NGO News Report :: Institutional Fragility of Central Banking in Bangladesh. The Unnayan Onneshan, an independent multidisciplinary think-tank, in its current issue of the Bangladesh Economic Update reveals the institutional fragilities of the country’s central bank against the backdrop of low effectiveness of monetary policies and poor risk management, driven by lax oversight and captured governance, resulting in scams, declining growth in disbursement of credit to private sector, rising non-performing loans, and excess liquidity.
Noting the linkage between expansion of credit and growth in investment, the Unnayan Onneshan cautions that sluggish rate of growth in private sector credit will further drag down investment and consequently slide down the expansion of the gross domestic product (GDP).
Pointing to the increased non-performing loans and low returns on asset and equity, the think-tank observes that the sector is inundated with severe structural rigidities resulting in the disappointment of risk management in the sector.
As regards the public and private sector credit, the think tank states that domestic credits experienced a decrease of 9.93 percent at the end of December 2015 over December2014 against the ceiling of 13.8 percent set for December 2015.
The rate of growth of credit to the private sector in FY’11 was 25.84 percent which drastically fell to 19.72 percent in FY’12and then further fell to 10.85 percent in FY’14.In FY’15 it slightly increased to13.19 percent where the target was set to 15.5 percent in monetary policy of July-Dec’15. In the first quarter of FY’16, the credit growth stood at 12.9 percent and in December 2015 jumped to14.19 percent(year to year basis) mainly due to a slight decrease in lending rate in second quarter of FY’16 and tranquil political situation.
The think tank evinces that the point to point inflation came down to 6.07 percent in January of FY2015-16 from 6.36 percent in July of FY2015-16 representing 0.29 percentage point decrease.
The UO cautions that continuous incidents of heist in the financial sector like recent theft from Bangladesh Bank, hall mark scam, BASIC bank scam,collapse of the share market, multilevel marketing business trapping people for excessive profit will makethis sector more vulnerable.
The research organization observes that captured governance through politically determined directorship for the nationalised banks, and family and friends domination in the board rooms of the private sector banks, meager actions against the perpetrators, and slack surveillance by the central bank hinder the maintenance of prudential system of management.
The spread of lending and deposit rate is stable hovering near 5 percent. In January 2016, it increased to 4.84 percent in from 4.77 percent in August, 2015. It was 4.87 in March’15 whichwas 5.15 percent in March’14. The rates of interest on depositor and lender were 7.26and 12.32 percent respectively in January’15 and stood at 6.21 percent and 11.05 percent respectively in June’16. Of late the lending rate is on slight decrease, the rate is still too high to attract the small and medium investors and enterprises in the economy.
Referring to the piling up of excess liquidity in the banks due to the dispirited investment environment in the country, the Unnayan Onneshan reckons 7.41 percent increase in the excess of liquidity between the periods of June’15 and December’15. Excess of liquidity in the banking system amounted to Tk. 120678.9 crore at the end of Dce’15, whereas the amount was Tk.1123851 crore in June’15.
Besides the incidences of large scale scams, the risk management has weakened to a dismal proportion. The research organisation evinces that the non-performing loans have increased to 10.5 percent in March 2014 from 8.9 percent in December 2013.
Pointing to the incapacity of the banks to recover loan, UO shows that the classified loan and written-off bad debt both are increasing. The classified loans increased to 54700 crore in the July- September quarter of FY 2015-16 from Tk.52500crore in the March-April quarter of FY 2014-15; representing an increase of 7.41 percent. On the other hand, written-off bad debt increases by 17.13 percent from Tk. 321.1 billion in June’14 to Tk. 376.5 billion in June’15.
The performance of the banking sector in regard to risk management has been deteriorating since FY2013. Returns on asset (ROA) and capital adequacy ratio are continuously decreasing after 2011. In 2011, overall ROA which measures the efficiency of the management in generation of earning to assets in the banking sector was 1.5 percent whereas it stood at 0.64 percent in 2014. In June of FY 2014-15, the ROA decreased to 0.47 percent and Return on Equity (ROE) decreased from 8.09 percent to 6.61 percent.
Examining the balance sheet of BB, UO finds that BB incurs a loss of Tk. 26.24 billion in FY’15 where it enjoyed profit of Tk. 33.5 billion in the previous fiscal year.
The Unnayan Onneshan recommends improvement in supervision and regulatory capacity of the central bank and streamlining of enforcement of prudential guidelines in order to check the incidences of scams and fraudulence and thus to ensure efficacy of risk management in the banking system.