Challenges facing the banking sector

Banking sector in Bangladesh has come across a turbulent year facing many odds and pitfalls in the macroeconomic fundamentals. The major challenges faced by the banking industry were low credit growth, increasing trend of non-performing loans resulting to higher provisioning requirements, and surplus liquidity. The cumulative effects of these put pressure on the profitability of the banking sector as a whole.
Domestic credit growth (Point to Point) was 10.78 per cent in October-end, 2013 against that of 16.85 per cent of the previous period. Private sector credit during the period registered slight over 11 per cent growth against 18.38 per cent over previous period. However, deposit growth (Point to Point) was over 18 per cent in October-end, 2013 against that of 19 per cent over the previous year. Consequently, a considerable gap has been created in sources and uses of fund of the banking sector. As a result, the industry has been burdened with liquidity surplus. Total liquid asset of the banking sector in October-end, 2013 stood at Tk 1860 billion which was more than 1.86 times higher than the required statutory liquidity ratio (SLR). With the same token, Advance Deposit Ratio (ADR) of the sector reduced to 71.70 per cent in September-end, 2013 against 76.59 per cent in December-end 2012 where ADR of Private Commercial Banks (PCB) reduced to stand at 77 per cent against 79.65 per cent of the same period.     
Despite low credit growth, non-performing loan (NPL) had continually been increasing at an increasing rate and reached to a record high of Tk  567 billion in September-end, 2013 registering around 33 per cent increase over December-end, 2012. Consequently NPL ratio increased to stand at around 13 per cent in September-end, 2013 against slightly over 10 per cent of December-end, 2012. Although State-Owned Commercial Banks (SCB) contribute the major portion in the classified loan portfolio pie (43 per cent reflecting around 29 per cent NPL ratio), PCBs had been affected more during the period. Non-performing loan of PCBs increased to Tk  223 billion in September-end, 2013 against Tk 130 billion in December-end, 2012 reflecting more than 70 per cent increase. The NPL ratio of PCBs, which was within a tolerable limit for more than a decade, reached to record high of 7.30 per cent in September-end, 2013 against 4.58 per cent in December-end, 2012. This deterioration of asset quality adversely affected the resilience capacity of the PCBs.
Consequent to increase in NPL, the provisioning requirement increased by 32 per cent to stand at Tk 320 billion in September-end 2013, against December-end, 2012 where required provision of PCBs increased to Tk 117.60 billion registering 40 per cent growth.  
As a consequence of low credit growth and high non-performing loan, coupled with increased interest/profit expenses for additional mobilised deposit, profitability of the industry has been adversely affected. Un-audited operating profit figure of a good number of banks registered negative growth in 2013 over 2012. Return on asset (ROA) decreased to 0.44 per cent in 2013 from 0.92 per cent in 2012 while return on equity reduced to 5.03 per cent from 10.17 per cent of the previous year.       
Considering the likely disastrous performance of the banking sector, Bangladesh Bank (BB) at the fag end of 2013 relaxed the loan rescheduling policy for the next six months to facilitate financing for the businesses, affected by political unrest. Under this directive, BB has allowed banks to reschedule loans by fixing their down payment and time limit for repayment on the basis of banker-customer relationship after taking NOC (No Objection Certificate) from the central bank. Thus, banks have got enough room to improve the asset quality through rescheduling and add back provision requirements for showing better financial performance than anticipated. Many of the banking industry experts are of the opinion that random implementation of the directive would increase 'paper profit' and might put the banks in jeopardy in the long run. Thus banks should use their prudence in capitalising the same.       
2014 would be a more challenging year for the economy as well as the banking sector. The economy has entered into the New Year in a situation where most of the macro-economic indicators are under huge pressure because of political turbulence in the country. Achieving the targets of the GDP  (Gross Domestic Product) growth, revenue collection, export earnings, ADP  (Annual Development Programme) implementation, public and private sector investment and reining in the increasing inflation would be the major economic challenges in the coming days. Banking sector, being an integral part of the financial system, will have to face the likely impediments. The major challenges of the banking industry in 2014 will be optimum utilisation of fund through achieving desired investment growth, preventing the deterioration of asset quality and maintenance of capital adequacy to absorb the risks.  
Banking sector will be under tremendous pressure to make effective utilisation of fund to bring the ADR at optimum level. In order to enhance income, banks will be under stress to increase the credit growth with the surplus fund and projected additional deposits to be mobilised in the current year. On the other hand, maintenance of asset quality will always come as a priority issue not only for the existing credit portfolio but also for new one.
The prime focus of the banking sector would be the recovery of rescheduled loans that has been made during last part of the previous year through the central bank's directive. If the banks are unable to make them performing within the relaxation period, a good amount of additional provision might be required that might put the banks in a distress situation.    
Bangladesh Bank is in the process of implementing Supervisory Review Process through Internal Capital Adequacy Assessment Process (ICAAP). Under the above directive, banks need to keep additional capital against residual risk, credit concentration risk, liquidity risk, strategic risk, reputation risk, settlement risk, evaluation of core risk management and environmental and climate change risk in addition to credit/investment, market and operational risk. The average Capital Adequacy Ratio of PCBs was slightly over 11.50 per cent against minimum requirement of 10 per cent.  The increased capital requirement under ICAAP might put pressure on capital requirement of a good number of banks having marginal capital adequacy.
Despite all macroeconomic and industry specific challenges, banking sector can turn around and show its resilience in 2014 as it did in the past during global and macroeconomic recessions. However, political stability is the precondition to make the breakthrough as economic stability can not be sustained without political stability.  
Khaled Mahmud Raihan, ACCA is an Assistant Vice President of Islami Bank Bangladesh Ltd. The views expressed in the article are the writer's own and not necessarily the organisation he works with                     [email protected]