Political turmoil takes its toll on financial services

It's known to everyone in the modern business world how political instability, slugfests and hostilities affect the economy of a country. The people of Bangladesh have been struggling since independence 42 years ago. The economy of the country is stained with the blood of human lives lost. All sectors of the economy, namely readymade garments (RMG), textiles, transport, real estate, financial service industries like banks, insurance companies, lease finance companies and many other industries have been hit hard by political blitzes and frays.
The financial sector of any country plays a vital role in investment helping create jobs and  enhancing economic growth. The profitability and performance of this sector are really stymieing. According to recent reports on this sector's performance and profitability, published in the dailies, the banking sector's net profit dropped around 17 per cent year-on-year in 2014 to Tk 59,930 million. The stakeholders of private banking industries are alarmed about a situation that might arise out of the political mayhem that started at the very beginning of the year 2015. The performance of financial sector industries is very much linked with investments, business and trading activities of their customers, imports and exports, stock market situation, asset management, hedge fund management and so on.
Bangladesh's economy is confronting problems with investments due to political tension, inadequate energy connectivity, inefficient and corrupt governance, high financing charges, lack of genuine investors and the lack of required infrastructure for industrial growth and expansion. The country is facing a serious drought-like situation in investments. Let alone new investment, the existing investments in export-oriented industries are encountering problems with marketing, transporting and shipping products to different destinations including international markets. Bangladesh Bank's foreign currency reserves are rising continuously. Recently the reserves reached a record high of US $ 23 billion. Investments in the country have become stagnant resulting in less import of capital machinery.
Due to political unpredictability and economic uncertainty, the volume of non-performing loans (NPL) in both public and private banks has been on the rise. Most of the NPLs have started to be classified. Classification of loans is killing the hard-earned profits of the banks, as they have to make provisions for such loans. This NPL acts as a contagious financial malady and plays havoc with the new investment possibility. According to recent reports, the volume of default loans in public sector banks is increasing at an alarming rate. Default loan is nothing new. But the tendency of resorting to financial scam, fraud and embezzlement in the banking sector due to undue political influence and bad governance as happened in the past is a major cause of concern. The volume of NPLs in the banking system was Tk 523.1 billion in mid-2013 against Tk 427.3 billion in 2012 and Tk 200.1 billion in 2006. The amount more than doubled in eight years' time. The situation is not improving, although the Bangladesh Bank has given an ultimatum to 11 local and foreign banks to bring down the NPL level to below 10 per cent of their respective outstanding and overdue loans.
The ratio of classified loans to the total outstanding loans is snowballing in every six years. At the end of September 2013, the classified loans' percentage of the total outstanding loans was 12.79 per cent. It stood at 8.9 per cent at the end of December, 2013 and increased to 10.5 per cent at the end of March, 2014. The percentage might stand at 14.21 at the end of June 2014. The volume of classified loans increased to Tk 481.70 billion in the January-March quarter from Tk 405.90 billion of the October-December quarter of 2014, according to the Bangladesh Bank data. The classified loans increased by 15.73 per cent to Tk 510.00 billion in March 2013 from Tk 290.00 billion in June 2012.
The private sector plays a significant role in creating employment, investment opportunities, generating revenue for the government and earning foreign exchange by exporting goods and services and many more. That's why the credit growth in the private sector is very important for the economy and the financial service providers like banks and insurance companies. The growth in credit in the private sector was 11.46 per cent in March 2014 against 12.72 per cent in March 2013. It indicates a 1.26 per cent fall.
Due to the fall in credit flow to the private sector, excess liquidity in the banking system reached over Tk 1,362.01 billion at the end of March 2014 from Tk 830.00 billion in November, 2013 and Tk 794.40 billion at the end of June 2013. Furthermore, the loan-deposit ratio (LDR) has been showing a downtrend for the past one year. In March 2014, the LDR stood at 63.9 per cent against 77.85 per cent in December 2013. This unfavourable situation leaves the financing industries' profitability in doldrums. The rate of growth in the industrial term loans is experiencing an uneven movement with the recurrent negative rate of growth due to the political situation in the country, though adequate capital is needed for industrialisation. Loan is one of the most important factors behind capital formation, mainly for developing countries like Bangladesh.
The RMG sector, the main player in earning foreign exchange, had been confronting glitches and challenges arising from the political tensions. The leaders of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and other export organisations expressed their concerns. Addressing compliance issues and avoiding possible political unrest will be the key challenges to the country's RMG sector in 2015 after a year of sluggishness in export, say economists and exporters. The fall in business in this sector will drastically affect the financial service industries, although we did not notice any protests or any expressive public comments from the owners and stakeholders of this vital sector. But the common shareholders are worried about the frustrating performance of this sector, especially banking and insurance companies. "We are having a tough time at the moment, our business has been halved due to the political impasse. Exports and imports have drastically declined, opening of L/C by RMG and other industries has fallen substantially and we are losing our business income" said the managing director of an insurance company seeking anonymity. Many workers are losing jobs due to the unusual fall in production at factories. The decline in profitability will severely affect the dividend and the moribund stock market.
The prevailing political stalemate needs to be resolved for the sake of peace and prosperity of the country. The general people do understand that every problem has its solution. Why Bangladesh is taking the path of a Sub-Saharan, African or a Middle-Eastern country in this 21st century is not clear and it also does not make any sense.
The democratically developed world always tries to find out the root cause of their problems-be it political or non-political. Without finding out the root cause, no country, no nation nor any national leader can resolve their problem. A temporary solution is not at all a solution. Bangladesh is passing a very bad time politically, socially, financially and economically. A permanent solution to the prevailing political problem is essential to save sectors like financial services, RMG, textile and real estate. Failure to resolve the problem on time would be very costly for the poor nation-for the millions of poor as well as the middle-class and rich people in the country.
The writer is a CFO of a private group of industries.
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