Problems and prospects of banking industry in Bangladesh
Ibsan Islam Edi and Ibnat Islam Etu
The central bank has finally approved nine more banks in addition to existing 47 commercial banks in Bangladesh. Three new NRB commercial banks, sponsored by non-resident Bangladeshis (NRBs), and six private commercial banks (PCBs), have been approved aiming to help boost the inflow of foreign exchange and strengthen the ongoing financial inclusion programmes through bringing unbanked people under the banking network respectively.
The letters of intent (LoIs) `have already been issued to the sponsors of such approved banks. There have been many significant developments in the economy of Bangladesh since 2000-2001, the central bank stated, explaining the economic context and rationale behind issuing licences in favour of new banks.
The economy has grown and the banking system has become more competitive but there are still a large number of under-banked people in Bangladesh.
Recent estimates from a survey conducted by the Institute of Microfinance (IoF) found that only 45 per cent of the nearly 9000 households surveyed do have access to banks and micro-finance institutions (MFIs) for loans.
The population per branch (21065) and the ratio of loan accounts per 1000 adults (42yrs) suggest that the outreach of the formal financial sector in Bangladesh is lower than that in India (14485 and 124 respectively) and Pakistan (20340 population per branch and 47 loan accounts per 1000), according to the statement of IoF.
Bangladesh Bank assumes that the new banks will help increase the quality of banking services by increasing competition in the banking sector. They will also be able to meet the unfulfilled demand for credit by the private sector whose needs have grown in line with a fast expanding economy.
The central bank noted that, for new banks the ratio of opening rural and urban branch will be 1:1 which will help increase bank branches in rural areas and improve financial inclusion. But the home truth is; no bank can expand in the rural areas before concentrating and making business in urban areas.
Earlier, the issue of granting licenses to new banks caused many to raise their eyebrows. Questions were being asked by authentic experts, bankers and people even on the board of directors of the central bank about the wisdom of allowing more banks, a sector that had been struggling hard to cope with the problem of liquidity shortage for years together. The banking sector is already saturated with 47 commercial banks.
There was no logic to allow new banks at this moment of the country. The new comers will create an unhealthy competition in banking services, affect stability of the sector and cause profitability of the existing banks to suffer. The entry of more banks will trigger a flight of huge fund including Tk 36.00 billion from existing banks to place as paid-up capital against new banks; this will lead to further deteriorations of the stringent situation already prevailing in the banking sector.
The similar incident will take place for quality employees of the existing banks. All these will lead to a greater mismatch between their credit and deposit ratio and acute shortage of good bankers. The banks will be forced to go for risky investment after collecting deposit at high rate from an already saturated market. It will seriously affect the overall bank- business and the industry as well.
Banks are to facilitate all kinds of economic activities and finance many other needs of the people, in both urban and rural areas. But overcrowding of the banking sector is not at all desirable as this, instead of meeting those objectives, would create problems for the sector itself, particularly the existing operators in the sector. This might even adversely impact the vital sectors of the economy in the process.
It was unlikely that the board of directors of Bangladesh Bank were not aware of that fact. Yet they were trying to select the right ones since the government is unrelenting in its decision to allow new banks. Opening up of new banks on political consideration, as reported time and again, may reduce the confidence of the clients in banks as well as impair the management quality of the overall banking sector.
Meanwhile, some speculators state that as soon as new banks kick off their operations a heavy pressure on deposits of existing banks would be exerted. The latter are likely to see a flight of deposits while their existing loan liabilities including non-performing loans (NPLs) will remain at an unchanged level. This is likely to cause a mismatch between their deposits and outstanding amount of credits or loan portfolio.
Now that the central bank already approved new banks and issued the LoIs, it will be just beating about the bush to say anything to the contrary. Rather, now it is better to design how all these banks can be managed smoothly. In this regard the following measures may be implemented:
* The new banks should introduce new and innovative services and should scale up their products for the sake of making the government decision meaningful.
* There is no denying that the quality of the sponsors largely influences the quality of operation of banks as such sponsors play an important role in the decision-making. So, the central bank will have to closely examine the track records of the sponsors and it must not give in to political pressure of any sort on this issue. The quality of the bank directors should be maintained scrupulously.
* The central bank may concentrate its attention on the colour of money of the proposed directors who will be investing as the paid-up capital.
* The central bank must have to play the role of a watchdog in case of shopping the investment clients of new banks from existing banks by approving the higher limit then the present outstanding.
* The central bank must have to be vigilant in examining the proposed investment clients of new banks, particularly those whose cases have to be rescheduled. Getting rescheduled, the sick clients in the existing banks become very much performing in new banks for the time being in the backdrop of opening new banks in the market.
* The central bank needs to require to consider several other issues, prior to giving effective permission to new banks, including ownership quality.
* The vital issue that deserves priority attention of both central bank and the government is better banking coverage of the hitherto neglected rural areas. The new banks may be asked to serve the rural people extensively.
* On the top of everything, both the central bank and the government will have to ensure the entry of stronger players in the banking arena and keep close watch on the effects of such an entry on the overall banking industry.
* The Bangladesh Bank and Bangladesh Institute of Bank Management (BIBM) have to take preparation on structuring the banks by training up the bankers. Because market will be oversaturated as soon as the new banks start operations. The precipitations of banks may appear at the bottom of the banker of banks in Bangladesh. Time has arrived; the possibility of merger of weak banks cannot be laughed away.
Still we hope for the best. The newly approved three NRB commercial banks namely, NRB Commercial Bank Ltd, NRB Bank Ltd and NRB Bank Ltd will bring USD150.00 million as paid up capital of the non-resident Bangladeshis (NRBs). Expectations of the people about the six approved PCBs, such as Union Bank Limited, Modhumoti Bank Limited, the Farmers Bank Limited, Meghna Bank Limited, Midland Bank Limited and South Bangla Agriculture and Commerce Bank Limited, are quite high.
Now the nation is passionately staring at the functions of the new-born banks with a ray of hope of even development of the people of all the strata in the days to come.
Financial Express/Bangladesh/ 19th April 2012