Banking Sector of Bangladesh

Like the economy of other countries, banking sector plays a vital role to the national economy in Bangladesh. It contributes to many arms of economy like agriculture, industry, power, transport, trade service, etc. This article observes the current scenario of banking sector in terms of disbursement, recovery, and trends of growth of credit to different sectors of the economy, such as agriculture and industry sector, and its inputs into national economic growth.

The situation of this sector in Bangladesh has been worsening in terms of growth of credit and disbursement and risk management. Growth of credit in industrial sector, private sector and in agriculture has been experiencing a declining trend. Three main problems have mainly gained prominence in case of credit disbursement. First, the amount of non-performing loan is increasing, requiring higher allocation as provision. Second, lack of profitability is reducing the taxable income of the government from the banking sector. ; and third, state owned banks have continued to be dependent of recapitalization of the government.

Growth of credit in private sector has been declining over the years after October-December, 2012 and it can be anticipated that in the last quarter of the 2013, rate of growth of credit in private sector might decline from 2.21 percent in July-September, 2013 to 1.98 percent in October-December, 2013. Low level of demand for credits by the private sector is manifested in the increasing situation of liquidity of the banking sector. Excess of liquidity of the banking business reached over Tk. 83000 crore at the end of November 2013 whereas this was Tk. 80000 crore in July, 2013.

Growth of credit in both industrial sector and agriculture has declined. The disbursement of industrial term loan stood Tk. 8880.79 crore in the first quarter of the current FY 2013-14, which is the lowest among the last five quarters. This amount was Tk. 9720.3 crore in the first quarter of the previous FY 2012-13. The rate of growth of the disbursement of the industrial term loan stood negative at 15.53 percent in the first quarter of the FY 2013-14, compared to the positive rate of growth of 4.49 percent in the last quarter of the FY 2012-13.

The rate of growth of agricultural credit disbursement and credit recovery has been experiencing lower trend as well as negative rate of growth after September, 2013. The rate of growth of the disbursement of the agricultural credit stood negative 5.4 percent in October 2013, whereas it was positive at 143.2 percent in September, 2013.  It is to be mentioned that the decline in the growth of credit illustrates the poor condition of investment which might drag down the current growth in GDP.

To make up the shortfall of capital by the four state-owned commercial banks (Sonali, Janata, Agrani and Rupali banks), Bangladesh Bank, the central bank of Bangladesh has taken measures to reform credit risk related issues. In addition, to meet the requirement of the Extended Credit Facility (ECF) of IMF, Ministry of Finance decided to revise the recapitalisation of bank proposals. After that revision, banking division will distribute Tk. 4100 crore in the first phase against their capital shortfall of Tk. 8863 crore.

In 2012, overall Return on Assets (ROA) in the banking sector was 0.60 percent whereas it was 1.3 percent in 2011. If these trends continue, overall ROA in the banking sector might decrease to 0.55 percent in 2013. Similarly, overall Return on Equity (ROE) in banking sector was 14.3 percent in 2011, which reduced to 6.5 percentage point in 2012. Projection says that if the current trend of ROE in the banking sector persists, ROE might decrease to 6.80 in 2013. Reduction of ROE ratio in banking sector indicates that profits of share holder are declining gradually.

Presently, return on equity and return on assets of banking sector are low, which indicate the low profit of the bank and this might be lesser collection of taxes since bank is the number one source of tax under large tax unit of National Board of Revenue ( NBR) which collects the major portion of revenue from banking sector. In addition, the revenue target might fail to achieve the revenue target since lesser investment is witnessed from lower growth of credit.

In April 2013, Interest Rate Spread (IRS) was also seen below 5 percent and after that it increased as earlier trend. In both of the cases, it is seen that advances remain relatively too high and this is an obstacle for taking loan by the business community.

Loan taking by the business community is also in decreasing mood because of the instability arisen due to the forthcoming general election.  Absence of enabling infrastructural support, such as, adequate power and gas supply are also liable for this decreasing rate of loan taking, which in turn negatively impacts on investment.

Strong and transparent regulatory entity may be a solution for the betterment of this sector and to make it more dynamic.


Md.Abdul Latif Mahmud

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