[🇧🇩] Banking System in Bangladesh

[Saif]

Shrinking rural banking weakening CMSMEs

Commercial banks' position in rural Bangladesh keeps weakening with the constant fall in formal credit disbursements and the number of branches in the least- developed areas, bankers say. As a result, the condition of cottage, micro, small and medium enterprises (CMSMEs) in rural areas is worsen

thefinancialexpress.com.bd

Shrinking rural banking weakening CMSMEs
Jubair Hasan
Published :
Jan 09, 2025 00:24
Updated :
Jan 09, 2025 00:24

Commercial banks' position in rural Bangladesh keeps weakening with the constant fall in formal credit disbursements and the number of branches in the least- developed areas, bankers say.

As a result, the condition of cottage, micro, small and medium enterprises (CMSMEs) in rural areas is worsening as they gradually lose their market to imported goods.

Bankers have identified several reasons behind this, including the rising cost of funds and higher inflation that blighted the demand for credit in rural areas after the Covid-induced shocks.

On the other hand, the lower possibility of making profits in rural areas having the least lending opportunities prompted commercial banks to concentrate more on high-yielding urban territories, they said.

Consequently, the flow of fresh credit disbursements among rural communities continued dropping in recent months.

Besides, banks, as part of their cost-cutting measures, keep reducing the number of rural branches. They serve rural clients through alternative arrangements like sub-branches and agent banking outlets.

According to the Bangladesh Bank (BB) data, banks invested Tk 16.20 trillion in various sectors across the country till September 2024, including Tk 1.25 trillion in rural areas. The remaining amount was invested in urban regions.

The share of bank loans in rural territories continued declining to reach 7.70 per cent (Tk 1.25 trillion) at the end of September 2024 from 7.90 per cent (Tk 1.26 trillion) in June that year.

On the other hand, the share of loans in urban areas rose to 92.30 per cent (Tk 14.95 trillion) in September 2024 from 91.10 per cent (Tk 14.71 trillion) in June that year.

Seeking anonymity, a central bank official said banks' lending in rural areas continued falling in recent months despite the rise in deposits in such regions probably because of profitability.

Citing data, he said the volume of rural deposits was Tk 1.20 trillion in September 2023. It rose to Tk 1.24 trillion in December that year, Tk 1.25 trillion in March 2024, and Tk 1.26 trillion in June. But then it dropped slightly to Tk 1.25 trillion in September, he also said.

"Economic activities remained almost standstill. This could be the main reason behind the fall in rural lending," he added.

Managing Director and Chief Executive Officer of Mutual Trust Bank Syed Mahbubur Rahman told The Financial Express continuing rural banking with full-fledged branches is not financially viable for the lender because of fewer lending opportunities there.

"That is why banks are now concentrating on rural banking with alternative arrangements like sub-branches, microfinance institutions, and agent banking outlets," he said.

The experienced banker also said the demand for formal credit in rural areas, like elsewhere in the country, kept falling due to persisting economic sluggishness.

Secretary of Barishal Metropolitan Chamber of Commerce and Industry Md Humayun Kabir said entrepreneurs in the region, particularly in rural areas, have for years been suffering severely due to poor access to formal credit.

"We keep requesting banks' high officials to address the issue, but nobody listens. Even entrepreneurs having all the required documents to secure loans do not get it. I do not know why banks are so reluctant to lend to rural clients," he told The Financial Express.

"Because of this reluctance, entrepreneurs, particularly small and medium ones, are getting demoralised. Bank financing is key to industrial and employment growth, but rural entrepreneurs do not have access to that," the business leader added.​

 

[Saif]

Risk based pricing: a safeguard for the banking industry

Risk-based pricing is gaining growing attention in today's business world full of risk imbalance. As all customer groups do not mirror the same look on a business scale, all cannot share the same cost burden alike. It has been around for many years and has been recommended by many credit risk manag

thefinancialexpress.com.bd

Risk based pricing: a safeguard for the banking industry
Nahid Ul Hasan
Published :
Jan 17, 2025 21:39
Updated :
Jan 17, 2025 21:39

Risk-based pricing is gaining growing attention in today's business world full of risk imbalance. As all customer groups do not mirror the same look on a business scale, all cannot share the same cost burden alike. It has been around for many years and has been recommended by many credit risk managers as a way for businesses to compensate for the risk of different customer segments. The theory is relatively simple. With fixed pricing, the cost of risk is evenly distributed among customer segments despite the fact that certain segments have high risk and others lower risk. This situation results in the lower-risk customers "paying" more than their risk -- essentially being overcharged -- while the higher-risk customers pay less than their risk.

In our present market perspectives, different interest rates and loan terms are offered to different borrowers, based on their credit worthiness. To substantiate credit worthiness, risk-based pricing focuses on factors such as a borrower's credit rating through External Credit Assessment Institutions (ECAI's), Audited Financial Statement, Risk Weighted Asset (RWA), Capital Charge, Cost of Capital/ Return on Equity (ROE) and Income depending on the type of loan. It does not consider factors which are irrelevant such as race, colour, national origin, religion, gender, marital status or age.

The continuous forward movement of classified loans in our economy is deeply skewed towards particular strata of high risk borrowers while the price burden is equally spread over the good ones. Had there been a good measure to price the credit risks, bank's losses from impaired assets could have been less or at least good borrowers would have been rewarded by a significant price comfort. Here comes the relevance of risk based pricing before lending any type of investment to secure depositor's money as well as stakeholder's safe return.

In this regard, this scribe has developed the 'Risk Based Pricing Model' considering credit risk to identify the credit risk and to assess the proper lending rate/pricing customer-wise.

The model shows how a borrower's Risk Based Pricing is followed through Net Income [Profit after Tax (PAT)], Risk Weighted Asset (RWA), Capital Charge, Net Income to Capital Charge ratio. If Net Income to Capital Charge ratio is greater than the Cost of Capital/Return on Equity (ROE), the pricing will be acceptable, otherwise the pricing will be un-acceptable or need to be re-adjusted to the pricing or increase the other factors like fee-based income, cash collateral, cash margin that would reduce the capital charge of the client and increase the Net Income to Capital Charge ratio.

User of the model has to decide ROE/Cost of Capital first. To assess your borrower through the model, you have to consider the borrower's ECAI's rating, Customer's Limit/Exposure, proposed pricing/margin, Cash Collateral, Cost of Deposit, Overhead Cost, Provision and Fees & Other Income (if any). The following flowchart describes a detailed picture of the model:

The model gives you the appropriate pricing to lend money for sustainable return.

Risk-based pricing allows lenders to charge higher interest rates to borrowers who seem less likely to repay their loans in full and on time or having higher Risk Weighted Asset (RWA) to charge higher capital, and lower interest rates to borrowers who seem more likely to repay their loans in full and in a timely manner or having lower RWA to charge lower capital. For example, if your ECAI's credit rating category shows that your long term rating is not good, you might be charged higher interest rate than someone who has good long term credit rating.

Exceptions:

If the risk distribution (risk score) is skewed to the left, the quantity effect might exceed the price effect and therefore the risk-based pricing strategy might be unprofitable. Alternatively, if the quantity of bad exceeds the quantity of goods in the market, the risk-based pricing strategy might be unprofitable, too.

By differentiating the interest rates charged to each identified risk group, lenders may inadvertently worsen the average level of risk of their portfolio as a whole.

If the lender has insufficient information to reliably distinguish low risk from high, it might be convenient to set a flat interest rate strategy rather than using a customised pricing strategy.

PROMOTING CREDIT CONSCIOUSNESS AND DISCIPLINE: Several reports and case studies of World Bank have shown that a risk-based pricing environment based on credit information data improves loan performance by reducing delinquency rates and contains non-performing assets. Credit penetration is achieved by significantly identifying "good borrowers" (low credit risk) that otherwise would have been misidentified as "bad borrowers" (high credit risks) and, therefore, may not have been provided credit at optimal terms and conditions. At the same time, high-risk borrowers are no longer subsidised by lower-risk borrowers. Risk-based pricing of loans could be a major motivating factor for borrowers to ensure they maintain a healthy credit history and a high credit score.

Rewarding the good has been an age-old practice. If a borrower has been paying back his/her loans on time, he/she is a good borrower. And if the aforementioned adage is followed, he/she could expect to be rewarded with a lower rate of interest the next time he/she applies for a loan. This practice of rewarding good borrower is yet to gain acceptance by the country's lending institutions.

To ensure that good borrowers are rewarded for their financial discipline, my own observations is that all credit institutions and banks in the country should adopt risk-based pricing to lend money for sustainable credit growth, prevent the continuous forward movement of classified loans, build strong capital base and provisions, secure depositor's money as well as stakeholder's safe return.

As per widely accepted global rules, a country poorly credit rated by Moody's or S&P and Fitch bears the burden of rising cost of business in terms of trade cost, correspondent relationship, foreign guarantee, various credit lines etc., while a better rated country reaps the fruits of lower business cost. In rhyme with this kind global practice, the Risk Based Pricing Model as developed and followed by the all banks among the industry will be a step forward to bring justice and equilibrium in our credit culture. This will help the banks not only reward the good customers while identifying the bad, but also prevent both continued credit loss and subsidised credit expenses facing the banking industry in recent time.
Nahid Ul Hasan is Deputy CRO, Dhaka Bank PlC.​

 

[Saif]

WB calls for forensic audit of 4 state banks in Bangladesh, FID reluctant

The World Bank has intended to evaluate the asset quality of four state-owned banks in Bangladesh, with a particular focus on the scam-hit Janata Bank, using international audit firms.

www.newagebd.net

WB calls for forensic audit of 4 state banks in Bangladesh, FID reluctant
Mostafizur Rahman 20 January, 2025, 00:16

The World Bank has intended to evaluate the asset quality of four state-owned banks in Bangladesh, with a particular focus on the scam-hit Janata Bank, using international audit firms.

The three other state-owned banks are Sonali Bank, Rupali Bank and Agrani Bank.

Two foreign audit firms, recommended by both the World Bank and the Asian Development Bank, have already begun auditing six private commercial banks, with plans for such audit for another six banks in the second phase.

According to Bangladesh Bank officials, the World Bank has now expressed strong interest in assessing the financial health of the banks through international audit firms to uncover their true financial health.

BB governor Ahsan H Mansur also supports bringing foreign chartered accountants for this task. However, there is scepticism about whether the finance ministry will allow such foreign audits on the government-owned banks.

A senior official of the Financial Institutions Division of the finance ministry told New Age that the World Bank demanded forensic audit of four state-run banks.

‘We are in negotiations, and no decision has so far been made in this regard,’ the official said.

Ministry officials are highly reluctant to approve such forensic audits due to their direct involvement in the state-run banks’ activities, including the appointment and removal of their boards of directors, according to Bangladesh Bank officials.

They noted that a forensic audit could potentially expose serious scams involving these banks, which could bring their involvement into the spotlight.

Zahid Hussain, former lead economist of the World Bank’s Dhaka office, told New Age that the forensic audit would reveal the full extent of the financial troubles facing the state-run banks and identify the root causes of their problems.

He emphasised that the findings would not only diagnose the current issues but also help prevent future obstacles.

He also said that there were no reasons for the Financial Institutions Division to reject the forensic audit of these banks.

Zahid noted that the asset quality and liquidity of these banks had severely deteriorated, with non-performing loans surpassing 50 per cent.

‘When asset quality deteriorates to such an extent, a special audit is essential to uncover the underlying crisis,’ he said.

As both the owner and regulator of these state-run banks, the FID’s role in the ongoing irregularities is critical, he said.

Zahid observed that it was highly unlikely these banks could have continued such massive irregularities without FID’s knowledge or consent. Consequently, the FID might be reluctant to appoint foreign audit firms to examine these institutions, he said.

Two global audit firms, Ernst & Young and KPMG, are already conducting asset quality evaluations for six private banks plagued by financial irregularities and corruption.

These audits, initiated at the suggestion of the World Bank and the Asian Development Bank, aim to restore transparency and accountability in the banking sector.

The six banks under review are First Security Islami Bank, Exim Bank, Global Islami Bank, Social Islami Bank, ICB Islamic Bank and Union Bank.

Ernst & Young is handling the audits of Global Islami Bank, Social Islami Bank and ICB Islamic Bank, while KPMG is auditing First Security Islami Bank, Exim Bank and Union Bank.

The forensic audits are expected to assess the financial health of the banks and guide decisions on whether to liquidate, merge, or inject bailouts for their continued operation.

Now, the foreign lenders are pushing for similar forensic audits of the four state-run banks.

Foreign lenders suspect significant fund diversions from these state-run banks.

Janata Bank, in particular, is under severe stress, with a staggering Tk 60,489 crore in non-performing loans as of June 2024, representing 61 per cent of its total loans.

Major borrowers like Beximco Group and S Alam Group withdrew Tk 24,682 crore and Tk 10,100 crore respectively from the bank, much of which has turned into defaulted loans.

Agrani Bank’s total non-performing loans escalated to Tk 26,891 crore in September, with the top 10 defaulters accounting for 30.95 per cent of this amount.

The amount of defaulted loans of Rupali Bank also soared to Tk 12,738 crore and that of Sonali Bank to Tk 16,623 crore at the end of September 2024.

During the Awami League regime which was ousted on August 5, 2024 amid a mass uprising, substantial amounts of public funds were reportedly withdrawn from the banking sector and laundered abroad.

Following the political transition, the interim government restructured the boards of a number of private banks, removing the influence of the S Alam Group and other politically connected entities.​

 

[Saif]

Bangladesh Bank must help stabilise forex market

Stability in the forex market is vital to minimise risks.

www.thedailystar.net

Bangladesh Bank must help stabilise forex market
Stability is vital to minimise risks

VISUAL: STAR

More than seven months after introducing the crawling peg exchange rate system to stabilise the foreign exchange market, the Bangladesh Bank has decided to be more flexible with the rates. According to a report in this daily, it is now allowing banks to trade foreign currency freely. However, this decision comes with a caveat, which is proving to be a headache for the banks.

According to the report, while the central bank has permitted banks to negotiate foreign currency rates following market trends—based on the recommendation of the International Monetary Fund—it still maintains a firm grip on the trade. To be exact, it is still operating with an unofficial mid-rate, which climbed to Tk 119 per dollar from Tk 117 on December 31. Bank insiders say this is preventing banks from truly negotiating the rates, undermining the central bank's intent to liberalise the trade. As a result, while banks are officially quoting around Tk 121-122 per dollar, the actual rates charged to importers range between Tk 125 and Tk 128, according to a cement mill's managing director. Moreover, under the new exchange rate regime, banks are required to maintain uniform rates for remittances and export earnings, which is causing them to lose out on profits, a private bank official said.

This discrepancy is concerning, as it has worrying consequences beyond shrinking profit margins for banks. For example, importers are increasingly using a workaround system where banks show an official rate while selling dollars to some importers, but a portion of that currency is sourced from exchange houses and aggregators. This is akin to hundi, which is illegal in Bangladesh. The mismatch in exchange rates also poses a risk to the country's prospect of remittance earnings, which hit a record $2.64 billion in December thanks to flexible exchange rates. But under the new system, remitters are more likely to turn to unofficial channels to send money to their families. If that happens, the economy will take a hit, and it will be bad news for our already shaky foreign exchange reserves.

Under this circumstance, it would be prudent for Bangladesh Bank to let go of all its control. As economists have repeatedly suggested, the central bank should allow the market to determine exchange rates while enforcing strict monitoring to prevent illegal trading and manipulation. This approach not only aligns with global best practices, but also offers an opportunity to stabilise our volatile forex market and shore up confidence in our currency.​

 

[Saif]

Ensuring good governance in banking sector

Bangladesh's banking sector plagued by escalating non-performing loans and a liquidity crisis affecting both the state-owned and private banks remains a matter of grave concern. Characterised by systematic looting and plundering of state resources and a culture of wilful loan defaults and impunity,

thefinancialexpress.com.bd

Ensuring good governance in banking sector
FE
Published :
Jan 26, 2025 22:20
Updated :
Jan 26, 2025 22:20

Bangladesh's banking sector plagued by escalating non-performing loans and a liquidity crisis affecting both the state-owned and private banks remains a matter of grave concern. Characterised by systematic looting and plundering of state resources and a culture of wilful loan defaults and impunity, the financial sector suffered extensive damage during the deposed Hasina government's autocratic rule. According to an estimate by the Bangladesh Bank governor, at least Tk17 billion was siphoned off from the banking sector during that period. Rampant corruption pushed numerous banks to the brink of collapse, severely eroding public trust in the sector. When the interim government took over, restoring financial stability and salvaging the banking sector emerged as a top priority. One crucial step towards restoring good corporate governance and accountability in this sector is ensuring the incorporation of an adequate number of independent directors in all banks' boards.

To this end, in May last, the previous government had committed to the World Bank to ensure that independent directors would constitute at least one-third of the boards of state-owned banks within a year. This initiative was aimed not only to improve corporate governance but also to meet the conditions for securing $500 million in budget support from the World Bank. However, nearly eight months later, this critical reform remains largely unfulfilled. According to a recent Financial Express report, only one state-owned bank, Rupali Bank, has complied with this directive, while 12 other state-owned financial institutions - including six commercial banks, three specialised banks, and four non-scheduled banks - have failed to comply with the requirement. The authorities attributed this delay to the recent political transition and the interim government's focus on broader financial reforms. This rationale, however, does little to justify such prolonged inaction on such a vital issue.

The term independent director generally refers to a member on a company's board of directors who is independent of the company's shareholders and management. These directors are not employees of the company, do not participate in its day-to-day operations, and hold minimal company stock. This independence allows them to make impartial judgments regarding company affairs to enhance good corporate governance. Independent directors can play an important role by providing unbiased opinions to protect the interests of depositors. However, while state-run banks often lack independent directors altogether, private banks tend to appoint relatives of bank management to these positions. This practice undermines the very essence of independent directorship, as these individuals may be reluctant to challenge management decisions or prioritise the interests of the institution and its depositors. Consequently, when the board of directors makes decisions that go against the interests of the institution and its depositors, there is a lack of effective oversight and accountability. Therefore, the government and the central bank must ensure that both state-owned and private banks induct independent directors into their boards in sufficient numbers to help these important institutions run efficiently and effectively.

It must also be ensured that independent directors appointed in financial institutions are performing their duties and responsibilities without fear or favour. Addressing the challenges such as establishing good governance, restoring order to the banking sector, improving service quality, and resolving the issue of defaulted loans must be at the top of the agenda. Strict oversight and accountability are of paramount importance for curbing mismanagement and ensuring accountability in the banking sector.​