As we approach the culmination of a decade marked by profound global challenges - from the financial crisis to the COVID-19 pandemic and the Russia-Ukraine war - Bangladesh's economy finds itself standing at a momentous turning point. The nation's banking sector, in particular, has reached a critical juncture, grappling with a confluence of pressing issues. Amidst the fervour of politics surrounding a credible general election, banks face the daunting task of navigating mounting bad assets and an interest rate cap. The CEOs, burdened with immense responsibility, must skillfully steer their businesses through margin pressures, regulatory compliance, risk management, and cost-cutting measures to ensure their survival.
In this dynamic landscape, Bangladesh's banking sector stands at a crossroads, beckoning the industry to chart a new course. The question that echoes through boardrooms and financial corridors is, "Where do we go from here?"
Bangladesh's economy is intricately linked to the global stage, heavily reliant on imports to satisfy its domestic demands, while exports remain concentrated in a limited range of products. However, the world economy has been grappling with a series of tumultuous events in recent years. From the ravaging impact of the Covid-19 pandemic in 2020 to subsequent disruptions in the global supply chain, followed by the staggering blows dealt by the Russia-Ukraine war, and exacerbated by a surge in global inflation, particularly in advanced nations, the global landscape has been a rollercoaster ride. As the world struggled to regain a semblance of normalcy, the situation further escalated with interest rate hikes in global markets aimed at curbing inflation, but inadvertently affecting banks in the US and Europe. These challenges stem from the very core of business practices and investment decisions. Amid this global turbulence, Bangladesh's economy stands at a critical juncture.
To steer through these trials, a reevaluation of business strategies and investment approaches is paramount. Embracing adaptability, innovation, and diversification will be key to safeguarding the nation's economic well-being and positioning it for a resilient and prosperous future. Only by learning from the past and forging ahead with a vision of sustainability can Bangladesh chart a course towards economic strength and stability. Although most financial indicators displayed remarkable progress over the years and Bangladesh is about to graduate from the least developed country (LDC) status and become a middle-income country, its growth momentum is now facing headwinds as several factors—including inflation, trade deficit, exchange rate volatility, pressure mounting on forex reserve. The economy has already been knocked by fueling inflation at home and weaker demand for garments abroad. The most painful thing is that the struggle of the poor and low-income group that began with the outbreak of COVID-19 in early 2020 is now worsened by the unabated rise in the prices of essentials. This hit the banking industry severely and many big banks are on deathbeds with mounting classified loans and compressed margins.
Despite various methods to cure the ailing banking industry, the amount of bad assets has not reduced but rather reached an all-time high pushing some big state-run banks to their deathbeds. The classified loan in the banking sector has already shot up to an alarming level due to investment in some bad projects or with the wrong people. This hurts the banks by reducing profitability, and pushes the cost of funds up which is the main impediment to the growth of the private sector, the main driver of the growth.
According to the latest data released by Bangladesh Bank, bad loans worth around Tk 110 billion were added to the total, which was 9 per cent more than the previous quarter. The total default loans were 8.80 per cent of the nearly Tk 15 trillion loans disbursed by the banks, up from 8.43 per cent a year ago. These huge bad loans suspended banks’ interest income of nearly Tk 10,00 crore when the existing cap on interest rates drags down the bank’s profit and the recent deposit rate ceiling has aggravated the situation further. If banks continue to remain saddled with huge bad loans for a long time, it would make them risk averse and choke the lending for economic activities in general. The central bank governor recently expressed this concern and asked the bankers to recover loans as it is their sole responsibility, as he said.
A blame game, however, is now being staged in the banking landscape. CEOs of some commercial banks blame the weakness in the existing legal system as the big hurdle to recovering bad loans. Many cases are pending with courts while some good borrowers cannot pay loans under the existing loan rescheduling procedure. A loan defaulter of Tk 58.61 crore loans with Janata Bank recently ran away abroad in front of the government and Bangladesh Bank. Trust and confidence have been shaken by different incidents. This has raised concerns among bank customers who often blame the banks to exploit them through higher fees and hidden commissions.
No doubt, the banks are now crawling into a big hole mostly created by their own mistakes. Recovery of bad loans from borrowers has become very tough- like “putting toothpaste back into the tube”. So, many banks are sitting on major cash reserves and lower credit growth has already dragged down their interest margins. This has been aggravated by the cap on lending rates imposed by the regulator which has already been proved an inefficient policy option for banking and economic growth. So, bankers have shifted their focus to non-interest income rather than income from lending operations. This has a negative impact on private sector growth, the main driver of economic growth. Competition in recent days has intensified with many faces. Not only are the institutions competing, but regulators and customers are also pitting one against another and have made the situation extremely difficult. So, bank customers often try to make the best out of the situation by not complying with the regulatory requirements.
In the midst of this global turbulence, Bangladesh's economy stands at a critical juncture. To steer through these trials, a reevaluation of business strategies and investment approaches is paramount. Embracing adaptability, innovation, and diversification will be key to safeguarding the nation's economic well-being and positioning it for a resilient and prosperous future. Only by learning from the past and forging ahead with a vision of sustainability can Bangladesh chart a course towards economic strength and stability.
The banking industry in Bangladesh has flourished over the years, making double-digit profit percentages, sustaining growth and surviving cut-throat competition, while providing attractive returns to shareholders. But dictated credit policy, poor oversight and imprudent lending, often to well-connected firms or individuals, are a hallmark of state-owned banks everywhere in Bangladesh. The central bank estimated that more than 166 billion takas of loans at the four big state-owned banks were in default-roughly 20 per cent of the total. The government injected billions of taka into them, as their life support when clever consultants of donor agencies in their reports have proposed privatising the state-run banks. The question is: Should we allow the state-run banks to go private?
The scenario in private-sector banking is different but identical. Bangladesh in recent times has seen an unmatched growth of banks in the private sector backed by certain interested and purposeful politicians and influential persons. Bank directors’ unethical interference in operations has put some private banks in a dire situation. This has made a dint in the discussions after the recently made Bismillah loan scam and heated up the board room battle. Some CEOs have already left the banks after the boardroom battle. To improve the situation, Bangladesh Bank has come up with its weapons and deployed administrators in the banks to oversee the corporate governance of the banks.
But the greed for more without befitting platform and fundamentals brings its own challenges and questions in people's minds. Most corporate executives aren't on the endangered species list and probably never will be. Increasingly their personal and professional decisions are placing them in the crosshairs of angry shareholders, opportunistic hedge funds, disgruntled employees and even their own boards of directors — making the imperious CEO far more vulnerable to personal, public and corporate missteps than ever before.
While compliance with new regulations and competitors remains a major challenge, maintaining customer loyalty is considered the financial industry’s biggest challenge in the days ahead. There is a growing concern that more empowered and better-informed customers may begin to switch providers in greater numbers. The most innovative banks will no longer think of themselves as mere providers of financial products and services and enablers of transactions. Risk managers spent most of their time monitoring risk, less time measuring it, and an even smaller amount of time actively managing it. This has brought a crisis in the banking industry globally and has piled up bad assets locally.
To recover bad assets, Bangladesh Bank has initiated a loan rescheduling process to recover the outstanding loans. But this has come into the debate as more than Tk 10,000.00 crore loans are now stuck up with a few top-line customers. These customers breached the loan agreements and invested borrowed money in the bubble equity market for stocky gains, but lost after the market bust. And thus confidence and trust have been eroded drastically and lending on Trust Receipt (LTR) is phasing out from the banking industry.
Bangladesh Bank has failed to stop dwindling money from banks as it is not an independent regulatory body and mostly take decision dictated by the government. However, it has played a revolutionary role in technology development in banking that has reduced the cost of operations drastically. Some bank banks have focused on heavy IT platforms and the control is out of their hands. To survive and escape from high compliance penalties, banks should try to develop centralised IT platforms, which are cost-effective and beyond their hands. So, banks need to add up to a comprehensive solution to fix the barrel and get rid of the bad apples. As competition already exists, if the bankers don’t rethink their role in this space, they’ll lose market share to upstarts.
As growth is struggling against the headwinds of economic uncertainty and market volatility, banks’ asset managers are scrutinising their businesses to find ways of strengthening their positions. A well-functioning financial market is prosperity for the Bangladesh banking industry. To push forward the banking sector towards growth, the blame game should be stopped and a well-functioning market should be set up. Here, both market players and policymakers should play their due roles. The question is: Who would blow the whistle to kick the ball?
In the midst of the beleaguered banking sector, Bangladesh's economy stands at a critical juncture. To steer through these trials, a reevaluation of business strategies and investment approaches is paramount. Embracing adaptability, innovation, and diversification will be key to safeguarding the nation's economic well-being and positioning it for a resilient and prosperous future. Only by learning from the past and forging ahead with a vision of sustainability can Bangladesh chart a course towards economic strength and stability.
(The writer is the Editor of THE BANGLADESH EXPRESS and the Chairman of the Bangladesh Journalists’ Foundation For Consumers & Investors-BJFCI).
