Risky shadows looming over financial sector
Tuesday, 14 December 2010
The financial sector of a country is like life-blood for its economy. Sure, the real economy meaning farmers tilling their lands, workers producing in factories, service providers engaging in their activities, all these keep the economy's wheels running. But just as fuel is required to start an engine and run it, finances are the fuels for ensuring that the engine of the entire economy would run smoothly. Any activity be it manufacturing, farming or distribution -- all are supremely dependent on the unimpeded flow of finances. The same in turn require the financial sector as a whole maintaining its vitality to be able to supply risk-free finances to meet various demands of the economy.
How far, the financial sector in Bangladesh can put up a pretty face in the new year is posing as a big question mark. Even one decade and a half ago, the financial sector in Bangladesh with a namesake capital market and undeveloped insurance businesses, largely meant the banking sector only. There has been notable changes since that time and non-banking sectors have spread their wings. And yet, the banks still predominate the financial sector.
The health of the banking sector looked rather sickly in the seventies and eighties from non-performing or classified loans. There were also many other ills plaguing it. But the financial sector reforms programme (FSRP) in phases brought about vast changes for the good in the banking institutions of the country. Only a couple of years ago, the banks as a whole including even the very ossified and inefficient public sector ones, were seen as having made a recovery. But is this restoration of their health holding? It appears from credible media information based on Bangladesh Bank's own actions taken out of concern for the well-being of the banking sector that this sector has once again invited a lot of troubles to it.The banks have invested heavily in the country's risky capital market far in excess of the ceiling granted to them by the central bank for making such investments. It would not matter if the share market had depth enough or acquired its strength from the strong fundamentals of the shares now being bought and sold. But the actual conditions in the share market is far from such an ideal state. The market is lacking in depth from too few shares being chased by too many investors and the value of them being artificially inflated having no relationship to their real values. Thus, there is the growing likelihood that the bubble in the share markets could burst any time taking down not only the millions of investors who invested in it but more significantly creating very great stresses for the banks which have been too exposed to this freaky market.
The great financial and economic crisis that had gripped the world economy for some years somehow left Bangladesh unscathed. This was expressly because Bangladesh to a large extent had an introverted economy with limited exposure to the threatened banking system in other countries. But its banks appear to have set the stage for a crisis of their own by not heeding warning and directives from the Bangladesh Bank (BB) about strictly limiting their investments in the highly risky capital market. According to recent media reports that quoted Bangladesh Bank sources, out of the 47 scheduled commercial banks, 42 of them are burdened with hefty amounts their management invested in the share market defying or ignoring BB's regulations. The total amount invested, thus, is some Tk 220 billion and a substantive part of it came from depositors' money kept with the banks.
What would happen if these investments turn sour? There is a growing possibility of these investments turning into net liabilities for the banks from the manner the bubble in the share markets is building up. If the bubble bursts, a chain reaction could be caused with the banks showing signs of a collapse amid depositors making a run for their money. One may shudder to think of a US-type of situation unfolding in Bangladesh when banks in quick succession failed in that country to be bailed out with cash from the government. But who would bail out banks in such a way in Bangladesh or does the government here have so much cash to spare? It is a tricky question.
Perhaps government or the central bank here will look the other way and carry out patchy holding operations as it had done in the seventies and eighties. At that time, some of the private banks and all of the nationalized banks were saddled with overdose of liabilities compared to their assets. These banks should have closed on their own or shut down by the central bank's orders if conventional prescriptions were followed. But this was not done out of concern for the depositors and government kept on propping them up artificially. It is a big unknown whether the same can be expected this time or can even be done given the enormity of the exposure of the banks to the risk-riddled capital market.
Not only the banks have directly invested their resources in the capital market, but also belated investigations from the central bank have led to detection of cases that bank credits in a good number of cases -- disbursed as industrial loans -- have been diverted to the capital market. But the borrowers instead of using the same for industrial activities or on other productive ventures, invested the same in the capital market.
It was earlier decided that some Tk 400 billion would be disbursed for small and medium enterprises ( SME) sector in the current year or 2010. This was the highest ever amount provisioned for the SME sector. Well over 90 per cent of the targeted amount for disbursement or some 380 billion has reportedly been already disbursed in the first nine months of the year. Thus, one could expect that output from the SMEs would remarkably rise in the coming year in support of the aspired higher overall growth target of the economy.
But now monitoring from the Bangladesh Bank (BB) has found out that a great deal of the resources meant for the SME sector has not gone to it but in the share market. BB investigations, for example, found out one commercial bank that disbursed some Tk 300 million recently as SME credits, but the same went directly into the beneficiary owner (BO) accounts of three separate borrowers for investment in the capital market. Similar violation of rules and regulations are being reportedly investigated and discovered in relation to some other scheduled banks and financial institutions. It will take a while to find out to what extent the amount meant for SME growth has gone to the capital market.
But the point to really worry about and feel outraged is why such an unusually long time was taken to launch investigations to identify the malpractice. It appears that the greater part of the already invested funds meant for the SMEs has gone into the non-productive and highly risky zone of the capital market. What good will it do to take action now that this wrong routing of the funds has taken place? It would make sense if the irregularity was detected much earlier and appropriate actions taken. The central bank can seek to only limit damage further but it is doubtful how much of the otherwise meritorious plan to boost the SME sector it will be able to salvage.
A vicious brew is building up. Government is touting that a great deal of resources are being pumped into the economy . But its monitoring is inadequate or inefficient to ascertain to what extent the monies are going into productive activities. No wonder, therefore, that the rate of inflation is rising sharply from money creation with the same not being utilized adequately on productive ventures.
The banks, a traditional pillar of the economy, have been tempted to put their resources excessively in the capital market as their conventional borrowers in industry and trade are not coming forward given the hopeless conditions for making investments in industries and services. Industries and services need energy supplies or gas and power to run. But government has failed to give new gas and power connections for the last two years. So, it should be obvious that hardly incentives are there to make new industrial or services sector investments by potential investors. Finding no proper outlet to make their investments, they have opted for the share market.
But here also their expectations of returns can be only for the short-term. If the bubble in the share market breaks, some of them could be financially flattened by the consequences. The banks would then be badly battered and even if they manage to survive, their capabilities to play their previous robust role in the economy might be much reduced.
The highest managers of the Bangladesh economy will need to start paying a close and serious attention to these issues from now on which are darkening the horizon. A business as usual approach will not do.
How far, the financial sector in Bangladesh can put up a pretty face in the new year is posing as a big question mark. Even one decade and a half ago, the financial sector in Bangladesh with a namesake capital market and undeveloped insurance businesses, largely meant the banking sector only. There has been notable changes since that time and non-banking sectors have spread their wings. And yet, the banks still predominate the financial sector.
The health of the banking sector looked rather sickly in the seventies and eighties from non-performing or classified loans. There were also many other ills plaguing it. But the financial sector reforms programme (FSRP) in phases brought about vast changes for the good in the banking institutions of the country. Only a couple of years ago, the banks as a whole including even the very ossified and inefficient public sector ones, were seen as having made a recovery. But is this restoration of their health holding? It appears from credible media information based on Bangladesh Bank's own actions taken out of concern for the well-being of the banking sector that this sector has once again invited a lot of troubles to it.The banks have invested heavily in the country's risky capital market far in excess of the ceiling granted to them by the central bank for making such investments. It would not matter if the share market had depth enough or acquired its strength from the strong fundamentals of the shares now being bought and sold. But the actual conditions in the share market is far from such an ideal state. The market is lacking in depth from too few shares being chased by too many investors and the value of them being artificially inflated having no relationship to their real values. Thus, there is the growing likelihood that the bubble in the share markets could burst any time taking down not only the millions of investors who invested in it but more significantly creating very great stresses for the banks which have been too exposed to this freaky market.
The great financial and economic crisis that had gripped the world economy for some years somehow left Bangladesh unscathed. This was expressly because Bangladesh to a large extent had an introverted economy with limited exposure to the threatened banking system in other countries. But its banks appear to have set the stage for a crisis of their own by not heeding warning and directives from the Bangladesh Bank (BB) about strictly limiting their investments in the highly risky capital market. According to recent media reports that quoted Bangladesh Bank sources, out of the 47 scheduled commercial banks, 42 of them are burdened with hefty amounts their management invested in the share market defying or ignoring BB's regulations. The total amount invested, thus, is some Tk 220 billion and a substantive part of it came from depositors' money kept with the banks.
What would happen if these investments turn sour? There is a growing possibility of these investments turning into net liabilities for the banks from the manner the bubble in the share markets is building up. If the bubble bursts, a chain reaction could be caused with the banks showing signs of a collapse amid depositors making a run for their money. One may shudder to think of a US-type of situation unfolding in Bangladesh when banks in quick succession failed in that country to be bailed out with cash from the government. But who would bail out banks in such a way in Bangladesh or does the government here have so much cash to spare? It is a tricky question.
Perhaps government or the central bank here will look the other way and carry out patchy holding operations as it had done in the seventies and eighties. At that time, some of the private banks and all of the nationalized banks were saddled with overdose of liabilities compared to their assets. These banks should have closed on their own or shut down by the central bank's orders if conventional prescriptions were followed. But this was not done out of concern for the depositors and government kept on propping them up artificially. It is a big unknown whether the same can be expected this time or can even be done given the enormity of the exposure of the banks to the risk-riddled capital market.
Not only the banks have directly invested their resources in the capital market, but also belated investigations from the central bank have led to detection of cases that bank credits in a good number of cases -- disbursed as industrial loans -- have been diverted to the capital market. But the borrowers instead of using the same for industrial activities or on other productive ventures, invested the same in the capital market.
It was earlier decided that some Tk 400 billion would be disbursed for small and medium enterprises ( SME) sector in the current year or 2010. This was the highest ever amount provisioned for the SME sector. Well over 90 per cent of the targeted amount for disbursement or some 380 billion has reportedly been already disbursed in the first nine months of the year. Thus, one could expect that output from the SMEs would remarkably rise in the coming year in support of the aspired higher overall growth target of the economy.
But now monitoring from the Bangladesh Bank (BB) has found out that a great deal of the resources meant for the SME sector has not gone to it but in the share market. BB investigations, for example, found out one commercial bank that disbursed some Tk 300 million recently as SME credits, but the same went directly into the beneficiary owner (BO) accounts of three separate borrowers for investment in the capital market. Similar violation of rules and regulations are being reportedly investigated and discovered in relation to some other scheduled banks and financial institutions. It will take a while to find out to what extent the amount meant for SME growth has gone to the capital market.
But the point to really worry about and feel outraged is why such an unusually long time was taken to launch investigations to identify the malpractice. It appears that the greater part of the already invested funds meant for the SMEs has gone into the non-productive and highly risky zone of the capital market. What good will it do to take action now that this wrong routing of the funds has taken place? It would make sense if the irregularity was detected much earlier and appropriate actions taken. The central bank can seek to only limit damage further but it is doubtful how much of the otherwise meritorious plan to boost the SME sector it will be able to salvage.
A vicious brew is building up. Government is touting that a great deal of resources are being pumped into the economy . But its monitoring is inadequate or inefficient to ascertain to what extent the monies are going into productive activities. No wonder, therefore, that the rate of inflation is rising sharply from money creation with the same not being utilized adequately on productive ventures.
The banks, a traditional pillar of the economy, have been tempted to put their resources excessively in the capital market as their conventional borrowers in industry and trade are not coming forward given the hopeless conditions for making investments in industries and services. Industries and services need energy supplies or gas and power to run. But government has failed to give new gas and power connections for the last two years. So, it should be obvious that hardly incentives are there to make new industrial or services sector investments by potential investors. Finding no proper outlet to make their investments, they have opted for the share market.
But here also their expectations of returns can be only for the short-term. If the bubble in the share market breaks, some of them could be financially flattened by the consequences. The banks would then be badly battered and even if they manage to survive, their capabilities to play their previous robust role in the economy might be much reduced.
The highest managers of the Bangladesh economy will need to start paying a close and serious attention to these issues from now on which are darkening the horizon. A business as usual approach will not do.