High lending rate 'can cause banks problems'
Monday, 10 August 2009
FE Report
Economic adviser to the Prime Minister Dr AKM Mashiur Rahman on Sunday said one way to mitigate the risk of lending by banks is to have a strong capital base.
He was speaking at a dialogue on Globalisation of Basel II: Its Implementation in Bangladesh organised by the International Chamber of Commerce, Bangladesh (ICC,B) in the city.
He said high interest rate on lending can cause serious problems to the banks as, on the one hand, reckless borrowers can 'gamble' with the borrowed money and, on the other, prudent borrowers think twice before taking loans from banks.
"The banks face difficulty in choosing the right borrowers when the interest rate is high," he added.
The banks do business with depositors' money and in the process they take more risk as their operations grow, he said.
Trust of depositors need to be earned to attract deposit and the banks need to trust their borrowers and there should be a balance between the two, he added.
From the past experience, the banks should develop a risk exposure portfolio to make advance provision, Dr Mashiur said.
"A bank with 60 per cent of the lending portfolio in readymade garments and textiles and another bank with 30 per cent will have different risk exposures," he explained.
The former civil servant was of the opinion that the credit market should not be distorted when other sectors did not perform efficiently.
"Electricity, gas and other sectors are not efficient and for that lending rate should not be reduced," he said.
Dr Rahman said the banks are making high profit but financial conditions of the borrowers are not well.
"It does not make any sense unless there is an oligopoly in the banking system," he said.
The Basel II capital framework remains a top priority for the Basel Committee, both in terms of maintaining its effectiveness and its implementation, said ICC,B president Mahbubur Rahman.
"The three pillars of Basel II will help ensure that capital regulation is better positioned to handle periods of rapid innovation and the resulting new products," he said adding, "In designing Basel II, the committee intended for it to be a living framework."
He said following the detection of the weaknesses during the recent global financial market crisis, the committee has reviewed Basel II and has developed a series of proposed enhancement to strengthen the framework.
Mr Rahman said the Basel II framework is intended to promote a more forward-looking approach to capital supervision, one that encourages banks to identify the risks they may face, today and in the future, and to develop and improve their ability to manage those risks.
"As a result, it is intended to be more flexible and effective to evolve with advances in markets and risk management practices," he said.
Mamun Rashid, Chairman of the ICC Standing Committee on Banking Technique and Practices in his welcome speech stated that without ensuring proper importance and accountability of the stakeholders the implementation of Basel II was not possible.
The central bank executive director ATM Nasiruddin said there is risk for every transaction and it should be mitigated.
Director of Bangladesh Institute of Bank Management Dr Taufic Ahmed Choudhury said the current crisis started as banks in the developed world did not manage the quality of assets and portfolio diversification.
Citigroup programme director Timothy D Rees made a presentation on the topic in the programme.
Economic adviser to the Prime Minister Dr AKM Mashiur Rahman on Sunday said one way to mitigate the risk of lending by banks is to have a strong capital base.
He was speaking at a dialogue on Globalisation of Basel II: Its Implementation in Bangladesh organised by the International Chamber of Commerce, Bangladesh (ICC,B) in the city.
He said high interest rate on lending can cause serious problems to the banks as, on the one hand, reckless borrowers can 'gamble' with the borrowed money and, on the other, prudent borrowers think twice before taking loans from banks.
"The banks face difficulty in choosing the right borrowers when the interest rate is high," he added.
The banks do business with depositors' money and in the process they take more risk as their operations grow, he said.
Trust of depositors need to be earned to attract deposit and the banks need to trust their borrowers and there should be a balance between the two, he added.
From the past experience, the banks should develop a risk exposure portfolio to make advance provision, Dr Mashiur said.
"A bank with 60 per cent of the lending portfolio in readymade garments and textiles and another bank with 30 per cent will have different risk exposures," he explained.
The former civil servant was of the opinion that the credit market should not be distorted when other sectors did not perform efficiently.
"Electricity, gas and other sectors are not efficient and for that lending rate should not be reduced," he said.
Dr Rahman said the banks are making high profit but financial conditions of the borrowers are not well.
"It does not make any sense unless there is an oligopoly in the banking system," he said.
The Basel II capital framework remains a top priority for the Basel Committee, both in terms of maintaining its effectiveness and its implementation, said ICC,B president Mahbubur Rahman.
"The three pillars of Basel II will help ensure that capital regulation is better positioned to handle periods of rapid innovation and the resulting new products," he said adding, "In designing Basel II, the committee intended for it to be a living framework."
He said following the detection of the weaknesses during the recent global financial market crisis, the committee has reviewed Basel II and has developed a series of proposed enhancement to strengthen the framework.
Mr Rahman said the Basel II framework is intended to promote a more forward-looking approach to capital supervision, one that encourages banks to identify the risks they may face, today and in the future, and to develop and improve their ability to manage those risks.
"As a result, it is intended to be more flexible and effective to evolve with advances in markets and risk management practices," he said.
Mamun Rashid, Chairman of the ICC Standing Committee on Banking Technique and Practices in his welcome speech stated that without ensuring proper importance and accountability of the stakeholders the implementation of Basel II was not possible.
The central bank executive director ATM Nasiruddin said there is risk for every transaction and it should be mitigated.
Director of Bangladesh Institute of Bank Management Dr Taufic Ahmed Choudhury said the current crisis started as banks in the developed world did not manage the quality of assets and portfolio diversification.
Citigroup programme director Timothy D Rees made a presentation on the topic in the programme.