Parvez: The financial system of Bangladesh is mainly bank dependent. Though in the recent years, a number of non-banking financial institutions (leasing and merchant banks) have been established, yet the banking sector still captures the lion share of the financial market. In current times loan default has emerged as a subject of common discussions both in academic circles and the media.
The high non-performing loans (NPLs) or bad loans are a major forecaster of bank and NBFIs failure, theoretically sky-scraping NPL ratio needed larger loan supplies, that is cause of decrease earning, worsen capital, raise loan pricing and by that reason it slowdowns the economy, and dents bank and NBFLs profitability.
Now the question is why this had been happened as a researcher viewpoint firstly it had been caused by the inefficiency of bank and NBFIs personnel because they are the first counter part of this problem then it indicate the pitiable governance in financial formal sector where board of director are not selected as per the relevant qualifications, and also audit committee are not working independently also the risk management committee is not working properly or efficiently and some time loans are made in a favor without proper judgment of the loan characteristics.
Other point is political pressure, sometime rescheduling or restructuring of loan is considered by political influenced. There is thousand of reasons hamper this loans and NPLs segment, if we observe then see that our judicial system sometime not working properly on this segment because a lot of recovery or repayment loan case just hanging on court or some time defaulters manage stay orders so it will takes more times.
Sometime central bank is not handled this kind of matter properly by many reasons, so it is a task for our government to look after financial formal sector seriously because without boost up this sector our economy will be slowdown and we can overcome it by reshape the above factors and monitoring and controlling it properly, it is a good news that our government takes many good initiatives about to meet up these kinds of financial crisis and it seems that we can overcome all of these factors very soon and our country will see the golden day of global financial village.
NN: Having political stability why banks and NBFIs struggled to retain their profits in recent years?
Parvez: A political stability is closely related with economic growth because these are interconnected. The World Bank has painted a brighter picture for Bangladesh’s economy for the next two fiscal years, pinning hopes on strong domestic demand, exports, investment and remittance.
Non-bank financial institutions, which are struggling to sustain business growth, have decided to intensify their deposit collection measures to reduce dependence on costly bank funds. Many NBFIs had to borrow at more than 17 to 18 percent from banks to run their business, and high costs of funds have corroded their interest margin and it cause to retain their profit, because NBFIs have diversified their business models and products; the sector is now not only involved in lease financing, but it is also giving term-loans and syndicated loans, margin loans etc. in this adverse situation it’s a hope that survey shows banks made profit Tk 48.33 crore in 2017 and recovering its loss Tk 126 crore in 2016.
NN: Business Activities in the country should get a boost after the election 2014. But there is a negative shock in the economy, why?
Parvez: Actually its depends on how can you observe it, because the economic impact of any kind of political or non-political incident can be traced with the help of the lead and lagged economic variables. There are many coincident economic indicators, such as Gross Domestic Product, industrial production, personal income and retail sales). Coincidental variables reveal the real-time impact of any kind of shock in the economy. It is difficult to identify any coincidental economic variable in recently recognized least developed countries like Bangladesh. But we hope that our government will overcome this so called “negative shock” in our current economy 2018.
According to United Nation Bangladesh already changed its status form developing to least developed country in March 2018. Bangladesh’s current GNI per capita is $1,610, according to the Bangladesh Bureau of Statistics or BBS. However, according to the UN, Bangladesh’s GNI per capita is $1,274.The UN said in a 2018 report Bangladesh’s Human Assets Indicators (HAI) is 73.2 and its Economic Vulnerability Indicators (EVI) 25.2. And its means that our economy is now sustain our development, and business sector is another counterpart for boost up economy, because Bangladesh has youth generation which one of the asset for its development.
NN: Have the NBFIs diversified their business models and products to retain their profits?
Parvez: The main business of NBFIs was leasing, now in Bangladesh NBFIs diversifying into other lines of business like term lending, housing finance, merchant banking, equity financing and venture capital financing. According to BB, 33 NBFIs are operating in Bangladesh while the maiden one was established in 1981. Out of the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 15 were initiated by private domestic initiative and 15 were initiated by joint venture initiative. As the current financial crisis situation recently NBFIs increased their interest rate, survey shows that NBFIs charges a minimum of 16 percent for SMEs and 15 percent for corporate borrowers. Both the rates are two percentage points higher than what they were in November last year. Because new regulation of BB. Now it’s hampered their profit maximization.
NBFIs depends on banks more than 50% for their loan disbursement, so when banks falls under liquidity crisis then it is also shows negative impact on NBFIs profit. NBFIs has needed to change their business models and products because if they increase their rate of interest on loan then it has some negative impact on their business because borrowers switch their interest on other institutions and competitions raises. For that reason NBFIs need to change their business pattern.
NN: Since 2006, most NBFIs were heavily involved in the capital market. At the end of 2010, the bubble burst and most NBFIs are struggling to maintain profitability. What should behave full-grown institutional investors?
Parvez: As the development process proceeds, NBFIs become prominent alongside the banking sector. Both can play significant roles in influencing and mobilizing savings for investment.
According to a directive of the central bank issued in April ’05 (FID Circular No. 3, April 30, 2005 ), financial institutions have to raise capital and reserve of at least BDT 250 million, a portion of which must be collected through the issuance of IPO.
Another research shows that, this arrangement will make their operations more transparent, bring accountability to the shareholders and reduce dependence on credit lines. Though all NBFIs were required to raise their minimum capital requirement thorough IPOs by September 2006 (extended from June 2006), eight (8) companies are yet to float their shares in the market. Four of these have already submitted necessary documents to Securities and Exchange Commission (SEC) for review while four others are still in the process of doing so.
Now the question is how long it was sustain and the time was very short because after capital market burst NBFIs faced shortfall of profit, another reason it margin transaction because most of NBFIs depends on banks for their margin loan, and for that reason we observe many banks are involved with stock market wings at that time still now also.
Now NBFIs needs to diversify their business model, because as full grown institutional investor their main task to pools money to purchase securities, real property, and other investment assets or originate loans, but for the recent financial liquidity crisis they need to change their mode of business.
NN: It is widely allegation that Banks and NBFIs violated their investment limits to invest in Stock Market. What is opinion to it?
Parvez: According to the survey of Bangladesh Bank seven banks for violating stock market rules by way of miss-reporting on share investment and over-exposure. The survey shows that BB probe found that the banks invested in the stocks by way of providing loans to their subsidiaries but did not report to the regulator. Some banks and NBFIs invested in stocks exceeding their exposure limit and some invested further despite having overexposure already. Another analysis of Bangladesh Bank shows that at the end of 2016 Total loan portfolio to the stock-market stood at Tk 7,600 crore from that banks invested Tk 2130 crore and NBFIs invested Tk 2330 crore.
From the above data we can say that banks and NBFIs violating their investment limit but according to the Banking Company Act 2013 the investment limit is 25%, in stock market but the question is stock market is one of the vital market in any economy, so before we charge allegation to banks and NBFIs we need to observe the rules and regulation of our stock market and monitoring system of BB, because the question is how can a bank or NBFIs violating their limit if my rules and regulation not support it, and why not we prevent before it occur so it is another big question.
Under the exiting provisions, the market value of total investment of a banking company in the capital market on consolidated basis will not exceed 50 per cent of the sum of its consolidated paid-up capital, balance in share-premium account, statutory reserves and retained earnings as stated in the latest audited financial statements. So, as my viewpoint it is easy to charge allegation but it is difficult to solve the solution, so BB and SEC should come to the inside point of this issue.
NN: When liquidity becomes tight, NBFIs suffer as their borrowing rates go up and funds become scarce. What should do at this situation?
Parvez: The banks are fails to honor checks and this situation also affect negatively on non-bank financial institutions (NBFIs) and capital markets. Most of the 33 NBFIs, which rely mostly on banks for funds, are in a liquidity crisis they never faced before.
It’s mostly depends on the monetary policies of BB, and also Finance Ministry to focus this part in the upcoming budget 2018-2019. We can observed the BB already takes some initiatives about it on Advance Deposit Ratio (ADR) or Investment Deposit Ration (IDR), and it reduced 1.50% for commercial and 1.00% for Shariah based Islami Banks.
But it is not the proper solution, one financial analysis shows that’s the weighted average lending rates of commercial bank and Non Banking Financial Institutions (NBFIs) were 9.93 per cent in 2017 and which is adverse effect of economy because the rate is year by year dropping. So it is a big challenge for our economy because the if liquidity crisis hikes then it impact both money and capital market and call money rate will going up and capital market will be more volatile because margin loans affect it. In this situation banks and NBFIs needs to sustain the trust of general and corporate customers, and find out the big fish of load defaulters and try to recover NPLs from the markets. And government needs to support this disrupted situation.
NN: Why most of the NBFIs are not being independent on its own sources of funds for lending?
Parvez: It’s very clear that in our country most of the NBFIs are related with banks and some time they are separate connected wings of banks. Some of them are controlled by the same holding company, which easily allocate resource under the same umbrella. For that reason it is not possible for most of the NBFIs move independently. On other hand funds are moving inside one umbrella, so that owners are gain more profit.
NN: Is there any bad impact on NBFIs of the current wobbly state of the banking sector?
Parvez: NBFIs sector represents one of the most important segments of the financial system and plays a very important role in mobilizing and channeling resources. In the present day, this sector continuously playing an important role in financing industry, trade and commerce, housing, etc. and thereby contributing significantly to the economic development of the country (Hossain & Hossain 2013).
Commercial bank is one of the major sources of funds for NBFIs and also the major investors in bond/debentures issued by them.
In the recent talk of the city is financial crisis of banking sector in Bangladesh, and which smack the total economy of Bangladesh. As we know that NBFIs is depends on banking sector so it must be negatively hampered by the liquidity crisis of banking sector, because most of the loan fund of NBFIs supplied by different commercial banks. It not only great threats for NBFIs it also big challenge for upcoming budget 2018-2019, now it is the time to see that how can finance ministry, & BB control this situation. But if the NBFIs maintain ACR (Adequate Capital Reserve) or Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator, and maintain it regularly then it will be a controllable factor for the NBFIs.
NN: Can Finance Ministry avoids responsibility for banking sector’s insolvent? Can leasing finance companies have the same position in future?
Parvez: “Be two sides of the same coin”, its mean if two things are two sides of the same coin, they are very closely related although they seem different: Violent behavior and deep insecurity are often two sides of the same coin. So it’s not possible to tells that who are responsible and who are not and it’s also not possible to measure because Bangladesh is a up growing country in 2017-2018 our Finance Minister AMA Muhith submitted the biggest-ever national budget for fiscal year 2017-18 of Tk 4,00,266 crore (4002.66 billion or 4 trillion ) and it is a ‘historic juncture’ of economic development.
If our banking sector will not developed or free from this curse (liquidity crisis) then it will be hampered all the related companies including leasing companies, from this situation it is hard to tell about the sustainable future of the all related companies of financial sector.
NN: How the financial (banks and NBFIs) sector can be stable?
Parvez: According to BB Bangladesh economy grew by 7.28 percent in FY17, up from 7.1 percent in FY16, which indicates that our economy is not dull, its response positively. BB also said that Under Basel-III, the banks in Bangladesh are instructed to maintain the Minimum Capital Requirement (MCR) at 10.0 percent of the Risk Weighted Assets (RWA) or BDT 4.0 billion as capital, whichever is higher. Under the Supervisory Review Process (SRP), banks are directed to maintain a level of “adequate” capital which is higher than the minimum required capital and sufficient to cover for all possible risks in their business. As the statistics of BB we observed that our financial sector is stable, but there are some other factor is related here that is increasing NPLs, the statistics also indicates that the amount of NPLs of the SCBs increased from BDT 117 billion in 2009 to BDT 310.3 billion in 2016. The amount of NPLs of the PCBs stood at BDT 230.6 billion in 2016 increasing from BDT 61.7 billion in 2009. The amount of NPLs of the DFIs increased to BDT 56.8 billion in 2016 from BDT 42.1 billion in 2009.
The amount of NPLs of the FCBs increased to BDT 24.1 billion in 2016 as against BDT 3.5 billion in 2009. From 2012 to June 2017 banking sector showed shortfall in maintaining provision, which indicates that it is not continuous stable enough. On the other hand Non Bank Financial Institutions (NBFIs) are playing crucial role by providing additional financial services that cannot be usually provided by the banks. BB said that the asset of NBFIs increased substantially by 16.83 percent to 713.87 billion in December 2016 from BDT 611.04 billion in 2015.
At the end of June 2017, assets of NBFIs increased to BDT 755.33 billion. So, which also indicates that this sector is also stable, but the point is here 34 NBFIs heavily depends on banking sector for their classified loan, because most of the investment banks and brokerage house offer margin loan faculties to their customer with high interest rate. According to the survey report of CPD, banking sector and NBFIs are shocks by financial scams, non-performing loans, inefficiency and slack monitoring and supervision.
Due to liquidity crisis, banks not clear checks of their customers, and many of them increase their interest rate high for overcoming NPLs. There are various factors are related with it, and one of the most important factors is scrawny rules and regulations and also the absent of good governance.
if one can think it is stable and another one think is not stable then it will be more difficult to balance it, according to my viewpoint, authority needs to find out the failure financial institution and then shape up it, and they should provide risk management techniques to the banks and NBFIs and also SWOT analysis of this sector with expert, and it needed then merge with one banks or intuitions with other, and controlling them internally and externally by different expert bodies. In my opinion it is not a big challenge for the government at all because if we observed history then many developed country falls in financial crisis and overcome from it.
