Banking Sector of Bangladesh: End of a Crucial Year and Challenges in the Coming Years

The banking sector of Bangladesh has been struggling to survive in the last couple of years. Most of the banks are in trouble regarding loan default, high non-performing loans and other issues. The pandemic situation has made the situation worse for the whole economy. The banking sector, a vital player in a country’s monetary and fiscal system, continues to face the wrath of the Covid-19 pandemic.

There is little doubt that the banking sector in Bangladesh is going to face a difficult period in 2021 due to the continuing impact of the coronavirus outbreak. To maintain good growth in the upcoming years, Bangladesh Bank along with the government has taken some steps to stabilize the economy, including the banking sector, by implementing some monetary and fiscal policies.

A major change in policy in the banking sector was seen last year. The Bangladesh Bank initiated single-digit borrowing and lending rate back in April 2020. The main purpose was to attract investors with a single-digit interest rate. It was expected that investments would go up as the borrowing rate is below ten percent. Along with this, some banks expected that deposits from individuals would go down because of the less-than-six percent interest rate in depository money. 

But beyond expectations, the banking sector has been facing excess fund availability in recent days. The main reason for this excess cash is low investment opportunities in the economy due to the Covid-19 situation along with a huge cash injection from the Bangladesh Bank. Rather than being low, bank deposits, excluding inter-bank balance, rose to Tk 13,454.36 billion at the end of September 2020 from Tk 13,054.54 billion nearly three months prior. Also, excess liquidity increased to almost 105 percent and stood at around Tk 160,979 crore at that same period of time if we look at year-to-year analysis. Bangladesh Bank has already injected around Tk 55,000 crore into the financial sector as part of its effort to implement the stimulus packages. 

Also, remittances increased drastically last year, likely due to heightened uncertainty in the global economy. It is expected to increase by over 40 percent this year compared to the previous year. Excess dollars in the banking sector create an imbalance in the dollar rate by making a stronger national currency. But to provide an advantage to the local exporters, keeping the price stable is necessary. As a result, Bangladesh Bank bought back around 5 billion dollars from the regular market to keep the dollar stable which is needed in terms of maintaining export-import balance. And it also helped to increase the liquidity in the market.

According to data released by Bangladesh Bank, the call money rate went below two percent in November after two years due to excess liquidity. It was seen in the last two months that the bank’s daily borrowings from the call money market ranged between Tk 3,600 crore and Tk 5,300 crore. But some months ago, in last July-August, the bank’s daily borrowings from the call money market ranged between Tk 7,000 crore and Tk 9,200 crore.

At the end of September last year, the banking sector’s total default loans stood at Tk 94,440.5 crore, which was 8.88 percent of total outstanding loans; it was around Tk 116,288 crore in the same period in the year prior. The amount decreased because of the regularisation of a big chunk of defaulted loans through a special rescheduling policy of the central bank.

Since the pandemic emerged, it was expected that the banks would not be able to make much profit as corporate deals – their major earning source – were closed. But a report published by Bangladesh Bank after nine months showed that 18 out of 27 banks posted a year-on-year rise in profits during the period of January to September. They generated around 3.49 percent higher profits (Tk 4,888 crore) in the nine months.

In such a dire situation, the banking sector must introspect and make a turnaround in the coming years. Along with making an initial recovery from the Covid-19 situation, the banking sector has to prepare for the impact of the second wave of coronavirus in 2021. It has recently been suggested that bad debt can be recovered by using banks’ profit. It will strengthen the position of banks in the coming years. 

The investors are preparing to make new investments. New investment requires more cash and most of them come directly from the financing provided by the banking sector. Also, banks started to distribute the government’s stimulus package money to a number of institutions. So, it can be expected that the rise in excess liquidity might not be same in the next couple of months. 

Additionally, the deposit rate of banks is still low which will attract fewer customers in the future. As the stock market is recovering after a new commission came into action, people might go for the stock market rather than keep their money idle in the bank which might create a problem in terms of collecting deposits in the near future.

On the contrary, to improve the unemployment situation which worsened due to Covid-19, investment opportunities are needed. Thus Bangladesh Bank needs to take appropriate steps to live up to the expectations of addressing the unemployment situation, spurring growth and the depository issue.

One of the main problems faced by banks is recovering money from big borrowers. If business as usual continues, it will be hard to survive in the long term. To address the problem of defaulted loans in the future, banks should take the necessary steps to investigate borrowers’ position.

The government has released a huge budget with a very big deficit amount at hand. As the economy took a downward spiral for a couple of months, the government had fewer opportunities to meet expected revenue collection. The deficit amount will thus be much higher than what was expected. The government usually takes out loans to cover the deficit amount. But our experiences in recent years show that the government is taking out loans from internal sources like banks and financial institutions. As a result, it is expected that the government might take money from these sources if it cannot meet the revenue collection target. Banks should keep in mind these issues while continuing their operations.

It is clear that the banking sector needs to be reformed with increased regulation and more supervision. Also, steps should be taken to tighten the criteria for loan rescheduling and restructuring; ensure better corporate governance; modernize state-owned commercial banks; and create more robust systems to accelerate loan recovery. The right steps and policies can help minimize the threats to our financial system.

Ahasan Ahmed, Research Assistant, Centre for Governance Studies (CGS). 

Views in this article are author’s own and do not necessarily reflect CGS policy.