Focus Writing : Banking sector of Bangladesh for sustainable growth

Banking sector of Bangladesh for sustainable growth

Bangladesh's financial sector is dominated by the banking sector. The dominance of the banking sector makes the financial sector vulnerable on the one hand, but highlights the crucial importance of the sector in resource mobilization and economic growth, on the other. The role of the banking sector in accelerating growth is contingent upon the soundness and depth of the sector. In Bangladesh the banking sector has travelled through a journey where the sector has experienced several ups and downs. Reforms measures have been undertaken in an attempt to improve upon the structural constraints of the sector. Such measures have been driven by objectives such as: *increasing the capital adequacy of banks,

▪ streamlining guidelines for rescheduling of various types of loans,

▪ tightening provisions for non-performing loans,

▪ strengthening disclosure requirements and

▪ improving accounting system.

At present, key performance indicators of commercial banks in the country reflect the poor health of banks. Most banks have not been able to show significant improvements on indictors such as :

▪ capital to risk weighted asset,

▪ non-performing loans,

▪ expenditure-income ratio

▪ return on asset,

▪ return on equity, liquid asset and excess liquidity despite several measures taken Since large financial irregularities in Sonali and BASIC banks, monitoring and inspection of Bangladesh Bank have increased. The central bank has also appointed observers in 14 banks and financial institutions, both state-owned and private to check further deterioration of these banks and supervise closely to improve their governance.

♦Profitability, measured by return on asset and return on equity, has been negative for the state-owned banks (SCBs).

♦For private commercial banks, though these indicators are positive, but very low.

♦In case of non-performing loans (NPL) similar performance is observed.

♦Though the share of NPL to total loans in SCBs has slightly declined in 2016 from 2015 the rate is still as high as 21.82%. On the other hand, NPL in private commercial banks (PCBs) and foreign commercial banks (FCBs) have increased. Because of high NPL, state-owned banks have to make larger provisions. The government has to inject capital into these banks to keep them going. Clearly, implementation of BASEL III requirements that call for capital adequacy ratio to be raised to 12.5% of their risk-weighted assets by 2019 will be challenging for the SCBs. As of 2016 capital adequacy ratio of SCBs was only 6.2%.

The advance-deposit ratio has been little over 70% in November 2016 even though banks are allowed to lend up to 80% of their total deposit.

The incidences as hallmark group, Bangladesh bank heist have affected the effectiveness of various measures taken to improve the governance of the banking sector. Flexible measures, including loan rescheduling policy favouring powerful people and lack of punishment for fraudulence in banks have worsened the situation.

♦In view of this there is a need for setting up a commission for the financial sector. The commission will scrutinise the overall performance of the sector, assess the need of customers and the economy, identify the current problems and emerging challenges and suggest concrete recommendations for prudential banking to be implemented in the short to medium terms.

Recently, there has been some discussion at the policy level as regards setting up a 'Financial Sector Commission' for the improvement of the sector. The broad terms of reference of the commission should be to critically assess the problems and weaknesses of the banking industry in order to find whether there is any disconnect between demand of the growing economy and the realities of a back dated financial system that is failing to meet the emerging need. On the basis of a comprehensive scrutiny, the commission will prepare guidelines and make recommendations as regards automation, risk management, internal control, the role of various players in banks and other financial institutions.

In 1998, a Commission on Banking and in 2002, a Banking Reform Committee were formed to make recommendations for the improvement of the performance of banks.

The banking sector has achieved considerable success due to the reforms in the 1990s, 2000s and afterwards. However, the sector will have to prepare for the next generation of global regulatory framework and meet emerging clients' needs.