A strong bank operating system makes a strong economy

26 Jul 2020 11:23 PM
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For the last several years, the banking sector in Bangladesh has been performing an important role in our USD 300-plus billion market where banks comprise a lot more than 80 percent of most financing activity. Besides featuring investible funds to both public and the individual sector, they are also facilitating foreign trade and service obligations, generating employment, earning international remittance, strengthening rural overall economy, developing the housing sector, etc. However in recent years, this critical sector possesses been facing various challenges, such as among others, a large volume of non-carrying out loans (NPLs), lack of corporate governance, raising capital shortfall and slow loan recovery that have raised serious issues about the effectiveness and soundness of the sector. 

Based on the "Global Competitiveness Survey 2019" of World Economical Forum, Bangladesh have scored 38.3 out of 100 and ranked 130th out of 141 countries in soundness of banks. This rating may be the lowest among South Parts of asia (India have scored 60.4 and ranked 89th, Pakistan rating 93rd, Sri Lanka 94th and Nepal 106th). In defining banks' soundness, fragile monitoring, developing default loans, insufficient good governance, balance sheets and option of funds, and ability to repay were taken into account. Another report (Financial Steadiness Statement, 2019) unveiled by the Bangladesh Bank (BB) implies that the country's banking sector preserved the cheapest capital adequacy ratio (CAR) in 2019 compared with neighbouring countries (India, Pakistan and Sri Lanka). Bangladesh maintained the CAR at 11.60 percent, way less than 17 percent in Pakistan, 16.5 percent in Sri Lanka and 15.1 percent in India. Capital adequacy ratio (CAR) is the reflection of all fiscal indicators of banks, like the ratio of defaulted loans, the ability of keeping provisioning against regular and categorized loans and you see, the problem of corporate governance.

It really is an open magic formula now that the country's banking sector has been mired found in a series of scams and irregularities, including the funnelling of loans value vast amounts of taka by violating banking guidelines and procedures to influential people, who've been known to be lax with repayments. Consequently, as of September 2019, defaulted loans in the banking sector stood at an archive Tk 116,288 crore. Disappointingly, rather than taking any strict actions against mortgage defaulters, Bangladesh Bank (BB) opted for a relaxation of varied rules. Beneath the relaxed plan provided in 2019, the central lender has given special mortgage rescheduling facility to loan defaulters, allowing defaulters to regularise their loans for a decade by paying simply two percent of their loans as down-payment. Due to the central bank's decision, this past year, a record Tk 52,770 crore was rescheduled, but of these, Tk 13,284 crore have turned sour once again, according to BB info. BB data also showed a lot more than 50 percent of the defaulted loans amounting to Tk 48,057 crore were with the eight state-run banks and 41 private banks collectively had defaulted loans amounting to Tk 44,174 crore, as of December 2019.

Industry experts, however, have strongly criticised the insurance plan. Khondkar Ibrahim Khaled, past deputy governor of Bangladesh Bank, said, "The plan will destroy the banks." The policy could have serious "unwanted effects" on the money industry. When loans aren't recovered for a long period, lending rates go up and harm businesses, he added. In an identical vein, Ahsan H Mansur, executive director of the Insurance policy Research Institute said, "Actually, this is just an eyewash to camouflage using the problem of defaulted loans." Wholesale rescheduling indicates that banking institutions are trying to clean up their financial balance sheets artificially in a bid showing profits. The quantity of non-undertaking loans (NPLs) would have increased drastically if banks hadn't regularised the defaulted loans in a peaceful manner, he described. These numbers (lessen defaulted loans) may appear good in writing but in the long run the insurance policy would deteriorate the banking sector's financial wellbeing because long-term bank loan rescheduling would hurt and squeeze the banking institutions' capacity to provide clean loans to productive sectors which could get disaster to the overall economy.

Amid such a predicament, the coronavirus outbreak in March added insult to injury for the banking sector. Because of the ongoing monetary fallout of the coronavirus pandemic, the majority of the business homes have been forced to take out a large amount of money to fork out wages and salaries to workers and for other operational expenditures. Individuals also happen to be withdrawing deposits from their savings account, cashing out set and deposit pension schemes prematurely to aid their family expenses. According to Bangladesh Bank, bank deposits reduced to Tk 12,28,000 crore at the end of this April from Tk 12,53,600 crore in January 2020. Furthermore, the governments' recent proceed to cap bank interest levels within 9 percent against loans and 6 percent for deposits will certainly encourage borrowing but banks will face hurdles in attracting depositors. Furthermore, the government decision to improve excise duty by 20 to 25 percent in a variety of slabs on deposits above Tk 10 lakh in the current budget for 2020-21 is expected to even more discourage depositors to recreation area their profit the banking system.

Unfortunately, as the banking sector can be moving through such a financially tricky period, government's borrowing from the bank operating system continues to go up. Data displays in the only concluded fiscal season the government's net borrowing from the banking sector stood at Tk 85,000 crores, up by Tk 37,633 crores from the initial estimate because of a dismal earnings collection amid the global coronavirus outbreak. Because of this fiscal year (2020-2021), the federal government has set its bank borrowing goal at Tk 84,983 crore to meet up portion of its Tk 1.9 lakh crore budget deficit. It seems the current trend of high government borrowing would rise even more in the coming months due to a dismal income collection amid the global coronavirus outbreak. Economists and bankers anticipate all of this to definitely put even more  pressure on bank deposits in the approaching days, that will ultimately increase the threat of crowding out the exclusive sector with adverse effects on private investments.

After the outbreak is contained and the economy resumes its normal activity you will see more demand for the money, the two from the private and public sector. Personal sector will be requiring funds for business structuring and the federal government will have to spend a large amount of cash on development jobs to improve up economic actions and to create aggregate demand, however the question remains, how do banks lend effortlessly if they do not really have satisfactory funds. To answer the question, economics 101 tells us that when the market starts growing, the united states needs more resources of finance and extra resources of credit. Today, there exists a strong want for other styles of institutions like capital raising, private debt equities, strong bond and capital marketplace, etc., so that businesses can boost longer-term finance through these institutions and lessen their reliance on short-term bank finance. Similarly, the government should also concentrate on availing foreign grants along with low-cost funds from exterior sources and really should have initiatives to fortify the bond market as the united states needs long-term expenditure to achieve its development goals and so reduce dependency on lender borrowing.

Therefore, it is about time for our policymakers to comprehend that a healthy, good and reliable financial sector is certainly a essential component of monetary growth. Anne-Marie Gulde-Wolf, the International Monetary Cash (IMF's) Asia-Pacific Deputy Director said: "Reforming the banking sector is one of the leading priorities for the federal government to improve the resilience of the economy...Comprehensive reform is required to address banking sector weaknesses. Measures should include enhanced banking regulation and guidance, state-owned commercial banking institutions reforms, tighter standards for loan rescheduling/restructuring, more powerful corporate governance in the banking sector, and increased legal devices to accelerate loan restoration." Therefore, the earlier the government starts to implement the above suggestions, the more rapidly Bangladesh will embark on a path that could create a more robust economy.