The International Chamber of Commerce-Bangladesh (ICCB) has called for stepping up efforts to tackle deep-rooted problems of corruption and poor risk practices in the banking sector.
As Bangladesh has graduated to a developing country, all efforts should be made to strengthen the banking sector which is the backbone of the economy, it said.
The requirements and challenges of many to a developing country must not be ignored and the best way to do this is strengthening the capital and liquidity ratio of the banks, the ICCB said in the editorial of its current News Bulletin (Jan-Mar 2018) released on Wednesday.
Until now, only limited action has been taken to penalise defaulters, improve risk management and strengthen bank management, it added.
The ICCB said Non-Performing Loans (NPL) is one of the issues that is impacting capital adequacy of the industry, especially the eight state-owned commercial and specialised banks. For decades, state-owned banks have been the prime leader to the large corporate borrowers, particularly in the industrial sector of the economy.
"The prerequisite for the economic development of a country is smooth and efficient flow of saving-investment process. Bangladesh, being a developing country and with an underdeveloped capital market, mainly depends on the intermediary role of commercial banks for mobilising internal saving and providing capital to the investor. Thus, it matters how well our financial sector is functioning."
In Bangladesh, six state-owned commercial banks account for about a quarter of total banking sector assets. They are supplemented by two state-owned specialised development banks, 40 private commercial banks and nine foreign banks.
Capital adequacy is the primary indicator of the banks' financial fitness and stability. After successful implementation of Basel II guideline in regards to the adequacy of capital, Bangladesh Bank is now in the process of implementing Basel III guidelines which is an international regulatory framework for banks.
According to a Bangladesh Bank study, five years (during CY 2012 to CY 2016) average ratio of gross NPLs to total loans were about 27.1 per cent, whereas it was 4.9 per cent for PCBs, 6.5 per cent for FCBs and 22.56 per cent for SCBs. The percentage of classified loan to total outstanding stood at 10.1 per cent in June 2016. The percentage was highest for the SBs 26.1 per cent, for the PCBs 5.4 per cent, for the SCBs 25.7 per cent and for the FCBs 8.3 per cent.
Until September 2017, total banking sector loan amounted to Tk 7,527.30 billion, of which Tk 803.07 billion or 10.67 per cent was bad debt. And if restructured or rescheduled loans were included, NPL in the banking sector goes up to 17 per cent of total outstanding loans.
By the end of September, the total bad debt of SCBs stood at Tk 385.17 billion against the disbursed loans of Tk 1,316.89 billion (29.25 per cent of disbursed loan); total bad debt of specialised Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank stood at Tk 55.18 billion against the disbursed loans of Tk 231.93 billion (23.79 per cent of disbursed loan); PCBs had default loans of Tk339.73 billion against the disbursed loans of Tk 5,687.32 billion (5.97 per cent of disbursed loan) and FCBs had bad debt of Tk 22.98 billion against the disbursed loans of Tk 291.16 billion (7.89 per cent of disbursed loan).
These high NPLs have affected the profitability and the overall capital to risk weighted assets ratio (CRAR), a key measure of bank strength and stability, said the ICCB.
According to The Economist's Intelligence Unit, The CRAR at private banks was 12.2 per cent, while that at the nine foreign banks was a healthy 23.9 per cent, the six state-owned commercial banks was only 5.9 per cent and that of the two specialised state-owned banks was an astonishing 35.23 per cent, it said.
Further bad loans are routinely restructured to permit further lending to the same borrowers. According to a study by the Bangladesh Institute of Bank Management (BIBM), on an average banks rescheduled bad loans of Tk109.1 billion annually during 2010-14.
According to a meeting of the parliamentary standing committee on finance ministry at the Jatiya Sangsad Bhaban on February 28, the amount of defaulted loans of top 25 defaulters stood at Tk 96.96 billion as of September last year. The central bank submitted the list at parliamentary standing committee and suggested forming a joint committee comprising BB and finance ministry officials.
"In contrast, to recapitalise banks over the past few years, the government has provided large amounts to the sector. In the budget for 2017-18, the government has earmarked Tk 20 billion to recapitalise state-owned banks. The decision to provide funding has been criticised by the experts. As despite the regular infusion of budget funds, state-run banks have not improved their NPL positions," the ICCB added.