Budgetary and other incentives provided for the banking sector in the outgoing fiscal year have failed to improve the financial health of the ailing sector, which witnessed further scams in the year.
The majority indicators suggest a gradual deterioration of the state of the banking sector, regarded as the backbone of the country’s economy in absence of a mature capital market to support the country’s economic progress, experts said.
They said that the malfunctioning of the banking sector would have an adverse impact on the country’s socio-economic advancement, hampering the graduation of Bangladesh into a middle-income country.
A significant instance of the degrading state was that the net profit of the country’s banking sector slumped by a huge 57.5 per cent to Tk 4,040 crore in 2018 from Tk 9,510 crore in 2017, according to a Bangladesh Bank report.
The steep decline in the net profit resulted mainly from higher provision requirement against the increased non-performing loans, the report said.
Banks were compelled to maintain Tk 14,620 crore in provision against the NPLs in 2018, a sharp rise by 98.6 per cent from Tk 7,360 crore in 2017.
Meanwhile, the amount of defaulted loans in the country’s banking system grew by 26.39 per cent in 2018, much higher than 19.51 per cent in 2017.
The non-performing loans in the banking sector shot up by Tk 19,608.4 crore to Tk 93,911.4 crore in 2018 from Tk 74,303 crore in the previous year.
Besides, the banking sector has been going through a series of scams and irregularities over the last several years, with the latest scam involving Tk 3,572.98 crore in Janata Bank by five subsidiaries of the Crescent Group and another involving Tk 5,508 crore by AnonTex in the same bank in the outgoing fiscal year.
In 2012, the Bismillah Group swindled about Tk 1,100 crore from Janata Bank and the Hallmark Group about Tk 3,500 crore from Sonali Bank in 2013.
In 2016, a central bank investigation found that Farmers Bank (now Padma Bank) sanctioned and disbursed loans and hid defaulted loans amounting to around Tk 400 crore in violation of banking rules.
Asked whether any qualitative change took place in the banking sector in the last couple of years, especially in the outgoing fiscal year, former Bangladesh Bank governor Salehuddin Ahmed told New Age that he did not observe any, rather the situation had been deteriorating day-by-day.
On the contrary, he said he observed, bank performance indicators were getting negative, including increase in bad loans and loan write-offs, the weakening capital adequacy and the deepening liquidity crisis and a lower growth in deposit compared to the lending growth.
Regarding regulatory aspects, the former BB boss said he observed increased government intervention in the central bank’s activities, adding that the public confidence in the regulator was fading.
The banks’ liquidity and asset management has also been deteriorating, said Salehuddin, adding that he saw no regulatory measures to address irregularities and no punitive steps against the malefactors.
As a result, the production sector of the country was adversely affected by the irregularities like viral diseases, he said and added that the problems in the banking sector would also create social problem like unemployment due to lack of investment.
Amid such a deteriorating situation, the government, like in the previous fiscal budgets, has kept aside Tk 2,000 crore in FY19 for the recapitalisation of the ailing state-owned banks, reduced corporate taxes by 2.5 percentage points for all the banks and other financial institutions.
In the latest instance in May this year, the central bank in what is seen as a politically-motivated move allowed the banks to reschedule bad loans with just a 2 per cent down payment to help the banks in shambles to ride over the ‘high’ provisioning burden.
The policy relaxation, however, remains halted until June 24 this year following a High Court order.
Speaking about the government moves regarding the banking sector, the central bank’s former deputy governor Khondkar Ibrahim Khaled told New Age, ‘Instead of making any solid contribution towards the development of the [banking] sector, the government’s contribution was towards the deterioration [of the banking sector].’
Mentioning the change brought about in the definition of defaulted loan, the former central bank deputy governor said that the change was not forward-looking, rather it was backward-looking.
The government moves regarding the rescheduling of bad loans have put bank officials into an uncomfortable situation and such changes could not be termed as positive reforms, rather they were bad reforms, said Khondkar.
He also noted that the BB had become inactive against the interventions from the government.
Speaking about how to remedy the situation, he said that things could improve if the government changed its mind set by promoting the good borrowers.
He also said that allowing the BB to work independently could help get rid of the situation.
The list of government incentives for the ailing banking sector and defaulters became longer as the central bank in February this year relaxed the loan write-off policy by extending the banks the authority to write off loans worth Tk 2 lakh.
Previously the limit was Tk 0.5 lakh.
The controversial amendment to the Bank Company Act 1991 allowed four directors, instead of two, from a family and extended the tenure of the directors to three consecutive terms.
The bank owners also got their demand met for lowering the bank rate to 6 per cent from 6.75 per cent while that realised for decreasing the cash reserve requirement to 5.5 per cent from 6.5 per cent on the pretext of liquidity crisis.
The government also met the bank owners’ demand that the state-owned agencies should deposit 50 per cent of their funds, instead of the existing 25 per cent, in the private banks.
But, the government budgetary and policy support, without bringing about improvement in the problem-ridden banking sector, continues to deepen the sector’s crisis.
The volume of excess liquidity in the country’s banking system fell by 13 per cent year-on-year to Tk 67,642 crore as of January this year.
Many of the banks are suffering from liquidity crisis that has forced the central bank to extend the deadline for the adjustment of advance-deposit ratio by six more months to September this year.
Till now, 22 banks are yet to adjust the ADR with the BB-set limit due to liquidity shortage.
As a result of the acute liquidity shortage, banks were forced to take high-interest loans from the central bank, at 9 per cent interest rate, in addition to borrowing under the inter-bank repurchase agreement.
As per BB statistics, banks’ borrowing from the inter-bank repo increased by a staggering 324.13 per cent, or Tk 35,431 crore, to Tk 46,362 crore in May 2-29 this year against Tk 10,931 crore in one month before Eid-ul-Fitr last year.