Fahmida Khatun writes for DOT : The banking sector of Bangladesh has expanded over the years in terms of number of formal institutions, higher number of financing instruments and bigger volumes of assets. However, the sector has been facing a number of serious challenges due to malpractices, scams and heists. These have affected the overall performance of the sector which is reflected through various efficiency and soundness indicators. Repeated concerns have been expressed by relevant stakeholders regarding the constant deterioration of banking performances and its potential implications for the sustainability of the sector. Given that the financial sector of the country is mainly bank based, poor health of the banking sector will also impact on economic growth. Therefore, fixing the problems is critically important. While much has been talked about, it is time to act to address the problems. For the next government, the banking sector should be a priority for action. As the country prepares for the national elections on 30 December 2018, CPD felt the need to bring the issues of banking sector performances to the notice of the political parties. CPD has been continuously flagging the issue for many years.
Performance of the Banking Sector
Bangladesh Bank’s Guidelines on Risk Based Capital Adequacy (2014) state that banks in Bangladesh must maintain a minimum total capital to risk weighted assets ratio of 10% by 2019, in line with BASEL III. State-owned commercial banks (SCBs) have failed to maintain minimum capital adequacy requirements since 2013. Development finance institutions (DFIs) are critically under-capitalized.
Non-performing loans (NPL) as a share of total loans, is exceptionally high in SCBs and DFIs. As of June 2018, SCBs had 28.2% NPL, which is highest in the last ten years. About 47% nonperforming loans were concentrated in 5 banks as of end-June 2018 (BB, 2018).
Classified loans, as a share of total loans; was more than 10% for nine banks during 2016-2018. During 2016-2018, all SCBs had expenditure income ratios greater than 0.5. This reveals poor management effectiveness of these banks during this period.
In terms of Return on Asset (ROA) and Return on Equity (ROE), the performance of FCBs, PCBs, and FCBs deteriorated. As of June 2018, ROA and ROE of the banking industry stood 0.3 percent and 5.3 percent respectively.
A fluctuating Advance Deposit Ratio (ADR) was observed over the last ten years, which indicates inefficiency in liquidity management of some banks During last few years, the banking industry faced more than two unusual incidences of both liquidity surpluses and liquidity shortages.
Fourth generation banks such as The Farmers Bank, NRB Global Bank, and NRB Commercial Bank faced liquidity crisis during 2016-2017. The problem was particularly acute in the case of The Farmers Bank, which had to be bailed out by the government. In May 2018, four state-owned banks and a financial institution signed share purchase agreements with The Farmers Bank to inject Tk 765 crore into the bank (The Daily Star, 2018).
Fahmida Khatun is the Executive Director, Centre for Policy Dialogue (CPD)
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