Banking sector: Numerous challenges ahead in BD

Ashfaque Choudhury: The banking sector in Bangladeshis is facing numerous challenges and needs to improve considerably.
According to analysts despite having a large population and a rapidly growing economy, the banking sector needs to catch up to its neighboring countries.
The industry is still largely dependent on manual processes, which are slow, prone to errors, and not very customer-friendly. As a result, customers often opt for non-banking financial institutions, which offer digital services that are faster and more convenient.
The country’s poor infrastructure makes it difficult for the banking sector to reach rural areas, meaning that a large portion of the population needs help accessing banking services, hindering the industry’s growth.
End of last year, eleven banks collectively faced a capital shortfall of Tk 32,606 crore, highlighting their fragile health caused by years of irregularities.
The banks are Bangladesh Krishi Bank, Agrani Bank, Rupali, Janata, Sonali, Rajshahi Krishi Unnayan Bank, BASIC Bank, National Bank, ICB Islamic Bank, Bangladesh Commerce Bank, and Padma Bank.
Corruption perpetrated at the banks is mainly responsible for the significant capital shortfall, said the analysts.
As of September, Bangladesh Krishi Bank had the highest amount shortfall of Tk 13,491 crore among the 11 lenders, data from the Bangladesh Bank showed.
State-run Agrani’s shortfall stood at Tk 2,851 crore. It was Tk 2,390 crore for state-run Rupali and Tk 2,300 crore for another government-owned Janata Bank. The shortfall led analysts to call on the central bank to take immediate measures to address the problem sending a negative signal to the international community and local businesspeople that the banking sector is weakening.
“The large capital shortfall gives a negative signal to foreign banks. So, the country’s image is taking a hit,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
He blamed financial corruption and the higher ratio of classified loans for the shortfall.
The number of default loans in the banking sector increased substantially in December. Default loans at 60 banks operating in Bangladesh surged to a record Tk 134,396 crore in last year, accounting for 9.36 percent of the total outstanding loans of Tk 1,436,200 crore in the banking system. A year earlier, the ratio was 8.12 percent.
The capital base also eroded in September compared to December 2021 as the capital adequacy ratio (CAR) shrank to 11.01 percent in contrast to 11.08 percent.
The CAR, also known as the capital-to-risk-weighted assets ratio, measures a bank’s financial strength by using its capital and assets to protect depositors and promote the stability and efficiency of economic systems worldwide.
The capital base of the banking industry in Bangladesh is also weaker than its peer countries in South Asia, according to BB’s Financial Stability Report.
In 2021, banks in Pakistan maintained a capital adequacy ratio of 18.7 percent, 16.5 percent in Sri Lanka, and 16.6 percent in India.
“If a bank faces a capital shortfall, its capacity to absorb shocks erodes,” said Mansur, a former International Monetary Fund official.
“The central bank should take immediate measures to strengthen the capital base of the banks.”
Fahmida Khatun, executive director of the Centre for Policy Dialogue, pointed out that the central bank had earlier injected a large amount of capital into the banks, but to no avail.
“A lack of corporate governance is the main problem for the capital shortfall. If scams continue unabated, the capital shortfall position will not improve,” she said.
To strengthen the capital base, the BB took the initiative to implement the Basel III guidelines by 2019.
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the global financial crisis of 2007-09 to improve regulations, supervision, and risk management within the banking sector.
As per a roadmap by BB in 2014, banks were supposed to raise the minimum CAR to 12.5 percent by December 2019 from 10 percent then, but the sector still needed to catch up.
Many industry insiders believe that the shortage of US dollars in the market has led to a decrease in foreign investment in Bangladesh, which is affecting the banking sector. Many foreign investors are hesitant to invest in the country due to the uncertainty caused by the dollar crunch.
The insiders also said that the shortage of US dollars has made it difficult for Bangladesh banks to carry out international transactions, as they need access to foreign currency to pay foreign suppliers and customers. The crunch has led to reduced exports as the banks need help to provide the foreign currency that exporters need to pay for raw materials and other inputs.
The dollar crunch in Bangladesh is affecting the country’s banking sector in several ways, including decreased foreign investment, increased borrowing costs, difficulty in international transactions, reduced exports, and inflated remittance costs.
The government and the central bank need to take measures to address the shortage of US dollars and stabilize the foreign exchange market otherwise the sector may face dire consequence.