There has been no year-on-year improvement in the banking sector during the first quarter (January-March) of 2023. Rather, the risk has increased at the end of March compared to December last year.
Whereas in December, eleven banks would have been non-compliant if the top three borrowers defaulted, the number rose to fifteen in March under a Bangladesh Bank stress test.
Besides, three banks will become non-compliant if the non-performing loans (NPL) rise to the highest outstanding level. This number was only one in December. Non-compliance means that the capital adequacy ratio (CAAR) of the banks will fall far below the prescribed level.
This was disclosed in the Quarterly Financial Stability Assessment Report (January-March 2023) published by the Bangladesh Bank on Thursday.
In the event of a combined shock, excluding defaults by top large borrowers and an increase in the highest outstanding NPLs, the CRAR of the banking system would decline to 6.67 per cent from pre-shock CRAR of 11.23 per cent.
NPLs of the banking sector are mainly responsible for this situation.
The report highlighted that the banking sector’s gross non-performing loan (NPL) ratio experienced a rise in the review quarter. The ratio stood at 8.80 per cent at the end of March this year, which was 64 basis points higher than that of December 2022.
The report further states that the NPL concentration ratios of top five and top ten banks stood at 43.45 per cent and 61.90 per cent respectively at the end of March 2023.
It is worth noting that high NPL concentration in top banks might be a concern for the management of overall NPLs in the banking system.
Bangladesh Bank Governor Abdur Rouf Talukder has emphasised on increasing good governance to resolve this ongoing situation.
At the beginning of the report, he said, “Both banks and FIs need to perform scrupulous evaluations of borrowers during the credit appraisal process to mitigate default risks. Also, they need to exercise good governance to curb the rise in NPLs.”
Due to the increase in NPLs, provisioning has also increased. But as the condition of the banks is not good, the volume of provision has fallen short. This indicates that depositors' money is at risk, mentions the Bangladesh Bank report.
It adds that the provisioning requirement of the banking sector increased by 10.06 per cent in the review quarter. The amount of required provision stood at Tk 92,620 crore at the end of March this year, from Tk 84,157 crore in December 2022.
However, the actual provision increased by 4.34 per cent.
The report highlights the dire situation of non-bank financial institutions (NBFIs), stating that the NBFIs showed mixed performance in the review quarter as evident from expansion in aggregate assets, and reduction in profitability of the sector.
At the end of March this year, total assets of financial institutions amounted to Tk 95,743 crore, exhibiting an increase of 4.07 per cent compared to the previous quarter.
NBFIs’ classified loans and leases ratio increased to 25.05 per cent at the end of March 2023, from 23.88 per cent recorded in the previous quarter. Profitability of the sector continued to remain negative, with ROA and ROE standing at -1.32 per cent and -20.68 per cent respectively.
The capital adequacy ratio (CAR), in line with Basel II, stood at 7.29 per cent, lower than the minimum regulatory requirement of 10 per cent.
However, the Tier-1 capital (core capital) ratio of the sector (excluding Peoples Leasing and Financial Services Ltd) was 5.26 per cent against the minimum regulatory requirement of 5 per cent.
The report highlights a number of macroeconomic issues, such as raising the interest rate to control inflation and subsequently devaluation of the currency.
In this regard, the governor said the central bank has been adopting policy measures to curb inflation by containing consumer demand, and ensuring adequate flow of funds in productive sectors.
Addressing the exchange rate issue, he pointed out, “To maintain a reasonable level of stability in the exchange rate, the regulator has been adopting a strategy of gradual local currency depreciation, taking into account the possible liquidity strain of this approach on the economy contemporaneously.”
