A bad loan hangover, liquidity crisis and poor governance have pushed the country’s banking sector in a mess in 2019, bedeviling the national economy, opine analysts.
They said the banking sector’s vulnerability also arisen from large loan scams, supervisory lapses and adhoc policy responses by the government and central bank.
“The baking sector performed ‘poorly’ in 2019 as an outcome of mismanagement and large bad loan problem,” former Bangladesh Bank Governor Dr Salehuddin Ahmed told The New Nation yesterday.
He said the current mess in banking sector is a growing concern for the economy as the sector has a big role in accelerating the growth.
“A high volume of non-performing loans (NPLs) has tightened the liquidity positions at banks sending the private sector credit growth to record low reaching 9.87 per cent in November 2019. Lack of business confidence may be identified another cause for the low credit-off take by private entrepreneurs,” said Dr Salehuddin Ahmed adding that the banking sector’s bad loans crossed taka one lakh crore for the first time (in 2019) signaling the real vulnerability of the sector.”
The NPL accounts for 10.41 percent of the total outstanding loans as on September 2019. The figure was 9.31 percent in December 2018. “The rising trend of the NPL is bound to have a long-lasting negative impact on the country’s financial sector and the economy as well,” he added.
Dr Salehuddin Ahmed observed that the banking sector has been struggling to address this culture of loan defaults as people involved with the loan nonpayment are very influential and connected with politics. “So, a strong ‘political will and reforms in laws,’ can only end the culture of loan defaults,” he added.
Former Bangladesh Bank Deputy Governor Dr Khondoker Ibrahim Khaled said, “The banking crisis, in fact, has gone so far, but the authorities remained ‘ignorant,’ over the problem.
“A slow-motion banking reform may worsen the crisis further,” he added.
Dr Ibrahim Khaled also said that not only in 2019, the performance of the banking sector in the recent years has not been satisfactory. Even, most banks have not been able to show significant improvements in key financial indictors despite several measures taken by the central bank.
“In the past few years, most banks have expanded ‘blindly’ and lent money to too many risky borrowers. This has led to raise in default occurrences by borrowers piling up their bad loan portfolios and weakening their financial health,” he noted.
Dr Ibrahim Khaled observed that the current banking sector crisis is a direct result of poor governance and lack of regulatory oversight across the various government institutions.
He said the banking sector would cease the burden of bad loan hangover and could grow and perform exceptionally well by any global standards if the government restores discipline in the sector, ensures punishment to willful defaulters and loan scammers and upholds ‘autonomy’ of the central bank.
“A sound banking sector can also give economy the kind of impetus that it needs to move ahead,” he added.
Dr Ibrahim Khaled also mentioned that relaxed rules relating to loan rescheduling has created a moral hazards, which encouraged many for voluntary defaults.
“The troubled banking sector appeared as one of the biggest economic problems for the nation that is striding out for the next development path,” said Dr Zahid Hussain, former lead economist at World Bank’s Dhaka office.
He said the under-performing banking sector caused by high volume of NPL has already hit new investment in the manufacturing industry and thus affected employment generation.
“The government has announced a slew of measures including merging weak state-run banks with stronger ones to avoid a surge in bad loans. But these measures are yet to be implemented and it undermine the performance of he banking sector,” he said, adding, “Delays in the reform process further push up stressed asset in the banks hindering the economic growth,” he added.
