The central bank, which has so far been protective about the actual situation in the banking sector, has finally asked the banks to reduce bad loans by writing them off.
The regulator also said the major financial scams have had their toll on the country’s banking sector because there was a lack of corporate governance.
This, it said, was reflected in the increasing classified loans, the huge amount of existing bad loans and the declining quality of assets owned by the commercial banks, which turned out to be a major concern for the banking sector.
The Bangladesh Bank yesterday published its Financial Stability Report 2013 at a programme in the capital.
At the programme, Bangladesh Bank Deputy Governor SK Sur Chowdhury admitted that the level of bad loans was alarming.
He said the central bank had suggested that the banks should reduce bad loans by writing them off and keeping the required provisions.
In layman’s terms, including bad loans in the balance sheet of a bank means showing some low quality assets. According to the report, such inclusions could be a result of wrong appraisal of assets and frauds.
The adverse effect of high volume of classified loans on the balance sheets of banks was a major concern for the monetary authority, the report commented.
The report also said out of a total of 56 banks operating in Bangladesh, the stressed advances ratio of 29 banks were between 6% and 20%, which meant they were more vulnerable to credit risk than others.
Stressed assets, which are mainly low quality assets, have continued to rise, primarily due to higher non-performing loans. As a result, public sector banks are in a worse conditions compared to those in the private sector, the report states.
Analysis shows that the 15 weakest banks have stressed assets concentration ratios between 32.8% to 48.2% at the end of December 2013.
Among the 10 worst banks, three are state owned commercial banks, three specialised development banks, two domestic private banks and two foreign banks.
Stressed assets in those banks are higher because of a lack of efficiency and transparency in credit approval, administration, monitoring and recovery, and poor selection of borrowers, the report says.
Classified loan concentration ratios of the five worst banks including Sonali, Janata, Rupali and Agrani were 54.5% of the total non-performing loans in December 2013. The classified loans in the state-owned commercial banks were higher due to a lack of efficiency in fund management, the report concluded.
In 2012, the central bank found major financial irregularities in loan programming in several state-owned and private commercial banks, orchestrated mainly by two big business groups – Hall-Mark and Bismillah. However, it had so far always tried to give the idea that the sector was not in any big trouble.
In the report published yesterday, the central bank said the loan scams were mainly carried out my means of fraudulent letters of credit, inland bills of trading and other documents.
It was said that “deficiency in corporate governance” allowed these financial crimes to take place.
While unveiling the report yesterday, central bank Governor Atiur Rahman said: “No matter how powerful or close to us someone was, we did not give any kind of concession to anyone.”
In December 2012, classified loans equalled 10% of the total outstanding loans. However, exactly a year later, it dropped to 8.93%, which the central bank said was because some banks took advantage of its relaxed policy and rescheduled huge amount of classifiable loans.
According to a Bangladesh Bank circular, classified loans are those which are considered sub-standard, doubtful, bad or loss.
Former central bank governor Salehuddin Ahmed told the Dhaka Tribune that the country’s banking sector was now is a really volatile situation.
“Getting the banks to write off their bad debts will not be an easy task because they will have to keep huge provisions. That will eventually hit their profitability and the capital bases,” he said.