Banks are now crawling in a big hole mostly created by their own mistakes. Recovery of bad loans from borrowers have made their situation too much difficult when mounting bad assets have put serious pressure on capital base and threatened their ability to grow in a competitive environment.
"It is like putting toothpaste back into the tube," said Md. Mehmood Husain, President and Managing Director of Bank Asia Limited (Bank Asia) in an exclusive interview with The Daily Observer last week.
"Giving a loan is relatively an easy part, but recovery is far more difficult. You have to act before the loan fully twins bad. All such loans are very closely monitored now through multiple channels", he said.
"Almost one-third of the total default loans are now stuck in trade-financing and banks are in deep trouble with their recovery", CEO of Bank Asia said.
Total outstanding loans of all banks amounted to Tk 4 lakh 60 thousand 758.63 crore on March 30, 2014, according to Bangladesh Bank, while 10.45 per cent of these loans amounting to Tk 48 thousand 172.60 crore were identified as classified.
The central bank officials recently have told the press that more than 32 per cent or Tk 131.20 billion of the total Tk 406.4 billion non-performing loans (NPL) were concentrated in trade-financing sectors in 2013. Around 40 per cent of outstanding loans are held by 30 to 40 business groups in Bangladesh.
During the talks, Mr. Hossain, an eminent banker with 30 years' of experiences in diversified areas in the finance and banking industry expressed his views and some thoughts first time with The Daily Observer.
"Despite repeated insistence from the regulatory authorities and high pressure from the managements, executives are under tremendous pressure to recover the classified loans, moving door to doors. But the recovery rate does not give us any good news', he said. Most of the default borrowers are also passing very hard times after heavy business losses from volatility in commodity markets and finally from bubble and bust capital and housing markets.
"When they incurred losses from commodity markets, some borrowers diverted their funds to the bubble capital and real estate markets. Later, suddenly, as both the markets busted, they lost their money", Bank Asia CEO said.
The banks were aggressive in lending, did not administer risk management process properly and failed to manage crises with appropriate rescue programmes. Therefore, he said a big whole has been developed in the financial market", Mehmood Husain said.
"More than Tk 10,000.00 crore loans are now stuck up with a few borrowers in the Chittagong which has been a difficult task for banks to recover as most of the money was invested in the bubble equity market and later dried up after the market bust", he said.
However, some private banks, like Bank Asia, could address the situation timely and are facing lower pressure comparatively, he said.
After starting its maiden journey in 1999, the Bank Asia Limited has already found a niche market in the country's banking industry and now stand on sound financial footings. The bank's core strengths are its corporate culture strategy, cautious credit policy and a team of efficient work force under the leadership of Mr. Md. Mehmood Husain.
Mr. Mehmood, an ex-cadet and a post graduate in Economics, started his banking career in 1984 with National Bank as Probationary Officer. He has to his credit 30 years of long and diversified banking experience. Prior to his joining Bank Asia, he was the Additional Managing Director of Prime Bank Ltd.
The finance whole emerged in the domestic market when the global banking industry passed through a big crisis and had put important implications for the feasibility of different banking models. The crisis has clearly exposed the dangers of a bank's excessive reliance on the traditional business activities, the CEO of Bank Asia said.
"The global financial crisis was made by wrong mathematical calculation, in domestic market, it was created by mistakes of banks taking proper actions", Mr. Hossain said.
Bangladesh capital market had experienced two stock market debacles in 1996 and 2010-11 respectively where we saw formation of bubbles and its impact were general rather than specific to Bangladesh. Most commodity prices soar to their record levels since 2000 and now it their lowest levels. This volatility made huge losses in the businesses of many borrowers, he said.
The iron ore price has fallen by more than 30 per cent and oil is down this year, mainly because of concerns over the future of China's economic growth rate and persistently soft European performance. Market analysts say export-reliant countries had to adjust both to lower prices and lower volumes of key commodities as a result of the growth concerns, Mr. Mehmood noted.
After the crisis, he said the universal banking model, which allows banks to combine a wide range of financial activities, including commercial banking, investment banking and insurance, has emerged as a desirable structure for a financial institution from the viewpoint of policymakers.
Now industry experts say banks in Bangladesh will face difficult time in near future as stiff competition will potentially hurt their profitability, unless asset growth favors everyone alike. Many banks are sitting on major cash reserves, when high interest rate and various fees discourage entrepreneurs to take loans from banks.
Lower credit growth dragged down the banks' net interest margin in 2013 driven by changing composition of gross earning assets. Banks' net interest income to the asset dropped by 1.7 per cent in 2013, while the non-interest income to the assets increased by 2.7 per cent.
"Most banks are now under pressure with compressed margins while their NIM (net interest margin) is falling driven by eroded trust. The mounting classified loans have put pressure on the capital of banks", the CEO of Bank Asia told the daily.
To survive, Mr. Mehmood said many banks are focusing on non-funded revenue as huge amount of loans are stuck up with a few big defaulters. Banks should focus on improving customer relations, prudent risk management and credit administration process.
While the efficiency and profitability of banks have increased, the Bank Asia CEO said, there is still an unfinished reform agenda for the banking sector. The financial health of the state-owned commercial banks is still fragile and a number of private banks are vulnerable, owing to exposure to the declining stock market.
"Banks should increase their capacity in risks management and selective in LTR lending", he said noting that the trust and confidence in the banking industry have been shaken in recent times by the large loan scams like Hall Mark Group and Bismillah Group.
"The reasons behind these scams should be brought under more scrutiny", Mr. Mehmood said adding that the hidden reasons of the scams should be discussed by the bankers separately.
The LTR- Lending on Trust Receipts is n important credit tool for banks as the trade-financing covers credits for export and import, apparel and clothing and loan against trust receipt (LTR).
More than 32 per cent or Tk 131.20 billion of the total Tk 406.4 billion non-performing loans (NPL) were concentrated in trade-financing sectors in 2013, according to the central bank, while around 40 per cent of outstanding loans are held by 30 to 40 business groups in Bangladesh.
"But the LTR lending has become very risky now driven by the recent loan scams that have embezzled crores of money from banks' cash vaults. Trust and confidence have been shattered in the banking industry", Mehmood Hossain said.
Bank Asia CEO said margin compression is becoming a feature across banking markets as regulation, capital requirements, funding costs, lackluster demand, low interest rates, price competition and shifting buying patterns all affect profitability.
"Scale or niche expertise is increasingly crucial and, as we've seen already, so are customer expectations", he said.