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Challenges and vulnerabilities of the banking industry are amongst the major newspaper headlines. Especially, the volumes of non-performing loans (NPL) and governance issues have become key concerns. Even questions are being raised whether confidence in the banking industry is getting eroded!
Has the banking industry really performed so badly? While building pressure to correct the misdeeds, should not we promote and support improvements and sound practices in the sector? Unfortunately, news and views about the vulnerabilities of the sector are well circulated but success stories and good governance practices hardly get attention.
Regarding market size, the banking sector expanded over the years in terms of greater number of formal institutions, higher number of financing instruments, and bigger volumes of assets. Unlike in developed economies and sophisticated markets, both long-term and short-term financing needs of the country are met by the banking industry. Volume of deposits expanded, and proportion of rural deposits in the banking industry increased over the years. However, one key weak area of the banking industry has been its liability side - banks depend almost entirely on deposits.
The real sector of the economy is extensively dependent on the banking sector. Unlike in many other countries, bond and equity market, non-bank financial institutions, external sources etc are not significant as sources of investment and finance in Bangladesh. Banking sector is the key supplier of these finance and investment needs. Stability as well as soundness of the sector is apparently a prerequisite for maintaining the current level of production as also for attaining the projected higher rate of growth.
Regulatory changes have been brought in several areas of banking and financial sector either to align these with global standards or to address internal needs and requirements. To cope with the international best practices and to make the bank's capital more risk sensitive as well as more shock resilient, risk-based norms were introduced in 2009 - and an updated version from 2014 (in line with Basel III). Major improvements can be observed in the adoption of internationally recognised standards of bank supervision and reporting arrangements. Bangladesh Bank's (BK) interventions for installing financial crime and money laundering regulations, promoting inclusive banking, and supporting transparency and financial literacy have been praiseworthy.
But, as a whole, the banking industry could not deliver to the level of expectation in terms of addressing the challenge of loan defaults. Specially, government owned/controlled banks faced several difficulties and scams in recent years. Some issues of board interference and operational inefficiency came up. Though this is not unique in the case of Bangladesh, it does not justify their performance. However, it indicates that it is not an easy challenge to address.
Private commercial banks are dominating the banking market, and there is no doubt that performances of some private commercial banks are laudable. There are examples of good governance in some private commercial banks that are replicable. Are we really aware of these leadership cases where top managements and boards performed tremendously to transform certain private commercial banks? In a recent study on leadership and governance in banking, we have captured and presented these cases at the Bangladesh Institute of Bank Management (BIBM). Unfortunately, success cases of banks failed to draw due attention, and criticisms and vulnerabilities of banks were, instead, highly publicised.
Risk absorption capacities of most banks improved in response to the enforcement of stringent loan classification norms, provisioning requirements, and capital adequacy regulations. There are challenges of capital adequacy in the government-controlled banks and in a few private commercial banks. But, regular capital injection using taxpayers' money is not desirable. At the same time, all the services of the state-control banks must also be priced to figure out the real shortage of capital or the actual amount of loss.
The banking sector has brought remarkable changes in service quality by using modern technology. Centralisation has changed systems of handling loan and other product processing. Mobile banking, agent banking, financial literacy drives, and green banking ventures are laudable. These initiatives have brought notable improvements in the financial and economic inclusion scenario of the country, and the role of regulator is praiseworthy in this regard. There is difference of opinion on the role of addressing these inclusive issues as part of the monetary policy and financial stability efforts of the Bangladesh Bank. I believe, these efforts of the Bangladesh Bank are very much in line with national priorities, and are desirable.
Improvements are visible in the area of banks' efforts to improve capacity of bank employees. In certain areas like international trade, banks now possess specialist people to facilitate trade services. However, capacity and awareness development of the key stakeholders needs further impetus. With the growing compliance requirements, demand for newer processes and technologies, and increasing financial crimes, employees of banks need regular training and capacity development programmes. The situation has improved remarkably and some banks are now allocating good amount of resources and efforts for capacity development by undertaking on-the-job and off-the-job training programmes. However, gaps remain which is especially visible in the government-controlled banks. Top managements and board members of banks must be brought under effective capacity and knowledge enhancement programmes on leadership and governance issues.
Addressing customers' complain and information rights are crucial, and I see reasonable level of improvement in these areas. Today, the customers have the advantage of analysing disclosed data to decide whether to keep fund with a bank or not. Customers are more aware today. It is a great development. Several factors have contributed to this development which include - greater transparency and data disclosers by the regulator, policy makers and banks; proactive roles of academic and research think tanks and civil society organsations; proactive roles of electronic, online and print media. The development is commendable and it helps create due pressure to act properly for addressing market vulnerability. As academicians, it is now relatively easy for us to identify statuses and vulnerabilities of the banking industry. However, we should be very careful that our comments and remarks should be reasonably placed to put pressure on under-performers and encourage good performers. Considering the sensitivity of the banking sector, probably it is better to incentivise good performers and deeds by inspiring them with good words and to push for addressing vulnerabilities side by side.
Dr. Shah Md Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM).