New challenges facing banking sector

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Banking sector remained a core segment in the country's financial arena for a long period due to its growing contribution to the development of the private sector-led economy. Significant progress has been made in the financial sector, especially in the banking sector by de-emphasising the role of the state-owned commercial banks, strengthening competitive pressures, softening government control, tightening prudential regulations and regulatory oversight and upgrading provisional standards. Key measures have been taken including increase in the capital adequacy ratio to international norms, stringency of loan classification, issuance of risk guidelines and improvements in corporate governance of banks.

However, some recent developments in the banking sector have posed a serious blow to the sector which is ultimately affecting the overall economy.

The issue of spread comes first in this regard. The central bank is putting pressure on the banks to lower the spread saying the difference between deposit and lending rates is too high in comparison with other countries. As a result of the central bank persuasion, the private commercial banks (PCBs) agreed to bring down the profit rate / interest rate spread to around 5.0 per cent from the existing 6.05 per cent.

On the other hand, entrepreneurs or industrialists are traditionally saying that banks charge high profit rate / interest rates on lending, and consequently asking for single digit profit rate / interest rate. All the more depositors are striving to look for the highest profit rate taking the advantage of volatility of liquidity position of the money market. So it is a "Four Encountering Challenge" for the banks to survive in the face of such onslaught.

Moreover, the recent budgetary provisions proposed for fiscal year 2008-09 will hit the growth of the banking sector.

The Bangladesh Association of Banks (BAB) noted that the proposed budget revised the tax rate for companies listed for public trading from 30 per cent to 27.5 per cent, while for companies not listed for public trading, to 37.5 per cent from 40 percent.

But no concession has been made to banks. The existing 45 per cent rate of corporate tax for banks has remained unchanged.

With a view to giving some income tax benefit on provision against classified investment/loans deduction @ 4.50 per cent / 5.0 per cent / 3.0 per cent (as applicable in different assessment years) of total outstanding investment / loans including profit / interest thereon or the amount of actual provision and profit / interest thereon in the books of Assessee, whichever appeared less, was allowed since 1990-91 assessment year under the Finance Act, 1990 and treated as allowable expenditure. Such income tax benefit on provision was, however, increased from 4.50 per cent to 5.0 per cent as per the Finance Act, 1994 and again reduced from 5.0 per cent to 3.0 per cent as per the Finance Act, 1997. It was again reduced from 3.0 per cent to 2.0 per cent as per the Finance Act, 2003. At last, income tax benefit on provision against classified investment loans was reduced from 2.0 per cent to 1.0 per cent from the assessment year 2005-2006.

Finally, 1.0 per cent rebate on provision was discontinued from the assessment year 2006-2007.

The BAB proposed that 2.0 per cent income tax benefit on provision against classified investment loans and advances (as was allowed earlier) should be reintroduced for a further period of three years in the proposed budget.

The bank has to maintain 1.0 per cent general provision on unclassified outstanding investment loans as per the Bangladesh Bank (BB)'s directive and also to keep provision of income tax on the said 1.0 per cent provision. Deductible expenses by the tax authority are also not allowed on such 1.0 per cent provision on unclassified loans. As a result, the banks are incurring loss in many ways and the adverse impact is as follows:

a)Declaration of dividend is hampered

b)Value of shares fall

The BAB, therefore, proposed that in the proposed budget loan loss provisioning on unclassified investment loans and advances should be withdrawn.

All types of Corporate Social Responsibility (CSR) activities and (for Islamic banks) Zakat extended by banks should be exempted from taxation.

The BAB has already made a plea for rational modifications in the proposed budget for fiscal 2008-09 of the above tax-related matters so that capital and reserve base of the banks in the private sector are strengthened, while banks having classified investment / loans are able to fulfill the provisioning requirement availing of the tax benefit.

So against this backdrop, a special focus on small and medium enterprises (SMEs) is needed to diversify the businesses of the banking sector which will play a more proactive role to develop the country's economy.

The small and medium enterprise (SME) sector and rural economy should be the thrust sectors as well of the banks with the launching of some scheme-based programmes.

In consideration of the above-stated situation, Shahjalal Islami Bank Limited is striving to nourish the rural economy of the country, formulating and launching schemes like Rural Investment Programme (RIP), foreign investment employment scheme, doctors' investment scheme, executives' investment schemes.

The banks need to shift focus from the big corporate houses to the micro areas so that the economic activities cannot remain confined, rather they spread all over the country bringing the teeming millions into economic mobility.

This writer is optimistic that the proposed investment areas will play a vital role in creating adequate employment opportunities, income generation and poverty alleviation.

Besides, improvement of treasury risk management, diversification of government securities market and development of a secondary market for government bonds is necessary to reduce the high costs of domestic borrowing for deficit financing. These and other sectoral reform agenda need to be implemented on a sustained basis with strong commitment.

Now, highlight the remittance issue can be highlight as inward remittances from the non-resident Bangladeshis (NRBs) continue to play a strong supporting role in strengthening the current account. Receipts on this sector increased to about $ 7.0 billion in the outgoing fiscal year. The underlying reason was the resultant effect of vigorous efforts of the BB such as expansion of activities of drawing arrangements, review of statements received from foreign banks/exchange houses, close monitoring and supervision of banks etc. vis-