The financial sector of a country is like life-blood for its economy. Sure, the real economy meaning farmers tilling their lands, workers producing in factories, service providers engaging in their activities, all these keep the economy’s wheels running. But just as fuel is required to start an engine and run it, finances are the fuels for ensuring that the engine of the entire economy would run smoothly. Any activity be it manufacturing, farming or distribution – all are supremely dependent on the unimpeded flow of finances . The same in turn require the financial sector as a whole maintaining its vitality to be able to supply risk-free finances to meet various demands of the economy.
How far, the financial sector in Bangladesh can go on putting up a pretty face is posing as a big question mark. Even a decade and half ago, the financial sector in Bangladesh with a namesake capital market and undeveloped insurance businesses, largely meant the banking sector only. There has been notable changes since that time and non banking sectors have spread their wings. And yet, the banks still predominate the financial sector.
The health of the banking sector looked rather uncertain in the seventies and eighties from non performing or classified loans. There were also many other ills plaguing it. But the financial sector reforms programme (FSRP) in phases brought about vast changes for the good in the banking institutions of the country. Only a some years ago, the banks as a whole including even the very ossified and inefficient public sector ones, were seen as having made a recovery. But is this restoration of their health holding ? It appears from credible media information based on Bangladesh Bank’s (BB) own assessments taken out of concern for the well-being of the banking sector that this sector has once again invited a lot of troubles to it.
The banks have invested heavily in the country’s risky capital market far in excess of the ceiling granted to them by the central bank for making such investments. It would not matter if the share market had depth enough or acquired its strength from the strong fundamentals of the shares now being bought and sold. But the actual conditions in the share market is far from such an ideal state. The market is lacking in depth from too few shares being chased by too many investors and the value of them being artificially inflated having no relationship to their real values. Thus, there is the growing likelihood that the bubble in the share markets could burst any time further taking down not only the millions of investors who invested in it but more significantly creating very great stresses for the banks which have been greatly exposed to this freaky market.
The amount of classified loans in the banking sector surpassed Tk 1.0 trillion-mark for the first time in March 2019, apparently defying monitoring of the central bank. The amount of NPLs was Tk 885.89 billion as on March 31, 2018.The volume of non-performing loans (NPLs) jumped by more than 18 per cent to Tk 1,108.73 billion in the first quarter (Q1) of the year from Tk 939.11 billion in the preceding quarter, according the latest statistics of Bangladesh Bank (BB).
Never before in the country’s banking history, the total amount of NPLs have been so great casting deep doubts whether the banking sector has any further ability to absorb such a huge NPL liability. The traditional approach of the BB to window dress the NPLs with more rescheduling or softer conditions of repayment could prove to be too risky according to experts. BB also is being prevented from exercising all of its regulatory functions under the circumstances by the relevant ministry in the government. Thus one is rightly apprehensive about where our financial sector is headed even in the short term.
Perhaps government or the central bank here will look the other way and carry out patchy holding operations as it had done in the seventies and eighties. At that time some of the private banks and all of the nationalized banks were saddled with overdose of liabilities compared to their assets. These banks should have closed on their own or shut down by the central bank’s orders if conventional prescriptions were followed. But this was not done out of concern for the depositors and government kept on propping them up artificially. It is a big unknown whether the same can be expected this time or can even be done given the enormity of the NPLs which are still growing briskly.The highest managers of the Bangladesh economy will need to start paying very close and very serious attention to these issues from now on which are darkening the horizon. A business as usual approach will not do.