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NPL buildup, high cost of fund remain major potential risks: Study

FE Report | Published: September 04, 2019 10:45:08 | Updated: September 05, 2019 10:28:10


The country's banking sector is now moderately competitive and stable. But, there are some potential risks for the sector, including further increase in the volume of non-performing loans (NPLs), insolvency, growing urban and rural discrepancy, and high cost of fund, a study opined.

The Bangladesh Institute of Bank Management (BIBM) disseminated findings of the study - 'Competition, Concentration and Banking Sector Stability' - through a seminar on its campus in the capital on Tuesday.

The study found a significant relationship between the banks' total asset and volume of NPLs. It implies that if the banks can reduce NPLs, they can increase their asset portfolio in a prudent manner, which eventually will reduce credit risk.

The estimated coefficient for total asset implies that increase in bank assets will reduce Z-score.

In banking, Z-score captures the probability of default of a country's banking system. Z-score compares the buffer of a banking system (capitalisation and returns) with the volatility of those returns.

The study suggested increasing the banks' asset portfolio to ensure stability.

It also opined that increased inflation may have an adverse impact on the banks' solvency that might trigger financial instability.

Bangladesh's banking sector has experienced manifold growth over last four decades. During the period, the number of banks has grown by more than 400 per cent, the number of branches by around 250 per cent, and the growth in total asset, deposit and advance ranged from 500 to 550 per cent, the study noted.

It also found the share of fixed deposit has increased to about double in the last four decades - from 24 per cent in 1980 to 46 per cent in 2018.

On the other hand, the share of current account deposit significantly dropped over the four decades, even after a significant rise in 2018.

The notable upward concentration in fixed deposit should remain as a point of worry in the market, as it causes high cost on deposit and cost of fund, the study opined.

It also observed that dependency on high cost deposit may cause high possibility of liquidity crisis, as there will be no space to offer higher profit to depositors.

The study found that the volume of rural deposit has increased from 15.9 per cent in 1980 to 20.6 per cent in 2018. But the volume of rural advance has reduced from 11.8 per cent in 1980 to 10.4 per cent in 2018.

Over the last four decades, the share of industrial loan (in the total volume of disbursed loan) has experienced regular ups and downs. But agricultural credit has declined to 4.6 per cent in 2018 from 17.5 per cent in 1980.

The study also placed different local banks in top-four, top-seven and top-10 groups, considering nine functional areas. These are - total asset, demand deposit, term deposit, total deposit, agricultural credit, industrial credit, business credit, total advance, and foreign trade.

The top banks that performed well in almost all nine areas are - the Islami Bank Bangladesh Limited, the Sonali Bank Limited, the Janata Bank Limited and the Agrani Bank Limited.

Only 19 banks competed for top-four position in last 40 years, while 34 banks for top-seven positions, and 43 banks for top-ten positions.

The study placed a set of recommendations, including segmentation of banks instead of all-purpose banks, and policy for progressive banking etc.

Speaking at the programme, the BB Deputy Governor S M Moniruzzaman said the banking industry of Bangladesh has become highly competitive in terms of many parameters, like - the number of banks, areas of operation, access to credit, cost and quality of financial services, and innovation etc.

He also said competition (among banks) can bring significant benefits to the market players, national economy and society. But, it can also be a source of potential instability due to the tendency of taking more risks.

The Bank Asia Ltd President and Managing Director Md Arfan Ali said both competition and (attitude) to be rich are good.

"We should change the mindset of not appreciating being competitive in business and to be rich," he opined.

Dr Muzaffer Ahmed Chair Professor of the BIBM Barkat-e-Khuda said all parties need to work together for getting expected results for the financial sector.

Director General of the BIBM Md Nazimuddin said findings of the study along with opinions and observations provided in the programme will help the BB to take future actions.

A research team, led by former faculty member of the BIBM Abdul Qayum Mohammad Kibriya, conducted the study. Other members of the team were Antara Zareen, Rexona Yesmin and Tofayel Ahmed, all assistant professors of the BIBM, and Dr Iftekhar Ahmed Robin, joint director of the Bangladesh Bank.

S A Chowdhury, former managing director of the Sonali Bank Ltd; Helal Ahmed Chowdhury, supernumerary professor of the BIBM; Md Yeasin Ali, former supernumerary professor of the BIBM; Quazi Osman Ali, Managing Director and CEO of the Social Islami Bank Ltd; and Dr Mohammed Helal Uddin, Professor of the Dhaka University, also spoke at the event, among others.

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