Merger of BSB and BSRS
Tuesday, 6 October 2009
The Bangladesh Development Bank Ltd (BDBL) that came into being through the merger of the Bangladesh Shilpa Bank (BSB) and the Bangladesh Shilpa Rin Sangstha (BSRS), two public sector specialized development banks, are going to be operationalised soon. The Prime Minister's Office (PMO) has given the all-important nod for the unification of the two institutions, which dominated development financing until the entry of large number of local private and foreign commercial banks during last two decades or so. But that dominance was rather eventful. The rate of default on the repayment of loans by most borrowers was very high, over 90 per cent in the mid-eighties, leading to their extreme sickness. The multilateral lenders gave lots of prescriptions to remedy the problems but those failed to produce any tangible results.
From the early part of the nineties, the two development financing institutions (DFIs) stopped extending new loans and concentrating more on existing projects that had not gone sick. The banks have been provisioning against the bulging non-performing loans (NPLs) with whatever amount of operating profits that they have earned since then. This has resulted in some decline in their respective NPLs. In the case of BSRS, the share of the NPL in the total outstanding loans stood at 34 per cent and BSB, 31 cent in the last financial year. However, the presence of high rate of classified loans in the portfolios of the two DFIs is nothing unique. The financial health of most state-owned banks and financial institutions has suffered much for a long time because of a 'default culture' in the country's banking system.
Now the question is: What difference would the merger of two sick DFIs make? The BDBL is set to have a paid-up capital of Tk. 4.0 billion. Will that be enough for long-term lending to set up new industries or infuse the much-needed dynamism to recover the huge stuck-up loans? With the DFIs withholding new industrial financing because of the paucity of funds, entrepreneurs availed themselves of the financing facility from the commercial banks and non-banking financial institutions (NBFIs). The entry of a large number of private commercial banks and NBFIs has made the situation rather easy. But a good number of private sector entities in the financial sector have not been all too eager to expose themselves to long-term lending that they consider relatively risky. And the state-owned commercial banks are glaring examples before them. Industrial loans form a substantial part of the bad loans of these banks.
There is no denying that the two DFIs have gone far away from the very objectives behind their establishment. This is partly due to the delinquent borrowers and partly for inefficiency and irregularities in sanctioning of loans. A large part of the DFIs' loans has turned bad and they are finding it hard to write off the same because of inadequate collaterals. All concerned would expect the new board of directors formed by the government for the BDBL to give a new sense of direction to the management and help them innovate new areas of activities so that they can mobilize enough funds to lend to entrepreneurs seeking to set up new industries. This is all the more necessary because of the fact that the rate of industrial sector growth has slowed down for the last couple of years. Besides, there should be proper monitoring of the operations of the DFIs by the central bank and to make that happen, necessary legal coverage needs to be ensured.
From the early part of the nineties, the two development financing institutions (DFIs) stopped extending new loans and concentrating more on existing projects that had not gone sick. The banks have been provisioning against the bulging non-performing loans (NPLs) with whatever amount of operating profits that they have earned since then. This has resulted in some decline in their respective NPLs. In the case of BSRS, the share of the NPL in the total outstanding loans stood at 34 per cent and BSB, 31 cent in the last financial year. However, the presence of high rate of classified loans in the portfolios of the two DFIs is nothing unique. The financial health of most state-owned banks and financial institutions has suffered much for a long time because of a 'default culture' in the country's banking system.
Now the question is: What difference would the merger of two sick DFIs make? The BDBL is set to have a paid-up capital of Tk. 4.0 billion. Will that be enough for long-term lending to set up new industries or infuse the much-needed dynamism to recover the huge stuck-up loans? With the DFIs withholding new industrial financing because of the paucity of funds, entrepreneurs availed themselves of the financing facility from the commercial banks and non-banking financial institutions (NBFIs). The entry of a large number of private commercial banks and NBFIs has made the situation rather easy. But a good number of private sector entities in the financial sector have not been all too eager to expose themselves to long-term lending that they consider relatively risky. And the state-owned commercial banks are glaring examples before them. Industrial loans form a substantial part of the bad loans of these banks.
There is no denying that the two DFIs have gone far away from the very objectives behind their establishment. This is partly due to the delinquent borrowers and partly for inefficiency and irregularities in sanctioning of loans. A large part of the DFIs' loans has turned bad and they are finding it hard to write off the same because of inadequate collaterals. All concerned would expect the new board of directors formed by the government for the BDBL to give a new sense of direction to the management and help them innovate new areas of activities so that they can mobilize enough funds to lend to entrepreneurs seeking to set up new industries. This is all the more necessary because of the fact that the rate of industrial sector growth has slowed down for the last couple of years. Besides, there should be proper monitoring of the operations of the DFIs by the central bank and to make that happen, necessary legal coverage needs to be ensured.