. Outlooks of the financial services sectors like banking, insurance and investment management provide better insights and trends for the year 2015. Some of the important banking rules like Basel liquidity rule, rule on leverage ratio, Volcker rule, bankers' pay limits etc., introduced following the 2008 global financial crisis, would take effect in 2015 covering the world as well as the US and EU banking industries. Though, there are arguments that the regulations might hurt profits, the rules are expected to make banks safer.
As expected, the banking industry would definitely expand more in 2015 in terms of a greater number and volume of products and services. Over the years the banking sector of Bangladesh expanded and greater changes and development in the banking sector demands greater supervision on the part of the supervisory authority. The Bangladesh Bank (BB) adopted financial sector regulatory and supervisory frameworks in line with the post-global crisis revisions of international best practices. The more stringent loan classification norms formulated by the BB have been implemented in the country. The central bank has implemented the Basel II capital regime and issued a roadmap to elevate the capital base of banks, in line with the Basel III requirements, starting from January 2015. The central bank is exercising the oversight of corporate governance and internal control functions for establishing sound risk management processes and practices in banks. Branches of banks are coming under closer monitoring and customers' interests are getting more attention of the BB. The central bank is working to identify and safeguard the weaknesses and vulnerabilities in the banking sector by adopting a forward-looking risk-based approach to regulation and supervision. The initiatives could bring more a favourable regulatory environment for banks in 2015.
After having a number of reform programmes related to credit operation of banks, current banking activities have reached a stage of maturity in view of several indicators. Banks have been given almost full freedom for their credit operation. In the recent years availability of different tools like Credit Risk Management manual, Credit Risk Grading manual, online Credit Information Bureau, legal support, accessibility to tailored software and, most importantly, injection of a pool of talented bankers in the banking sector upgraded the credit operation of commercial banks. Practically, the banking sector experienced much improvement in terms of asset quality during the last five years. Though enforcement of the tighter loan classification norms was a factor, the increase in the volume of nonperforming loans during 2014 might be mainly due to the 'overhang' of scams at the end of 2011 and early 2012, and the difficulties businesses faced in repaying loans following the political unrest in 2013. This scribe believes a stable business environment would help bring down the classified loans to the reasonable and expected level in 2015.
In the area of international banking, in spite of a marginal declining trend, documentary credit remains the most widely used international trade payment method in the country. In contrast to the most global economies, the use of open accounts remained insignificant. However, the use of documentary collection and open accounts is significantly higher within export processing zones (EPZs) of the country, where the restrictions as in the trade policies are not applicable. Practically, there are confusions among bankers about the provisions applicable to the EPZs. Instead of scattered and piecemeal directives, a comprehensive master guideline on trade service practices in EPZs might help bankers act properly and correctly. The BB is working on the issue and we may find a comprehensive guideline in this regard in 2015.
Information technology is rapidly changing the nature of international trade services in the country. Basically, the ICT enabled banks to go for faster decision making, prompt documentation and processing. Internally, quite a few banks are fully relying on software-based operations. In addition, the banking sector of the country observed a remarkable improvement in connection with the development of professional bankers in trade services. The advancement in trade services of banks is expected to continue in 2015.
The banking sector in Bangladesh witnessed a big liquidity surplus because of the lack of investment opportunities in 2014. With the increase in deposits, banks were struggling to find the investment opportunities in both money and credit markets. The rate of interest showed a negative trend in some instances. However, the market did not respond to the increased demand because of the lack of investors' confidence. So from banks' point of view, it is necessary to find out the appropriate strategy to invest idle funds. In an improved global business and investment environment, we may expect an improved investment environment in the country in 2015.
Notable improvement has taken place in the country in regards to e-banking services in Bangladesh. The BB is playing a notable role in maintaining and promoting smooth and secured e-banking operations. Security awareness of both bank customers and employees is a great concern for the banking sector. In case of mobile banking, the lack of awareness of customers and agents is the main reason for several frauds. To handle these, the banking sector as a whole should come forward to improve customers' awareness by counseling them and also by advertising.
'Financial inclusion' is a high policy priority of the BB to facilitate faster and inclusive growth. The agriculture and rural economy is getting greater emphasis of the BB and both disbursement and recovery of agricultural credit increased. Despite the substantial expansion of bank branches and an increase in membership of MFIs (microfinance institutions), a notable portion of adult population is still financially excluded. A number of policy measures are very innovative for our banking system, especially, the provision of agriculture credit to sharecroppers, arrangement for financing women entrepreneurs, ICT (information and communication) solutions for inclusive banking, agent banking, initiatives on Green Banking and CSR (corporate social responsibility), school banking etc. are remarkable. Banks are expected to respond adequately to the BB's efforts on financial inclusion in 2015.
It is good to observe that Knowledge Management (KM) has started receiving importance in banks in the country. Banks here generally do not have formal KM strategies. However, they have some kind of arrangement for knowledge creation, storing and dissemination. Undertaking an effective KM strategy and its enforcement by banks can help devise a professional development strategy in the country in the new year.
The BB sought to strengthen credit and debt markets of the country by taking steps to improve corporate governance and supervisory capacity and create higher demand for government securities. The central bank is supporting the capital market through ongoing deeper regulatory coordination and other policy initiatives. For a better banking and financial environment, we need more effective internal control and compliance systems and improved corporate governance practices in banks. This scribe believes the existing supervisory arrangement with a supportive and positive approach to the stakeholders would be able to deliver in 2015.
Dr. Shah Md Ahsan Habib is Professor and Director (Training) at BIBM (Bangladesh Institute
of Bank Management. ahsan@bibm.org.bd