Rejaul Karim Byron

Most private banks have ventured into risky business to bag excessive profits that inflated share prices and call-money rates.

According to Bangladesh Bank (BB) statistics, the credit-deposit ratio in private banks was 89 percent last year, which was 73 percent in state-owned commercial banks (SCB) and 83 percent in foreign banks.

Banks are allowed to lend up to 82 percent after maintaining a statutory liquidity requirement against deposits. If any bank wants to go for aggressive banking it can raise the ratio to 85 percent by adding capital alongside deposits, the central bank said.

It was revealed that 20 out of 30 private banks lend up to 85 percent against deposits. Some banks lend more than 100 percent, which means they lend by borrowing from the call-money market at higher interest rates.

Lending growth of 30 out of 43 local and foreign commercial banks was much higher than their deposit growth.

According to senior bankers, banks cannot lend more than its deposit growth but many private sector banks, even SCBs, defy the norm.

The deposit growth of one private bank was 4 percent whereas its credit growth was 22 percent. Another private bank posted 34 percent deposit growth, while its credit growth was 64 percent.

Bangladesh Bank officials said the banks went into risky banking to make high profits overnight.

In recent times, the banks made most of such investments in the share market to take returns on investment. As a result, shares were overvalued, one of the officials said.

The chief executive officers of private banks receive high salaries, so the shareholders consider their banks will make more profits quickly, enabling them to earn more in turn, said an official of Sonali Bank to The Daily Star.

K Mahmud Sattar, president of the Association of Bankers Bangladesh (ABB) and managing director of City Bank, said there was huge liquidity surplus in the banking sector last year. As a result, the banks put emphasised increased credit investment.

While lending excessive amounts, many banks failed to manage their assets and liability properly, he added.

“Our banking sector is in a very strong position now. Depositors have no risk as the banks are going for aggressive banking. Some banks may not have maintained ideal practices though.”

Sonali Bank Chairman Kazi Baharul Islam and Krishi Bank Chairman Khandker Ibrahim Khaled said such risky and aggressive banking must be stopped.

If a bank is caught practising so risky and aggressive banking in any other country including neighbouring India, the central banks take punitive action against the delinquent banks.

Islam said it also shows the incompetence of the bank authorities in fund management. Alongside, it seems that there was lack of competent supervision on the part of the board of directors of the banks concerned.

The central bank should take stern actions in this regard, he said.

“If the central bank goes for taking actions, you reporters should write that Bangladesh Bank is up to destroying the capital market,” said Sattar.

BB Executive Director SK Sur Chowdhury said lending should be within 80 percent of its deposits for sound and safe banking. The central bank monitors it regularly to ensure that banks do not cross the limit. BB has been issuing warning letters, he said.

Many observers hold the central bank responsible for the recent slump in the share market. They say if the BB had monitored strictly and checked the aggressive banking, the shares would not have been overvalued.

A central bank official said BB was warning the banks since June last year. Despite resistance from some powerful quarters, the central bank advised the banks on July 6 last year to be cautious in lending in the capital market.

News: The Daily Star /Bangladesh/17 Jan 2011