The banking sector spent 2023 searching the horizon in search of smooth sailing, but found a rocky road instead as the year was fraught with a persistent shortage of USD, and the highest recorded volume of non-performing loans (NPLs) in the country’s history.
Key indicators in the industry showed a downward trend throughout the year, despite a number of initiatives taken by the Bangladesh Bank to reform the sector.
USD market volatility
Bangladesh’s forex reserves started declining in 2022 due to a shortage of USD in the banking sector. The country’s forex reserves stood at $48 billion in 2021, but it is now at $21.44 billion, calculated under the BPM6 method of International Monetary Policy (IMF).
Speaking to The Business Post, Policy Research Institute of Bangladesh (PRI) Executive Director Ahsan H Mansur said, “The country is facing the USD shortage due to a lack of proper decision about this market.
“The government should have turned this into a market-oriented sector, but following regulatory approval, Association of Bankers, Bangladesh (ABB) and Bangladesh Foreign Exchange Dealers Association (BAFEDA) have been setting this rate since September 2022.”
He added, “The banks are not complying with the ABB-BAFEDA’s rate of USD. Officially, the USD rate for import is Tk 110, but the importers are paying Tk 128 for opening of letters of credit (LCs). Otherwise, they cannot open LCs in banks.
“The central bank has failed to stabilise the USD market in 2023.”
Industry insiders believe that the ABB-BAFEDA USD rate decision is not reflected in the banking sector, which in turn is causing the USD market to remain volatile.
BB halts injecting high-powered money
The Bangladesh Bank supported the government by directly loaning it money, a move that has the same effect as printing more money.
This caused inflation to surge to 9.92 per cent in 2023, say economists, while criticising the central bank for injecting high-powered money into the economy.
Eminent economist Wahiduddin Mahmud had recommended to central bank Governor Abdur Rauf Talukder that the regulator should stop injecting high-powered money into the economy. The regulator decided to follow this advice.
Liquidity crisis surges
One of the major problems faced by the banking sector this year was the liquidity crisis. The private sector credit has been directly affected by liquidity shortage in the industry.
As a result, the private sector credit growth was down at 9.69 per cent in September this year – which was a 23-month low in the country. After one month, it rose slightly to 10.09 per cent.
However, the government started borrowing money from scheduled banks comparatively more than previous times.
Dr Zahid Hussain, former lead economist at the World Bank, said, “It impacted the private sector. This happened because the government has been borrowing money from the scheduled banks to repay the central bank.”
According to the central bank data, the government borrowed Tk 31,274 crore from scheduled banks in the July to November 29 period of FY24. In the same timeframe, it repaid Tk 27,635 crore of the loans it took from the central bank.
Bank interest rate
The Bangladesh Bank had introduced a new bank loan interest rate called Six Months Moving Average Rate of Treasury Bill (SMART) in July this year, and it lifted the cap from bank loan interest in 2023 – which was imposed back in April, 2020.
Now banks are following these rules, but experts think that the regulator is trying to control the interest rate through SMART rate.
As a result, the market is not operating properly for this method. Ahsan H Mansur said, “Though the central bank claims its market-based interest rate, the regulator is controlling the interest rate through the SMART rate.”
NPLs reach highest figure
Experts believe that non-performing loans (NPL) is a legacy problem in the banking sector. NPLs in Bangladesh stood at Tk 1.56 lakh crore in the June quarter, which was the highest recorded in the history of Bangladesh.
Though NPLs dropped slightly to Tk 1.55 lakh crore in the July-September period (Q3) of this year, it however denotes the shaky situation in the country’s banking sector.
On the issue, Dr Zahid Hussain said, “Actually, the NPLs have not decreased in the banking sector. Two big groups had the opportunity to schedule their loans. As a result, the volume of NPLs decreased at the end of September quarter.
“In reality, the banking sector is worsening day by day. The economy is getting worse for the banking sector.”
