The state of uneasiness in banking sector
Monday, 27 August 2007
Shamsul Huq Zahid
All is not well in the country's banking sector. While the sector is sitting on a huge amount of excess liquidity, a reverse trend in the recovery of non-performing loans (NPLs) is now being witnessed, much to the discomfort of the banks' management.
What has been causing pains to the banks, which are now awash with money, is that not many investors and traders are coming to them these days. The poor demand for funds from the private sector does indicate a slowdown in manufacturing and trading activities. If this trend persists for some more time, the banks would find it hard to maintain their business growth momentum of past years. The banks might even experience a bulging portfolio of non-performing loans.
The banks, reportedly, have in their vaults an excess liquidity of around Tk. 100 billion with a marked decline in the flow of credit to the private sector. There could be two reasons behind the poor demand for funds from the private sector. One is the restricted monetary policy now being pursued by the Bangladesh Bank with the objective of containing inflation that has now reached the highest level in 15 years' time. And the second one relates to panic and a sense of uncertainty that have gripped most businesses, allegedly, due to the ongoing anti-corruption and anti- tax evasion drives launched by the present caretaker administration. The fact that the prevailing situation is far from ideal is very much evident from the poor rate of opening of letters of credit (LCs) by the industrialists and other importers.
The big businesses can afford to slow down or close their operations for one or two months. But what is about the common men? The inaction or slowdown of their normal activities by the owners of industries and big trading houses would surely take a heavy toll on the poor consumers. Actually, the poor, low and middle income people have been paying a price for such unwanted actions for the last few months, in terms of hike in the prices of essentials and cut in employment opportunities.
It would not be fair to blame the banks for discouraging the private sector people from taking loans by asking them to comply with certain rules and regulations. Banks take deposits from people and disburse the same as loans, keeping certain spread in interest rates and this particular operation remains to be its major source of earning. They cannot afford to hold back deposits since that would be suicidal for them. Why should the banks discourage borrowers, particularly when they have so much of idle money in their vaults?
The slowdown in economic activities has resulted not only in reduced flow of credit to the private sector but also a reverse trend in the recovery of the non-performing loans in the banking sector. According to a newspaper report, the share of the NPL in the total outstanding loans increased to 13.96 per cent in June last from 13.15 per cent in December, 2006. The increase though appears marginal, actually, is an ominous sign for the sector.
Notwithstanding the fact that there had been some widow-dressing of NPLs, particularly in the public sector banks, the extent of overdue loans have been on the decline in recent years because of the enactment of the Money Loan Courts and other reforms in the financial sector. The share of the NPL in the total outstanding loans was nearly 25 per cent in the early nineties. Bringing it down to 13 per cent has not been an easy task.
None wants to witness a reversal of the situation as far as NPL is concerned. It is not that difficult to identify the reasons for the reverse trend in the recovery of overdue loans. The drive of the present government against corruption, tax-evasion, financial irregularities, extortion and land grabbing have landed some of the country's top businessmen and industrialists in the jail and some others have fled the country. In their absence such business operations and industrial units being in a state of disarray are finding it hard to service their debts to banks and other financial institutions. Because of the economic slowdown, some other business operations are also facing difficulty in paying their dues to banks.
Nobody should ask the government to release the businesses accused of corruption or other crimes. For, that would set a bad precedence. However, the government does need to take initiatives to dispel fear among the business circles and encourage them to return to their normal business activities. One may like it not, some actions soon after the assumption of power by the present caretaker administration in the name checking anti-hording activities, created both panic and resentment among the business community.
The people expected that the overall business climate would improve in the absence of political confrontation, decline in the incidences of extortion and bribery. But, unfortunately, despite all these conditions in place, the businesses do have a feeling of uneasiness. It is not that the government is not aware of the situation. Now it is time for the caretaker head and the finance adviser to restore the much-needed confidence among the businesses, the prime movers in a deregulated economy. The government can try market intervention with the help of the Bangladesh Rifles and the Trading Corporation of Bangladesh. But that is unlikely to make any big difference in ground realities as far as the price situation is concerned.
All is not well in the country's banking sector. While the sector is sitting on a huge amount of excess liquidity, a reverse trend in the recovery of non-performing loans (NPLs) is now being witnessed, much to the discomfort of the banks' management.
What has been causing pains to the banks, which are now awash with money, is that not many investors and traders are coming to them these days. The poor demand for funds from the private sector does indicate a slowdown in manufacturing and trading activities. If this trend persists for some more time, the banks would find it hard to maintain their business growth momentum of past years. The banks might even experience a bulging portfolio of non-performing loans.
The banks, reportedly, have in their vaults an excess liquidity of around Tk. 100 billion with a marked decline in the flow of credit to the private sector. There could be two reasons behind the poor demand for funds from the private sector. One is the restricted monetary policy now being pursued by the Bangladesh Bank with the objective of containing inflation that has now reached the highest level in 15 years' time. And the second one relates to panic and a sense of uncertainty that have gripped most businesses, allegedly, due to the ongoing anti-corruption and anti- tax evasion drives launched by the present caretaker administration. The fact that the prevailing situation is far from ideal is very much evident from the poor rate of opening of letters of credit (LCs) by the industrialists and other importers.
The big businesses can afford to slow down or close their operations for one or two months. But what is about the common men? The inaction or slowdown of their normal activities by the owners of industries and big trading houses would surely take a heavy toll on the poor consumers. Actually, the poor, low and middle income people have been paying a price for such unwanted actions for the last few months, in terms of hike in the prices of essentials and cut in employment opportunities.
It would not be fair to blame the banks for discouraging the private sector people from taking loans by asking them to comply with certain rules and regulations. Banks take deposits from people and disburse the same as loans, keeping certain spread in interest rates and this particular operation remains to be its major source of earning. They cannot afford to hold back deposits since that would be suicidal for them. Why should the banks discourage borrowers, particularly when they have so much of idle money in their vaults?
The slowdown in economic activities has resulted not only in reduced flow of credit to the private sector but also a reverse trend in the recovery of the non-performing loans in the banking sector. According to a newspaper report, the share of the NPL in the total outstanding loans increased to 13.96 per cent in June last from 13.15 per cent in December, 2006. The increase though appears marginal, actually, is an ominous sign for the sector.
Notwithstanding the fact that there had been some widow-dressing of NPLs, particularly in the public sector banks, the extent of overdue loans have been on the decline in recent years because of the enactment of the Money Loan Courts and other reforms in the financial sector. The share of the NPL in the total outstanding loans was nearly 25 per cent in the early nineties. Bringing it down to 13 per cent has not been an easy task.
None wants to witness a reversal of the situation as far as NPL is concerned. It is not that difficult to identify the reasons for the reverse trend in the recovery of overdue loans. The drive of the present government against corruption, tax-evasion, financial irregularities, extortion and land grabbing have landed some of the country's top businessmen and industrialists in the jail and some others have fled the country. In their absence such business operations and industrial units being in a state of disarray are finding it hard to service their debts to banks and other financial institutions. Because of the economic slowdown, some other business operations are also facing difficulty in paying their dues to banks.
Nobody should ask the government to release the businesses accused of corruption or other crimes. For, that would set a bad precedence. However, the government does need to take initiatives to dispel fear among the business circles and encourage them to return to their normal business activities. One may like it not, some actions soon after the assumption of power by the present caretaker administration in the name checking anti-hording activities, created both panic and resentment among the business community.
The people expected that the overall business climate would improve in the absence of political confrontation, decline in the incidences of extortion and bribery. But, unfortunately, despite all these conditions in place, the businesses do have a feeling of uneasiness. It is not that the government is not aware of the situation. Now it is time for the caretaker head and the finance adviser to restore the much-needed confidence among the businesses, the prime movers in a deregulated economy. The government can try market intervention with the help of the Bangladesh Rifles and the Trading Corporation of Bangladesh. But that is unlikely to make any big difference in ground realities as far as the price situation is concerned.