A total of eight state-owned commercial and specialised banks in Bangladesh bear the brunt of poor risk management, according to a study by the London-based Economic Intelligence Unit (EIU).
In its latest report titled “Banking sector faces challenge”, the EIU said the poor risk management system contributes to a high level of non-performing loans (NPLs), low profitability, large capital shortfalls and balance sheet weaknesses of the banks.
In January-March 2017, the overall bad loans in the banking sector rose by 18% from the previous quarter to Tk734.1 billion while NPLs at six state-owned commercial banks rose by 15.1% quarter-on-quarter to Tk357.2 billion accounting for just under half of the total non-performing loans.
The study, however, observed that an improvement in conditions within the state-owned banking sector will be dependent on the political will to address the problems.
With reference to an International Monetary Fund report published on June, the EIU said there were weaknesses in the banking sector owning largely to the legacy of loans to large borrowers, who lack incentives to repay and legal limitations that hamper recoveries.
The report also reads that a total of six state-owned commercial banks account for about a quarter of the total banking sector assets.
The six are Janata Bank, Agrani Bank, Rupali Bank, Sonali Bank, Krishi Bank and Rajshahi Krishi Unnayan Bank.
“For decades, the state banks have lent large amounts to big, influential borrowers, who have been known to be lax with repayments while defaulters are rarely penalised, and instead, loans are routinely restructured to permit further lending to the same borrowers,” the report said.
According to a study by the Bangladesh Institute of Bank Management (BIBM), on average banks rescheduled bad loans of Tk109.1 billion annually from 2010 to 2014.
The central bank inspections have found that several state-run and other commercial banks have under-reported bad loans and inflated profits.
For example, in the quarter ending December 2016, four state-owned commercial banks under-reported Tk40.7 billion in loan defaults of Janata Bank, Agrani Bank, Rupali Bank and Sonali Bank, the BIBM study said.
Unsurprisingly, these high NPLs have hit profitability hard. In 2016, the operating profits of the six state-owned commercial banks dropped by 37% to Tk20.1 billion while their net losses surged by 309% to Tk5.1 billion, the EIU said.
Meanwhile, losses at the two state-owned specialised banks – Krishi Bank and Rajshahi Krishi Unnayan Bank – rose by 150% to Tk4.2 billion in total.
According to the EIU report, “By the end of the first quarter of 2017, seven of the eight state banks had capital shortfalls totaling Tk147 billion compared with only two private banks that had such shortfalls.”
“The highest capital shortage was Tk72.5 billion at Bangladesh Krishi Bank followed by BASIC Bank Tk29.6 billion and Sonali Bank Tk25.6 billion,” added the report.
The overall capital to risk weighted asset ratio, a key measure of bank strength and stability, has also been affected, the study found.
In June 2017, the government allocated Tk20 billion to recapitalise the state banks. There are signs that the country’s banking sector is facing mounting problems, and regulators’ efforts have so far been insufficient to tackle the issue, the study has said.
Only a limited action has been taken to penalise defaulters, improve risk management and strengthen bank management, it noted.
In its latest Article IV report, the IMF states that there are some underlying risks to banking sector owing to its excess liquidity.