Dhaka, Bangladesh (BBN)- The central bank of Bangladesh sees the deficiency of corporate governance, which caused scams at some state-owned banks, may adversely affect the country’s financial stability.
Decline in the real gross domestic product (GDP) growth rate may also adversely affect the situation, according to the Financial Stability Report (FSR) 2013, released by the Bangladesh Bank (BB) on Wednesday.
The central bank also urged policy makers to come up with ‘resolution regimes’ and a ‘lender-of-last-resort’ framework for banks, strengthen cooperation further among various regulators of financial intermediaries and ensure more stringent supervision of banks and other financial institutions.
It also identified eight factors, including stringent loan classification and provisioning, that help improve the financial stability.
Other factors are the constraint to loan rescheduling, ample liquidity, automation of the payment and settlement system, broad-based financial inclusion programme, emphasis on risk management in banks, improvement in the inflation situation and satisfactory international reserves.
Despite a turbulent political scenario, considerable progress was made in reinforcing resilience of the banking system in the calendar year (CY) 2013, the central bank said in its report.
The banking sector assets increased, and new banks started their operation, the report added.
Domestic private banks held the majority of banking assets, and the role of state-owned commercial banks (SoCBs) and specialised banks (SBs) increased slightly (as measured by marginal increase in market share of their assets) in the CY ‘13, according to the report.
“Due to the volatile business and political environment, banks took a cautious approach to loan distribution and moved to safe liquid investments,” the BB observed.
The report also said the operating performance of the banking sector was less impressive compared with that of the CY ‘12, but the overall reported profitability improved due to the lower provisioning requirement.
“With the aim to help strengthen the ongoing financial inclusion programmes by bringing unbanked people under the banking network, the banking sector penetration has been enhanced and branch networks have been expanded,” it noted.
It also said the bold step would help extend credit facilities to the unbanked people, which in turn would be quite helpful in achieving higher growth of the economy.
Classified loan concentration ratios based on the non-performing loan (NPL) amount of the worst five banks and worst 10 banks were 54.5 per cent and 67.4 per cent respectively at the end of December 2013, according to the report.  
Such ratios were 62.7 per cent and 73.2 per cent respectively in the fiscal year (FY) 2011-12.
“The classified loans in the state-owned commercial banks (SoCBs) are higher due to the nature of their operations (lack of efficiency in fund management, extending obligatory financing towards social and economic priority sectors etc.) and the size of their loan portfolio,” the report said.
Of the worst 10 banks in terms of their NPL amounts, four are SoCBs, three are domestic private commercial banks, and three are specialised development banks, according to the report.
However, of the worst 10 banks in view of the NPL ratios (in order to ignore the impact of size of the portfolio), two are SoCBs, one is a domestic private commercial bank, four are specialised development banks and three are foreign banks.
The report also said: “It is a matter of concern that the number of foreign banks included among the worst 10 banks, based on NPL ratios, is increasing, though their total loan amount is still not very significant.”
BB Governor Atiur Rahman unveiled the FSR laying emphasis on ensuring stability in the country’s overall financial sector.
Dr. Rahman said despite different obstacles, Bangladesh’s financial base was getting stronger day by day, especially in the situation arising out of last year’s political turmoil, the financial sector showed noticeable stability.
At the meeting, the BB governor asked chief executives of commercial banks and non-banking financial institutions (NBFIs) to take necessary pre-emptive and cautious measures considering possible risks so that people’s confidence in the sector did not wane.
The BB’s relentless regulatory efforts would continue to increase the banking sector’s capability to stave off any future blow and to ensure financial stability, he said. “But you will have to ensure corporate governance at your own institutions.”

BBN/SSR/AD-04Sept14-1:31 pm (BST)