Too many banks, more challenges ahead
My cadet college buddies were almost throwing me out from the second floor of the club for even indirectly supporting our finance minister and Bangladesh Bank board for granting few more new bank licences, reports The Daily Sun.
Their arguments were of course -1) a small economy like Bangladesh can’t afford too many banks, 2) the case of championing financial inclusion through granting more bank licences didn’t bring result, 3) existing banks could not foster desired product development or service offering and more importantly 4) granting of fresh licences could not create fair competition to benefit the end users. My focus has always been – no issue with granting of licences if they can come up with required capital (that should also be much higher than the present); but a lot of issues remain with performance and ultimate contribution to community, economy and future of business in Bangladesh. In line with the principle of Evolution, survival of the fittest should be the ideology on which we build our banking sector. Performance and only performance should dictate who sustains and who bites the dust. With 57 scheduled and 6 non-scheduled banks, the banking sector of Bangladesh contributed 3.39 per cent to GDP in 2017-18, according to the provisional figures reported by BBS recently.
The corporate tax rate has also been reduced in the national budget for this sector to provide a much-needed relief for the financial intermediaries. However, the ever-increasing bad loans and lack of governance, in general, have crippled Bangladesh’s banking sector.
Yet we see more and more businessmen vying to open up new banks because it gives them an elevated social status! For decades, state-owned banks have lent large amounts to big, influential borrowers, who are known to be pernicious borrowers when it comes to repayments. Measures have rarely been taken against defaulters. Instead, loans are routinely rescheduled to allow further lending to the same borrowers. Between 2014 and 2018, Non-performing Loan (NPL) ratio has been hovering around 10 per cent, which is much higher than the international standard of 5 per cent. The NPL ratio would go up to 17 per cent if restructured or rescheduled loans had been taken into account. The sector, which could have been our pride and a major growth engine of the economy, has instead, ended up doing everything it can to enrich its owners, at the expense of everyone else especially the government.
To make matters worse, there’s a culture of “life-support” for banks that cannot turn available deposits into loanable funds as the amount equivalent to bad loans are set aside as provision. Consequentially, banks’ costs of funds rise leading to an increase in lending rate. Bank capital gets weaker. The government has announced a large bailout package so that the state-owned banks can meet some of their capital shortfalls. This move has drawn flak from the public as taxpayers’ money has been diverted from the development side to pay for these handouts. While the amount is meagre when compared to the amount demanded (BDT 203.98 billion), but the bailout is continuously being given despite banks failing to improve their NPL positions.
A fourth-generation private commercial bank, which came into being following political consideration, has arrested a lot of attention recently owing to the fact that not only has not the bank been able to collect any new deposits but also, existing depositors are trying to withdraw their fund. The owners of the literally failed bank reportedly requested the government to inject funds so they could retain ownership. The government though didn’t release any ‘dole’ from the exchequer has unprecedentedly pushed state-owned banks and financial institutions to buy stakes of the troubled or ‘failed’ bank. This bizarre method to keep the particular bank afloat has raised eyebrows and rightly so. First comes the question whether the public sector banks, which regularly request the government for capital replenishment, are at all financially sound enough to buy the stakes in a troubled bank. Second, why should these banks invest in the particular bank, which has near zero possibility of turning the tide?
Distribution of credit based on political influence, impunity culture, abuse of power in loan distribution and weakness of existing laws contribute to the decay of the banking sector. Additionally, regulatory requirements become a problem area when changes in regulation prompt regulators to roll out action plans without thorough research or understanding the future implications and the ability of the banks to comply with it. This not only confuses stakeholders but also delays implementation.
Lack of technological expertise is also a major issue as depicted by the Bangladesh Bank heist in 2016. It is speculated that, besides possible involvement of rogue employees, lax computer security practices (the Bank had no firewall installed on its network) enabled the hackers to obtain necessary information and transfer $81 million successfully to their accounts. Abrupt collapse of the central bank’s Credit Information Bureau (CIB) server on March 6, 2018, for nearly a week, disrupted lending activities of banks as no loan is sanctioned/extended/renewed without obtaining client’s credit status from CIB report.
In the last decade, although the number of banks has increased, the industry’s capacity has not kept pace with it. It is essential that banks focus on improving supervision, reducing risks by avoiding high concentration of loan to a particular borrower or in one sector, improving the legal and financial framework for loan recovery. Enforcement of regulations ought to be ensured and the practice of loan disbursement, as well as other favours based on political affiliation, ought to be curbed. Banks stand to gain by investing in technology to improve governance and that would do wonders for our economy. Some say consolidation and merger of underperforming banks might be a way out but rarely do sum of the parts become greater than the whole.