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Thursday | 12 December 2024 | Epaper
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Challenges for our banking sector and urgent recovery priorities

Published : Saturday, 9 November, 2024 at 12:00 AM  Count : 438
AKM Asaduzzaman Patwary
The banking sector in Bangladesh is a critical component of the economy, serving as the primary channel for financial intermediation and capital allocation. With approximately 86% of financial transactions conducted through banks, they play a vital role in facilitating investments, promoting financial inclusion, and supporting economic growth. It is undoubtedly the lifeline of our economy. In the recent past, several deviations have been observed, including frequent and rapid policy rate changes, high interest rate, loan defaults, rising NPLs to BDT 2.11 trillion, low capital adequacy ratioand substantial capital flightdue to governance lapse across the financial sector in the recent years. 

Approximately Tk. 92,261 crore was embezzled in 2024 through major banking scams, equivalent to 12 percent of the FY2024 national budget and 2 percent of the GDP in FY2023. In the recent past, we have witnessed that many commercial banks have borrowed through the repo window to meet their liquidity needs due to liquidity shortfall. Since several banks have not strictly followed governance standards across the industry, it has been observed that banking operations have become uncertain, with many banks becoming dysfunctional.  

Above all, inflation rate has reached double digit both food and non-food inflation which have caused huge liquidity flow in the market.As a result, Bangladesh Bank initiatedranking of all including six state-owned banks out of total of 54 based on the CAMEL rating. 36 banks, including six state-owned banks were termed as weak lenders. 12 are in critical condition--9 in the red zone and 3 are the yellow zone-while 16 banks, including 8 local ones, are in the green zone. Based on these rankings, the central bank initiated forced mergers and remedial measures of several commercial and private banks. This situation has raised serious concerns about sustaining the stability of Bangladesh's banking sector as a whole.

Bangladesh's banking sector encounters significant challenges that undermine its ability to support economic growthas expected. Non-Performing Loans (NPLs) now account for around 38% of total financial assets, severely impacting liquidity and operational efficiency. Moreover, the sector struggles with declining financial depth, as evidenced by reduction in the money supply and a low asset-to-GDP ratio, which limits its capacity to drive substantial economic expansion. 

Additionally,frequent devaluation of Taka against USD,low trend of foreign exchange reserve, limited financial inclusionrestrict broader growth potential and leavethe sector ill-prepared to meet national economic goals. Alongside, the financial sector is laden with various systematic challenges including weak regulatory oversights, lack of Governance and Leadership and capital shortfall which have further aggravated the financial sector. These challenges are holding back the smooth business and economic activities.Alongside inflation, the growing policy rate of Bangladesh Bank and bank interest rate have become another major concern for private sector. The growing interest rate is slimming the revenue and liquidity of commercial banks.

To effectively tackle these challenges, several strategic actions and policy measures are needed. Attracting foreign equity, strengthening bank capital, liquidity position, enforcing legal measures against willful defaulters are crucial steps toward stabilizing the sector. Asset Management Company (AMC) could play a pivotal role in handling bad assets while expanding the money supply and addressing the Dollar crisis are essential to resolve funding shortage. To further build resilience, initiatives such as utilizing trade credit or import factoring to ease capital constraints, maintaining a stable exchange rate to bolster remittance flows, and expanding offshore banking to facilitate smoother remittance inflow and capital injection are crucial.

Additionally, targeted financial inclusion programs in rural and underserved areas, with incentives for banks to broaden services, would foster inclusive economic growth. Providing affordable credit solutions for CMSMEs can reduce reliance on traditional banking branches and improve accessibility. A crawling peg exchange rate, aligned with market indicators, is proposed as a potential stabilizer to keep exchange rates in sync with currency values, promoting economic stability. The crawling peg has been applied in Argentina, Nicaragua, Pakistan, Kenya and Nepal suggested by IMF but failed in many countries. The currency swaps with key trading partners, based on trade volume analysis, may lessen dependence on foreign exchange reserve and SDR currency may be used for trade with other economies.

To address these pressing challenges, the central bank has initiated reforms, imposed merger restructuring weak banks, enhancing remittance incentives, and negotiating with global financial institutions for funding to stabilize the sector. The new leadership at the central bank and the task force for sector reform demonstrate a commitment to strengthening governance and oversight. 

Additionally, reforms like the Bank Company (Amendment) Act 2023 introduce stricter measures against willful defaulters, aiming to tackle the bad loans. The new task force needs to be empowered to work holistically across the banking sector, covering both public and private banks, to ensure the full extent of governance without any compromise, bringing discipline and restoring confidence to revitalize the shattered trust in the financial sector. Recently, we have seen that S&P's sovereign and Moody's have downgraded Bangladesh to BB- due to the lackluster performance of the financial sector.  The aggregate debt reached over $100 billion till end of 2023. The share of public sector debt from both foreign debt and local banking sector led borrowing are increasing whichadd more pressure on financial sector. 

As a result, private sector lending is declining which is around 9.8% way lower than public sector lending. Consequently, the private sector investment hovers around 23% in recent years. In order to fix the money market and inflationary stress, the contractionary Monetary Policy was followed in January and July 2024 but has not generated any desired outcome. These issues urgently need to be addressed to restore our sovereign credit rating so that both local and foreign investors can restore the confidence on financial sector.

Our asset of banking sector is around 11% of GDP which is much lower than that of our many peer economies. Though this sector is not a large contributor to GDP, it is affected with multifarious challenges. The financial sector requires massive reform and development priorities. Taking into account the need of growing economic spree, the banking sector must map and plan some immediate priorities instead of mid and long-term agenda focusing on strategic expansion,stronger regulatory framework and moves to improve liquidity, forex reserve and banking sector's asset base and ensure governance and transparencyto foster reliance, financial inclusion and sustained economic growth.

It is inevitable to develop a conducive and competitive financial ecosystem that aligns with the nation's aspirations, ultimately restoring confidence and supporting the broader private sector investment and economic ambitions of Bangladesh. 
The writer is Executive Secretary, R&D, DCCI



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