Too many banks and too few good customers  

Nironjan Roy from Toronto, Canada | Published: March 02, 2019 21:27:17 | Updated: March 04, 2019 20:39:08

Three more new banks are being added to the country's banking sector. Bangladesh Bank has recently approved licensing of People’s Bank, Citizen Bank and Bengal Commercial Bank. With these three new banks, country's total number of banks has reached 62, which coupled with more than hundreds of non-banking financial institutions and branches of some foreign bank has placed Bangladesh among few countries in the world where large number of banks and non-bank financial institutions operate. To what extent the financial sector and common people will be benefited from these new banks remains to be seen in future. However, approval of new banks has created mixed reaction among think-tanks, experts and the business community as some have welcomed this decision stating that these new banks will support the country's economic growth while others have argued that without streamlining the banking sector, the new banks will not bring any good at all.

IMPACT OF MORE NEW BANKS: New banks are not a problem if proper regulations are in place to ensure that they are well compliant in carrying out their business and thus depositors' as well as other stakeholders' interest is well protected. New banks bring new investments, more deposit mobilisation and more business opportunities that collectively contribute to country's economic growth. Above all, new banks create new employment opportunities. New banks also contribute in improving country's saving-GDP ratio. On the other hand, if stringent regulation cannot be established, increased number of banks may result in serious problems in financial market with the accompanying adverse impact on the economy. Banks are quite different from any other business enterprises in running business operations. Moreover, banks have to comply with many local and international rules and regulations. Banks are not only the custodian of public deposit but also the supplier of money into the country's economic artery. Government's monetary policy is also implemented through banks and financial institutions. Every action performed by banks has either positive or negative implication in the economy. So, allowing more banks to operate without establishing stringent regulations, control and monitoring system may adversely affect the entire financial system. Historically our regulators, particularly the central bank, could not prove their strong presence in regulating the banking sector. We have seen that innumerable anomalies, lapses, failures, fraudulent activities in our banking industry have gone unpunished. There are few countries in the world where large numbers of banks are allowed to operate. The USA has the highest number of banks because the country maintains strong regulations and there is effective Merger &Acquisition law under which banks are merged regularly. India and China have good number of banks operating and regulation is also quite strong, although India's regulatory role has recently been severely criticised. Although most countries in the developed world pursue free market economy, they have not made their banking sector free at all. Canada and most European countries have very limited number of banks. 

GROWING ECONOMY AND BANKING NEEDS: It is undeniable that our county has achieved spectacular economic development during the last one decade. The country has been persistently maintaining GDP growth rate at about seven per cent during the last few years and this growth rate is expected to accelerate further in the years ahead. This considerable economic growth is the result of public sector investment. Our private sector, especially corporate sector, has not grown enough commensurate with the growth of the country's economy. It is obvious that self-employment and small and personal retail business have extensively flourished all over the country and this has become the main driving force of country's economic growth. Corporate business houses have not grown at the desired pace and even county's wholesale business has remained in the grip of a handful of conglomerates. Our experience shows that banks in Bangladesh are often reluctant in creating self-employment opportunities and financing small businesses. So, new banks' lending focus will be on those handful of business houses.

NEW BANKS AND UNDUE COMPETITION: In support of allowing more banks, ensuring fair competition in the country's banking sector is always referred to as a strong ground. While corroborating the decision of new banks, its proponents always argue that new banks will create the atmosphere of fair competition that will eventually improve service quality. This may be true in some cases but does not always happen as expected. Competition is good but too much competition may not be good, rather may produce adverse impact. In many situations steep competition turns into undue competition which sometimes destroys regular business environment. Excessive competition creates the scope of overtrading that finally goes beyond businessman's control for which the business itself and the banking relationship, particularly debt-servicing performance is badly affected. In our country, Chottogram is known as the commercial capital. This city, especially Khatungonj, was famous for wholesale market and the commitment of business community in Chottogram in dealing with business deal was really very praiseworthy. Their performance in utilising bank loan, timely repayment of loans and debt-servicing record was found extraordinarily satisfactory. Rate of NPL (Non-performing loan) among the business community in Chottogram was very nominal and very low compared to other cities and country's average. Having been allured by the reputation of the business community in Chottogram, all banks focused their banking strategy in this area. Within a while, all banks established their presence in Chottogram and steep competition prevailed. Almost all banks were vying the business community in Chottogram and offering attractive loan proposals. The businessmen who were either reluctant or careful in availing bank loan realised that easy money is moving around. While working in a bank in Bangladesh, I experienced many bankers sitting hours after hours in front of a businessman's office to meet and convince him to borrow form his bank. This type of competition eventually turned into undue competition. Many business people resorted to indiscriminate overtrading, the result of which is now known to everyone. Now, Chottogram which was once a centre of banks' quality lending has turned into a big burden for almost all banks. Further, mobilising deposit is a very challenging task for new banks, so as a strategy, undue pressure may be created on the employees to collect deposit. They may be given monthly and yearly target and such target-oriented deposit mobilisation drive may instigate immoral activities and thus fraudulent incidents cannot be ruled out.      

STRENGTHENING REGULATORY MEASURES: Controlling the number of banks and financial institutions is not in the regulator's hand. However, ensuring regulatory compliance is exclusively the central bank's responsibility. Since Bangladesh Bank has approved licence for three more new banks, it is now their prime responsibility to prove the decision worthwhile by strengthening regulatory measures. In order to do so, they will have to bring about some qualitative changes in regulatory approaches. Banks should be compelled to operate as SRO (Self-Regulatory Organisation). As an SRO, each bank will have to develop its own policy and procedures in line with guidelines of the central bank and other regulators. Any deviation and breach will have to be dealt with severly. In addition to standard punitive measures, provision of imposing huge amount of fine depending on the nature of violation must be introduced. Bangladesh Bank has raised minimum capital base to BDT 5 billion which is a good sign. But merely increasing minimum capital requirement is not good enough, so other restrictive measures will have to be in place. Bangladesh Bank should now actively consider categorising all banks into different groups such as Schedule-A bank, Schedule-B banks, Schedule-C bank and so on. This categorisation of banks may be determined based on performance related parameters that among others must include capital adequacy ratio, professional strength, loan deposit ratio, loan capital ratio, rate of NPL, rate of provisioning and policy of writing off NPL. Based on the category of banks, some restrictive measures viz., lending cap, deposit taking criteria, sectoral cap on financing etc will have to be applied.

Nironjan Roy is a banker, based in Toronto, Canada.


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