Fitch\\\'s sweet and sour observations

The international rating agency, the Fitch Ratings, has for the first time assigned international ratings to the Bangladesh sovereign.
It has assigned 'BB-'for long-term and 'B' for short-term foreign and local currency issuer default ratings (IDRs).
The ratings do serve as an indicator to the country's 'elevated vulnerability' to default risk. But the agency has not overlooked the country's respectable rates of economic growth in recent years.
'The key rating drivers for Bangladesh's rating reflects a balance between high, stable real GDP growth and strong external balances", the Fitch said in a press statement issued last Friday.
The above-mentioned part of the statement must have soothed the ears of the policymakers. But the remaining part that speaks about 'weak structural features indicating significant political and banking sector risks' surely has soured their mood.
The political risks have been more of a reality for many years in this country. Barring for brief periods, political climate has been rarely stable and trouble-free. Even under the so-called democratic dispensation, politics could hardly ensure mental peace to the democracy-loving people of this country. Another bitter truth is that troubled politics continues to take a toll on the economy.
Yet the mention of the 'banking sector risks' in the Fitch's statement does deserve more attention of all concerned than what has been said about the 'political risks'.
'The banking sector is vulnerable to shocks, especially the state-owned banks, as both asset quality and governance are weak. The gross non-performing loans ratio of the sector increased to 10.5 per cent in the first quarter of the calendar year 2014 from 8.9 per cent at the end of the fourth quarter of 2013, while the ratio for state-owned banks was 21.9 per cent in the first quarter of 2014', the Fitch statement said.
The concern about the banking sector is also growing at home since the size of the default loans grew larger at the end of the second quarter of 2014. The impact of the window-dressing allowed deliberately at the end of 2013 by relaxing the loan rescheduling rules, in fact, had been short-lived except for making the profit figures of the banks for the last calendar year somewhat respectable.
That the banking sector situation is not comfortable was highlighted in a newspaper report published last Tuesday. The report quoting the central bank statistics said the banks' overall capital base shrank by 1.36 per cent in the second quarter of this year following further deterioration of the quality of their assets over that of the previous quarter.
Overall on June 30 last, according to the report, the banks' capital was nearly Tk. 637 billion. The amount is equivalent to 10.64 per cent of their total risk-weighted assets. The figure also represented the capital adequacy ratio (CAR) of the country's banks at the end of June last.  Generally, in line with the international practices, banks are required to maintain a minimum CAR of 10 per cent against their risk-weighted assets.
Barring three, all the private banks (excluding the fourth generation banks) had CAR over the minimum requirement. But one half of those banks had their CAR slightly more than the threshold level.
The situation with the public sector commercial banks is pitiable. With the erosion in the capital base, their CAR went down to 8.05 per cent at the end of June last. The state of affairs with the state-owned specialized banks sans the Bangladesh Development Bank Ltd (BDBL) is just horrible. At the end of June last, they had a negative capital amounting to Tk. 43.38 billion. The Bangladesh Krishi Unnyan Bank (BKB) has been leading the way in terms of capital shortfall.
It is most likely that the government would soon start pumping more funds into the state-owned banks for their recapitalization. It has become more of an annual ritual for the government.
It does not, in fact, need any mention that the existence of a large volume of default loans particularly in Sonali Bank, Basic Bank, Rupali Bank and two agricultural banks is responsible for substantial decline in the CAR of the public sector banks together.
In reality, the capital base of the private sector banks got enlarged between the first and second quarters of this year. Yet they can hardly escape the ill-effect of the developments taking place in the public sector banks. What is being described as the 'banking risk' by the global rating agencies has originated from bad banking practices followed by inept management and a section of unscrupulous officials of the public sector banks and indifference on the part of their owner, the government, in the formation of boards of directors for the public sector banks. The interference part does hardly need any mention.
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