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Borrowing by top 20 defaulters makes up 40pc of soured loans

Credit risk emerges as biggest threat to banking assets: Expert

FE Report | March 06, 2018 00:00:00

Credit risk has emerged as the most challenging for banks, involving as much as 88 per cent of the overall assets of the country's financial sector, an academic said on Monday.

To overcome this challenge, local and overseas professionals laid emphasis on paying more attention to making credit risk management stronger enough to limit the space of wrong selection of borrowers.

Such specialised system would not only alert the financial institutions about possible areas of risk but also help banks reduce the growth of NPL (non-performing loans), which increased to over 10 per cent in 2017 from 6.1 per cent in 2001.

The experts also suggested the bank boards understand the role of CROs (Chief Risk Officer) and empower them.

"There are three kinds of risks prevailing in the banking system-credit, market and operational. Nearly 88 per cent of risks come from credit here," said professor of Bangladesh Institute of Bank Management (BIBM) Md. Nehal Ahmed.

He revealed the figures at a session on 'Operational Issues of Banking' on the last day of the two-day regional banking conference.

BIBM, Financial Institutions Training Institute (FITI) and National Banking Institute (NBI) jointly organised the event where banking sector experts from India, Nepal and Bhutan also presented papers.

Showing Bangladesh Bank's off-site supervision data, Mr. Ahmed said operational and market risks accounted for 3.5 and 8.6 per cent respectively at the end of September 2017.

Referring to troubled loans, he said that the borrowing by top 20 loan defaulters alone amounts to over Tk 320 billion, which is 40 per cent of such credit.

At the same time, he said that Capital to Risk-Weighted Asset Ratio (CRAR) has turned out to be another challenge for the banking sector in Bangladesh as nine banks fell short of the required CRAR target of 10 per cent in 2017.

The problems of credit risks and increased NPL volume can be addressed by ensuring effective operation of credit risk management, he said.

BIBM Supernumerary Professor Helal Ahmed Chowdhury suggested the central bank make a 'fit list' of directors as per norms and rules because the board members need to have sound knowledge and competency to run sensitive institutions like banks.

About the credit risk, he said it started from the micro-level while selecting borrowers and undergoing subsequent stages. "If you (bankers) don't select the correct borrowers, if you are being guided by head office dictation then the loan portfolio will be as such and NPL will be automatically increasing."

He also suggested top management of the banks should consider the advice of CROs while making any lending decision.

Talking about the banks' reluctance to reach unbanked people, president and managing director of Bank Asia Ltd Arfan Ali said banks did not show interest to go to the poor people with their services fearing it might not be financially viable.

"The failure of the bankers created the term of unbanked people. If we can change our (banks) business model, we can still make money and can cover the unbanked people. We can't achieve economic sustainability by leaving the poor out of the bank system," he added.

Additional managing director of Trust Bank Ltd Faruk Mainuddin Ahmed said the central bank should classify the loan defaulters in two categories - willful and normal as many countries did. After that, the country could treat them accordingly.

"I was a CRO of a bank. Till now I feel that in our banking industry, the role of CRO has yet not been fully defined. Even, CROs in many cases don't know what their roles are. If the management and the CROs do not know their roles, what should the board do?" he said.

"It is the responsibility of the management to educate the board about the importance of CROs for ensuring financial governance," he added.

Moderating the function, chief executive officer of Bangladesh International Arbitration Centre Muhammad A. (Rumee) Ali said in the case of digital banking, the country had not been able to create products beyond the bank account.

"We've to link mobile financial services account to a bank account. Why are we not thinking about digital wallet, which can act like a bank account? Whether you (banks) like it or not, it is going to happen," he said.

He also raised some emerging challenges the bankers would face in the coming years such as cyber security, money laundering, disrupted technology, demand of talented workforce and corporate governance.

BIBM professor Prashanta Kumar Banarjee called upon the banks to go for separate products for different segments of the people for making baking service more lucrative for the people.

Responding to a question about the reasons for low NPL rates in Nepal, CEO of Janata Bank Nepal Ltd Parshuram Kunwar Chhetri said the Nepali banking system was dominated by the SMEs as the country had not many big industries.

"Another key thing is that the defaulters are simply not tolerated in our country. They are blacklisted and once they are blacklisted, they cannot get loan from any banks," he said. "In some cases, their passports are seized by the government to prevent them from leaving the country."

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