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2023 was annus horribilis for our banking sector

Published : Monday, 8 January, 2024 at 12:00 AM  Count : 1006
M A Masum
The year 2023 has ended with so many economic and financial crises that leave the economy of Bangladesh in new challenges to face. The crises hit the growth of the banking sector of Bangladesh and exhibit multifarious challenges for the year 2023 like liquidity crisis, shrinking spread as such degradation of income, slowdown of export import business resulting from foreign currency crisis, increase of Non-performing loan, increasing pressure on maintaining provision and minimum capital requirement, sluggish credit growth, increasing trade based money laundering, increase in different financial scams etc.

A majority of banks in Bangladesh, including some Shariah-based banks are facing difficulties to run their activities due to a liquidity crisis, according to industry people. The liquidity crunch deepened further as the central bank recently raised the policy rate to tackle ongoing inflationary pressure in the country. Now, a growing number of banks are continuously taking liquidity support from the central bank despite the increased policy rate, also known as repo rate.

One of the recent hot news is around Tk 92,261 crore has been plundered from the countrys banking sector in 24 major scams over the past 15 years - from 2008 to 2023, according to a report of the Centre for Policy Dialogue (CPD). The amount was more than 12% of the budget for FY24, which means it would have been possible to meet the budget deficit easily if the money was not stolen from the banks. CPD says financial irregularities, including sanctioning loans against fake documents, loans for non-existent institutions, and embezzlement of money took place over the past 15 years. The money taken illegally from the banks during the period is about 2% of the current gross domestic product (GDP).

The banking sector is grappling with a large amount of non-performing loans (NPL), which shows no sign of coming down.  The banking sector spent 2023 searching the horizon in search of smooth sailing, but found a rocky road instead as the year was fraught with a persistent shortage of USD, and the highest recorded volume of non-performing loans (NPLs) in the countrys history. Non-performing loans (NPLs) in Bangladeshs banking sector hit a new record in June as withdrawal of a relaxed central bank policy, slowdown in business sales and deliberate non-payments pushed up the volume of bad loans to Tk 1,56,039 crore, central bank data showed. At the end of June, NPLs accounted for 10.11 percent of the total credits disbursed, according to the latest data from the Bangladesh Bank. Experts says In Bangladesh, a lack of good governance, relaxed policies pursued by the central bank, political interference and irregularities have largely been responsible for the upward trend of NPLs. The capital shortfall of 14 banks increased by Tk3,774 crore in the July-September quarter, according to central bank data. Bankers attribute this rise to growing non-performing loans (NPLs) in the banking sector, leading to an increase in risk-weighted assets.

All the key measures the Bangladesh Bank had taken in the last one year to stabilise the forex market, including multiple exchange rate mechanisms, punishing banks for selling dollars at higher prices, and new price mechanism for forward trading, have backfired as they neither could contain inflation or stabilise the eroding foreign exchange reserves. For the first time, the Bangladesh Bank has decided to determine the rate of foreign exchange, namely the US dollar, to be delivered in future, widely known as forward contract-a move that has created mixed reactions among businesses. The forward exchange rate is the rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor. The development comes amidst the backdrop of the forex crisis, with banks charging different rates to firms for forward purchase of dollars.

Bangladeshs imports dropped 24.07 per cent year-on-year to nearly 22 billion US dollars in the first four months of the 2023-24 fiscal year (July 2023-June 2024) due to acute dollar crysis, showed the latest central bank data. Inward remittance fell in the fourth quarter of 2023-24 fiscal year thanks to the increased use of informal channels like hundi despite a sharp rise in the number of Bangladeshi migrant workers. The remittance experienced a sharp decline-13.5 percent year-on-year-when it hit $4.91 billion in the July-September quarter of 2024, down from $5.67 billion in the same period previous year, according to the quarterly data of the central bank. Economists said that 60 percent of the expatriate income in the country comes through hundi. They think that the illegal hundi is eating up the countrys foreign exchange reserves. Now there are so many rates and the 2.5% incentive on remittances failed to increase remittance but money is being spent from the government treasury.

One of the talking points of the countrys banking sector throughout past year was dollar crisis and rapid depletion of FC reserves in Central Bank. Bangladeshs forex reserves started declining in 2022 due to a shortage of USD in the banking sector. The countrys forex reserves stood at $48 billion in 2021, but it is now at $21.44 billion, calculated under the BPM6 method of International Monetary Policy (IMF). Economists says that The country is facing the USD shortage due to a lack of proper decision about this market.

As disheartening as it is to see the crisis unfolding at the National Bank Limited (NBL), we are hardly surprised by it. After its inception in 1983, the bank, first ever in the countrys private sector, performed well for nearly three decades until 2013 when things started to go downhill because of various irregularities. On December 21, the Bangladesh Bank reconstituted the board to protect the interest of depositors and ensure good governance following a recommendation from the Bangladesh Securities and Exchange Commission. Meanwhile, three committees in the board of graft-ridden National Bank were formed, a week after the central bank reconstituted the governing body to help the countrys first private sector lender make a comeback.

There is no way to deny, the year 2023 ended in a great excitement. Bangladeshs banking sector faces a plethora of challenges regarding transparency and accountability, making reinforcement of discipline an urgent need for the country. Bangladeshs gross foreign exchange reserves increased by $1.08 billion to $20.4 billion, thanks to the release of the second instalment of a loan programme by the International Monetary Fund (IMF) and project support from the Asian Development Bank (ADB).

Good corporate governance should establish so that it directs banks and makes them and their decision-making process transparent and accountable to stakeholders. Good governance is especially important now for banks in the view of adverse events and media reports, which at times can be somewhat sensational but perhaps lack context. To reduce the increasing amount of defaulted loans, authorities should identify underlying reasons through strict monitoring and take exemplary actions against the borrowers.

Non-performing loans (NPLs) have been a thorn in our side for decades, but now it is turning into blight for our economy. Bangladesh Bank & govt. An overall reform in our financial sector is needed to instil good governance and strict regulations to check bad lending practices, but as immediate remedies, the government should put specific measures in place to stop lending irregularities in our banks, and make all big loan defaulters pay their debt off without exception. should stop being lenient to big loan defaulters. Bangladesh needs to go for a flexible, market-determined exchange rate to contain volatility in the foreign exchange market and restore stability to the economy. A flexible exchange rate would lead to increased cost of import and a reduction in demand for import. Income of exporters will rise and improve the current account balance.

Prevention of ccorruption, nepotism and good governance should be ensured in the banking sector. Also strict action must be taken against money laundering. Political interference in banking decisions has been a long-standing issue in Bangladesh. It compromises the independence and effectiveness of banking institutions.

Inadequate risk management practices have contributed to the accumulation of bad loans and financial irregularities in the sector.

The writer is Banker & Economic Researcher



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