At the moment, there is plenty of idle money in the banks. The growth of deposits is also adding to the problem of plenty. Banks are getting virtually no return from the same. Interests will have to be paid against deposits. This is increasing the burden of the banks. As of last April, surplus liquidity with banks stood at Tk 1140 billion. These funds are invested in govt bills or bonds. Banks are getting nominal interest on account of such investment. Bangladesh Bank is found unwilling to call these funds as idle. According to their statement, idle money is Tk 150 billion.
The banks are moving away from business and investment and the money is invested in bonds and bills. The private sector is unable to absorb funds on offer for investment. So the banks are investing money in bills and bonds. The central bank has advised the banks to use money in SMEs (small and medium enterprises). Such investment will reduce the extent of idle money. It appears from April report of central bank that banks have a liquidity of Tk 2560 billion. Out of this, Tk 1420 billion is said to be in statutory deposits leaving a surplus of Tk 1140 billion.
The government has utilised some of these funds to control inflation. They have withdrawn money from the market and kept it in the vaults of the central bank. Bank deposits have increased compared to loans. Unless investment is increased further, the size of idle money will not be reduced. During 2014/15 money outside the banking system increased by 9.0 per cent whereas during 2015/16 it increased by 15 per cent. These figures are based on central bank report.
Bangladesh bank has recently withdrawn Tk 170.61 billion from the market. This has been done to control inflation. Depositors cannot use funds for investment because of stagnation. New investments are not coming. The trend has resulted in the rise in idle money with banks. A permanent solution is needed for managing excess liquidity. Investment needs to go up. This has to be done in a coordinated manner .The central bank cannot do it alone.
Loan defaults cannot be controlled. The volume of the same has been rising continuously. According to the Bangladesh Bank, loan default increased by about Tk 40 billion in three months. This is an ominous signal for the baking sector. This may lead to breakdown of discipline in the banking sector. There are a few people on the boards of the banks. They conspire to provide risky loans. As a result loans turn into defaults.
According to the Bangladesh Bank, the share of classified loan in the banks' total outstanding loans is more than 10 per cent. State-owned banks have the largest volume of classified loans. If the written-off and rescheduled loans are taken into account, the volume of classified loans would be bigger.
Loans are given without due diligence. There is no control in the state owned banks. This may lead to breakdown of discipline in the banking sector. Loans are given on political consideration. Competent people are not appointed in state owned banks. Bank management has become corrupt. Banks are losing out on revenues. They have to make provisioning against bad loans from their incomes. The state owned banks need capital injection from taxpayers' money to stay alive.
The non-performing loans of state-owned banks at the end of first quarter of 2016 stood at 24.27 per cent. In contrast, it was 6.2 per cent in India. The banks are largely responsible for default loans. They have continued to give loans under various influences and without properly looking into the quality of borrowers. Poor governance at bank boards, inadequate credit information and inadequate financial statements of borrowers are major factors contributing to poor asset quality, according to IMF report on Bangladesh, published in January 2016. Moreover, lengthy legal procedures make it difficult to recover loans.
Some 60 per cent banks operating in Bangladesh faced termination of ties with their corresponding banks in transactions during the lat three years. This was revealed by a research. The research carried out by Bangladesh Institute of Bank Management listed the reasons for such a deplorable situation in correspondent banking. Non performing loans, capital shortfall, dilatory payment tendency and adverse media reports are among the causes.
The survey observations reveal lack of business and profitability as well as compliance issues as the key reasons for the growing termination of correspondent banking relationship in the country. The declining trend in correspondent banking is not a good indication for the banking sector as it would affect our trade abroad while increasing the cost of doing business in the country.
Decline in correspondent banking relationship is resulting in growing loss of competitiveness in international banking. High country risks as well as lack of credit rating of local banks by the world class rating agencies are also weakening the bargaining power of local banks in maintaining foreign-correspondent relationship.
These trends need to be reversed to improve the economic situation in the country.
The writer is an economist and columnist.
jamaluddinsyed23@yahoo.com.au
Odds facing the banking industry
Syed Jamaluddin | Published: August 31, 2016 00:00:00 | Updated: February 01, 2018 00:00:00
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