bangladesh banking sector regultions

7/29/2019 Bangladesh Banking sector regultions

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Banking Sector Performance, Regulation and Bank Supervision

5.1 Industry statistics of the banking sector and

the performance trends have been discussed in

this chapter. The banking sector in Bangladesh

comprises of four categories of scheduled banks.

These are, nationalized commercial banks

(NCBs), government owned development financeinstitutions (DFIs), private commercial banks

(PCBs) and foreign commercial banks (FCBs).

As of December 2004, total number of banks

operating in Bangladesh remained unchanged at

49. These banks have a total number of 6,303

branches including 10 overseas branches.

Structure of the banking sector with breakdown

by type of banks is shown in Table 5.1.

5.2 In 2004, the nationalized commercial banks

(NCBs) held 39.6 percent of the total industry

assets against 41.7 percent in 2003. Evidently,NCBs' domination in this area is showing a

declining trend, while PCBs share rose to 43.5

percent in 2004 against 40.8 percent in 2003. The

foreign commercial banks held 7.2 percent of the

industry assets in 2004, showing a little decrease

by 0.1 percentage point over the previous year.

There has been a decline in the operation of the

DFIs with their shares of assets of only 9.7

percent in 2004, against 10.2 percent in 2003.

5.3 Total deposits of the banks in 2004 rose to

Taka 1,326.1 billion from Taka 1,140.3 billion in

2003 showing an overall increase by 16.3

percent. The NCBs' (comprising of 4 largest

banks) share in deposits decreased from 46.0

percent in 2003 to 42.8 percent in 2004. On theother hand, PCBs' deposits in 2004 amounted

to Taka 588.0 billion or 44.3 percent of the total

industry deposit against Taka 468.2 billion or

41.1 percent in 2003. FCBs' deposits in 2004

rose by Taka 11.00 billion or 13.0 percent over

the previous year. The DFIs' deposits in 2004

were Taka75.1 billion against Taka 62.6 billion

in 2003 showing an increase of 20.0 percent

over the year.

Aggregated Balance Sheet

5.4 Assets: Aggregate industry assets in 2004

registered an overall increase by 14.0 percent

over 2003. During this period, NCBs' assets

increased by 8.2 percent and those of the PCBs

rose by 21.2 percent. Loans and advances

played a major role on the uses of fund. Loans

and advances amounting to Taka 1,047.1 billion

out of aggregate assets of Taka 1,725.5 billion

29

Table 5.1 Banking system structure (billion Taka)

2003 2004

Bank

types

Number

of banks

Number of

branches

Total

assets

% of

industry

assets

deposits % of

deposits

Number

of banks

Number of

branches

Total

assets

% of

industry

assets

deposits % of

deposits

NCBs 4 3,397 631.6 41.7 525.0 46.0 4 3,388 683.7 39.6 567.5 42.8

DFIs 5 1,314 154.5 10.2 62.6 5.5 5 1,328 167.9 9.7 75.1 5.7

PCBs 30 1,510 617.8 40.8 468.2 41.1 30 1,550 749.3 43.5 588.0 44.3

FCBs 10 32 110.1 7.3 84.5 7.4 10 37 124.6 7.2 95.5 7.2

Total 49 6,253 1,514.0 100.0 1,140.3 100.0 49 6,303 1,725.5 100.0 1,326.1 100.0


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constituted a significant portion (60.7 percent).Cash in tills were Taka 15.5 billion (below 1.0

percent), deposits with Bangladesh Bank wereTaka 86.3 billion or 5.0 percent. Other Assetswere Taka 385.7 billion or 22.4 percent and

investment in government bills and bondsaccounted for Taka 190.9 billion or 11.1 percent

of the assets.

5.5 Liabilities: The aggregated liability portfolio

of the banking industry in 2004 was Taka 1,725.5billion of which deposits constituted Taka 1,326.1

billion or 76.9 percent and continued to be themain sources of fund of banking industry. Capital

and reserves of the banks were Taka 92.7 billionor 5.4 percent of aggregate liabilities in 2004,against Taka 76.8 billion or 5.1 percent in 2003.

Performance and Rating of Banks

5.6 Performance of the banking sector under

CAMEL framework, which involves analysis,

and evaluation of the five crucial dimensions of

banking operations, has been discussed in this

chapter. The five indicators used in the rating

system are (i) Capital adequacy (ii) Asset quality

(iii) Management soundness (iv) Earnings and

(v) Liquidity.

Capital Adequacy

5.7 Capital adequacy focuses on the total

position of bank capital and protects the

depositors from the potential shocks of losses

that a bank might incur. It helps absorbing major

financial risks (like credit risk, market risk,

foreign exchange risk, interest rate risk and risk

involved in off-balance sheet operations). Banks

in Bangladesh have to maintain a minimum

Capital Adequacy Ratio (CAR) of not less than

9.00 percent of their risk-weighted assets (with

at least 4.50 percent in core capital) or Taka

1.00 billion whichever is higher.

30


Chart 5.1

Aggregate industry assets (Dec, 2004)(billion Taka)

Loans &

advances, 1047.1, 61%

other

assets,

385.7, 22%

Deposit

with BB,

86.3, 5%

Cash in tills,

15.5, 1%

Govt. bills &

bonds,

190.9, 11%

Aggregate industry assets (Dec, 2003)(billion Taka)

Loans &

advances, 918.3, 60%

other assets,

335.9, 22%Deposit

with BB,

84.1, 6%

Cash in tills,

13.4, 1%

Govt. bills &

bonds,

162.3, 11%

Chart 5.2

Aggregate industry liabilities (Dec, 2003)(billion Taka)

Other liability,

296.9, 20%

Capital &

reserve,

76.8, 5%

Deposits,

1140.3, 75%

Aggregate industry liabilities (Dec, 2004)(billion Taka)

Other liability,

306.7, 18%Capital &

reserve, 92.7, 5%

Deposits,

1326.1, 77%


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5.8 Table 5.2 shows that as on 31 December

2004 the DFIs, PCBs and FCBs maintained

CAR of 9.1, 10.3 and 24.2 percent respectively.

The 4 NCBs could not attain the required level.

One of the DFIs and 5 PCBs failed to maintain

required CAR. FCBs have the CAR much

above the required standard at 24.2 percent but

2 of them maintained inadequate capital

individually. Table 5.2 and Chart 5.3 reflect that

the aggregate capital adequacy ratio of the

banking sector showed a downward trend since

1997 and declined to 6.7 percent in 2000.

However, in 2002, the ratio rose to 7.5 percent,

i.e. to the 1997 level and in 2004 the ratio rose

to 8.7 percent, the highest during the last 8

years.

5.9 The asset composition of all commercial

banks shows the concentration of loans and

advances (60.7 percent) in total assets. The

high concentration of loans and advances

indicates vulnerability of assets to credit risk,

especially since the portion of non-performing

assets is significant. A huge infected loan

portfolio has been the major predicament of

banks particularly of the state-owned banks. In

the total assets, the share of loans andadvances is followed by the investment in

government securities and bills covering 11.1

percent.

5.10 The most important indicator intended to

identify problems with asset quality in the loan

portfolio is the percentage of gross and net

non-performing loans (NPLs) to total assets

and total advances. FCBs have the lowest and

DFIs have the highest ratio of NPLs. NCBs

have gross NPLs to total assets of 14.6 percent

31


Table 5.2 Capital to risk weighted assets

ratio by type of banks(Percent)

Bank type 1997 1998 1999 2000 2001 2002 2003 2004

NCBs 6.6 5.2 5.3 4.4 4.2 4.1 4.3 4.1

DFIs 6.0 6.9 5.8 3.2 3.9 6.9 7.7 9.1

PCBs 8.3 9.2 11.0 10.9 9.9 9.7 10.5 10.3

FCBs 16.7 17.1 15.8 18.4 16.8 21.4 22.9 24.2

Total 7.5 7.3 7.4 6.7 6.7 7.5 8.4 8.7

Table 5.3 Ratio of gross NPL* to total

loans by type of banks(Percent)

Bank type 1997 1998 1999 2000 2001 2002 2003 2004

NCBs 36.6 40.4 45.6 38.6 37.0 33.7 29.0 25.3

DFIs 65.7 66.7 65.0 62.6 61.8 56.2 47.4 42.9

PCBs 31.4 32.7 27.1 22.0 17.0 16.4 12.4 8.5

FCBs 3.6 4.1 3.8 3.4 3.3 2.6 2.7 1.5

Total 37.5 40.7 41.1 34.9 31.5 28.0 22.1 17.6

* Without adjustment for actual provision and interest suspense.

whereas in case of PCBs, FCBs and DFIs, the

ratios are 5.6 percent, 0.9 percent and 26.6

percent respectively. Similarly, NPLs net of

provisions and interest suspense to the total

assets is 9.1 percent, 2.1 percent and 10.5

percent for NCBs, PCBs and DFIs. FCBs are

having excess provision for loan losses.

Chart 5.3

Aggregate capital adequacy pos ition

0

200

400

600

800

1000

1200

1997

1998

1999

2000

2001

2002

2003

2004

Billion

Taka

0

2

4

6

8

10

Percent

Capital RWA Cap./ RWA

Chart 5.4

Aggregate pos ition of NPLs to total loans

0

100

200

300

400

500

600

700

800

900

1997 1998 1999 2000 2001 2002 2003 2004

Billion

Taka

0

10

20

30

40

50

Percent

Total loans NPLs NPL ratio


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5.11 The ratio of NPL to total loans of all the

banks shows an encouraging trend since its

decline from the peak (41.1 percent) in 1999,although the aggregate ratio is still as high as

17.6 percent in December 2004. The reason

being very high NPL of the NCBs and the DFIs.

5.12 The NCBs and DFIs continue to have

very high NPLs mainly due to substantial loans

provided by them on considerations other than

commercial and under directed credit

programmes during the 70s and 80s. Poor

appraisal and inadequate follow-up and

supervision of the loans disbursed by the NCBs

and DFIs in the past eventually resulted inmassive booking of poor quality assets which

still continue to remain significant in the portfolio

of these banks. Furthermore, the banks were

reluctant to write off the historically bad loans

because of poor quality of underlying collaterals

and to avoid any possible legal complication

due to lacunas in the judicial framework.

Recovery of NPLs however witnessed some

signs of improvement; mainly because of the

steps taken with regard to internal restructuring

of these banks to strengthen their loan recovery

mechanism and recovery drive and write offmeasures initiated in recent years.

5.13 It appears from the Table 5.3(a) and Chart

5.4 (a) that the net non performing loans to total

loans after adjustment of actual provision and

interest suspense stand at 17.6 percent (NCBs),

23.0 percent (DFIs), 3.4 percent (PCBs) and 9.8

percent (Banking Sector). NCBs' and DFIs' non-

performing portfolio is still high after adjustment

of actual provision and interest suspense.

5.14 Chart 5.5 graphically displays the amountsin NPLs of the 4 types of banks since 1997

through 2003. Amount of NPLs of the NCBs

increased from Taka 89.1 billion in 1997 to Taka

99.6 billion in 2004 although the ratio had

declined. The PCBs also recorded a total

increase of Taka 2.5 billion in their NPL

accounts, which stood at Taka 41.9 billion in

2004 against Taka 39.4 billion in 1997. The

amount of NPLs of the DFIs decreased to Taka

47.7 billion in 2004 from Taka 56.0 billion in

1997. The decline in NPL ratios in the recent

years can be attributed partly to some progress

in recovery of long outstanding loans and partly

to write-offs of loans classified as 'bad' or 'loss'

for over five years.

Loan Loss Provisioning of the Banks

5.15 The Table 5.4 shows the aggregate

amounts of NPLs of all banks, amounts ofprovision required to be maintained and the

amounts actually provided by the banks from

1997 to 2004.

5.16 Table 5.4 and Chart 5.6 depict that in

aggregate, the banks have been continuously

failing to maintain the required level of provisions

against their NPLs. During the years from 1997

through 2004, the banks could maintain 55.8

percent of the required provision in 2002; which

declined thereafter to 40.9 percent in 2004. The

32


Table 5.3 (a) Ratio of net NPL to total

loans by type of banks

(Percent)

Bank type 1997 1998 1999 2000 2001 2002 2003 2004

NCBs 31.4 35.6 41.3 34.1 32.8 30.1 28.3 17.6

DFIs 56.9 59.1 58.5 54.6 54.5 48.0 38.3 23.0

PCBs 25.1 26.3 21.2 15.5 10.5 10.5 8.3 3.4

FCBs -0.5 0.1 0.9 -0.1 -0.3 -0.4 0.1 -1.5

Total 30.7 34.4 35.6 28.8 25.6 22.6 18.8 9.8

* Net of actual provision and interest suspense.

Chart 5.4 (a)

Aggregate position of NNPL to total loans (net of provision)

Total loans (net of provision)

Net NPLs NNPL ratio

Billion

Taka

Percent

0

100

200

300

400

500

600

700

800

900

0

5

10

15

20

25

30

35

40

1997 1998 1999 2000 2001 2002 2003 2004


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main reason for the continuous shortfall in

provision adequacy is the inability of the NCBs

and some of the PCBs including those inproblem bank category to make sufficient

provisions due to inadequate profits and also

transferred provision for write-off. Notably the

FCBs are much better in that they have been

able to make adequate provisions in the recent

years. A comparative position as of end 2003

and 2004 is shown in Table 5.5.

5.17 Although some individual PCBs could

make adequate provisions, the aggregate

position did not improve mainly because of the

huge provision shortfall of the banks in "ProblemBank" and "EWS" categories.

Management Soundness

5.18 Sound management is the most important

pre-requisite for the strength and growth of any

financial institution. Since indicators of

management quality are primarily specific to

individual institution, these cannot be easily

aggregated across the sector. In addition, it is

difficult to draw any conclusion regardingmanagement soundness on the basis of

monetary indicators, as characteristics of a good

management are rather qualitative in nature.

Nevertheless, the total expenditure to total

income, operating expenses to total expenses,

earnings and operating expenses per employee,

and interest rate spread are generally used to

gauge management soundness. In particular, a

high and increasing expenditure to income ratio

indicates the operating inefficiency that could be

due to flaws in management.

33


Table 5.5 Comparative position of provision adequacy

(billion Taka)

Year Items NCBs DFIs PCBs FCBs

2003 Required provision 53.3 14.7 23.1 1.4

Provision maintained 3.5 14.6 17.5 1.7

Provision

maintenance ratio 6.6%99.2% 75.4%125.2%

2004 Required provision 50.7 13.5 22.3 1.3

Provision maintained 3.4 12.4 18.5 1.6

Provision

maintenance ratio 6.7%91.9% 83.0%123.1%

Table 5.4 Required provision and provision maintained - all banks

(billion Taka)

All banks 1997 1998 1999 2000 2001 2002 2003 2004

Amount of NPLs 173.3 214.3 238.8 228.5 236.0 238.6 203.2 187.3

Required provision 79.1 93.5 100.2 98.4 101.6 106.8 92.5 87.8

Provision maintained 46.7 50.1 51.5 58.1 61.4 59.6 37.3 35.9

Excess(+)/shor tfall (-) -32.4 -43.4 -48.7 -40.3 -40.2 -47.2 55.2 51.9

Provision maintenance ratio 59.1%53.5% 51.4% 59.1%60.5% 55.8% 40.3%40.9%

Chart 5.6

Provision adequacy position of all banks

Amount of NPLs Provision maintained

Provision maintenance ratio

Billion

Taka

Percent

0

50

100

150

200

250

300

1997 1998 1999 2000 2001 2002 2003 20040

10

20

30

40

50

60

70

Chart 5.5

Comparative position of NPLs by type of banks

Billion

Taka

NCBs PCBs DFIs FCBs

99.6

121.8122.3117.3

128.9

107.6

89.1

105.7

41.939.546.4 45.3 46.2 45.7

54.848.5

47.756.0

59.163.3 63.7

66.761.6

47.3

1.10.9 1.3 1.3 1.3 1.4 1.41.7

0

20

40

60

80

100

120

140

1997 1998 1999 2000 2001 2002 2003 2004


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5.19 It transpires from Table 5.6 and Chart

5.7 that expenditure-income (EI) ratio of the

DFIs was very high with 180.4 percent in1998 and 175.3 percent in the year 2000.

This was mainly because the DFIs made loan

loss provisions by debiting 'loss' in their

books. The position however improved after

2000 and the ratio came down to 89.1

percent and 95.9 percent in 2001 and 2002

respectively but again rose to 101.1 percent

in 2003 and 104.0 in 2004 due to huge loss

incurred by BKB (Bangladesh Krishi Bank).

The EI ratio of the NCBs exceeded 100

percent in 1999 before falling to below 99

percent by end 2003 but again rose to 102.3

percent in 2004 due to loss incurred by

Agrani Bank. Very high EI ratio of NCBs was

mainly attributable to high administrative and

overhead expenses, suspension of income

against NPLs and making provision out of the

profits made.

Earnings and profitability

5.20 Strong earnings and profitability profileof a bank reflect its ability to support present

and future operations. More specifically, this

determines the capacity to absorb losses by

building an adequate capital base, finance its

expansion and pay adequate dividends to its

shareholders. Although there are various

measures of earning and profitability, the best

and widely used indicator is returns on assets

(ROA), which is supplemented by return on

equity (ROE) and net interest margin (NIM).

5.21 Earnings as measured by return on assets(ROA) and return on equity (ROE) vary largely

within the industry. Table 5.7 shows ROA and

ROE by types of banks and Chart 5.8 shows the

aggregate position of these two indicators for all

banks. Analysis of these indicators reveals that

the ROA of the NCBs has been very low and

turned to negative in 2004, and that of the DFIs

even worse. PCBs had an inconsistent trend and

FCBs' return on assets ratio consistently declined

from 4.8 percent in 1997 to 3.2 percent in 2004.

34


Table 5.7 Profitability ratios by type of banks(Percent)

Return on assets (ROA)Bank types

1997 1998 1999 2000 2001 2002 2003 2004* 1997 1998 1999 2000 2001 2002 2003 2004*

Return on equity ( ROE)

0.0 0.0 0.0 0.1 0.1 0.1 0.1 -0.1 1.3 0.3 -1.1 1.7 2.4 4.2 3.0 -5.3

-2.1 -2.8 -1.6 -3.7 0.7 0.3 0.0 -0.2 -29.1 -36.3 -29.4 -68.0 12.3 5.8 -0.6 -2.1

1.1 1.2 0.8 0.8 1.1 0.8 0.7 1.2 24.4 26.8 15.3 17.0 20.9 13.6 11.4 19.5

4.8 4.7 3.5 2.7 2.8 2.4 2.6 3.2 38.2 40.7 41.8 27.3 32.4 21.5 20.4 22.5

0.3 0.3 0.2 0.0 0.7 0.5 0.5 0.7 7.0 6.6 5.2 0.3 15.9 11.6 9.8 13.0

NCBs

DFIs

PCBs

FCBs

Total

* Provisional.

Table 5.6 Expenditure-income ratio

by type of banks(Percent)

Bank type 1997 1998 1999 2000 2001 2002 2003 2004*

NCBs 99.4 99.8 100.5 99.4 99.0 98.5 98.8 102.3

DFIs 142.3 180.4 145.2 175.3 89.1 95.9 101.1 104.0

PCBs 85.9 85.3 90.4 90.8 88.1 91.9 93.1 87.1

FCBs 59.7 60.1 67.4 77.7 75.7 78.3 80.3 76.3

Total 95.3 95.4 96.6 99.9 91.2 93.3 93.9 90.9

* Provisional.

Chart 5.7

Aggregate position of income and

expenditure - all banks

Total expenses Total income EI ratio

Billion

Taka

Percent

0

30

60

90

120

150

1997 1998 1999 2000 2001 2002 2003 200485

90

95

100

105


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5.22 NCBs return on equity ratio rose from

-1.1 percent in 1999 to 3.0 percent in 2003

but again declined to -5.3 percent in 2004. In

case of DFIs, the ROE sharply rose from

-68.01 percent in 2000 to 12.3 percent in

2001 and again declined to -0.6 percent in

2003 and -2.1 percent in 2004. The sharp

rise in 2001 was due to booking of net profit

amounting to Taka 1.0 billion in 2001

against net loss of Taka 5.16 billion in 2000

by the DFIs. The huge loss of the DFIs in

2000 was mainly due to making of provisions

by debiting 'loss' in their books of accounts.

Net Interest Income

5.23 Aggregate net interest income (NII) of

the industry has been positive and

consistently increased from Taka 6.3 billion in

1997 to Taka 18.3 billion in 2004. However,

the NII of the NCBs sharply declined from

Taka 3.1 billion in 1999 to a negative amountof Taka 1.2 billion in 2000. The trend

continued and the NCBs' interest income in

2001 was less by Taka 1.8 billion than

interest expenses, and in 2002 by Taka 1.5

billion, in 2003 by Taka 0.3 billion and in

2004 by Taka 1.1 billion. The DFIs had a

negative NII in 1997 and 1999, which was

reversed in 2000 to Taka 1.0 billion and

thereafter was positive in 2001 (Taka 2.7

billion), 2002 (Taka 1.4 billion), 2003 (Taka

1.3 billion) and 2004 (Taka 1.8 billion).

5.24 Although the net interest income of the

NCBs has been negative during the last five

years, the overall industry NII shows a

consistently upward trend. This is because

the rate of increase in NII of the PCBs and

FCBs has been very high over the periodfrom 1997 through 2004. This trend indicates

that the PCBs and the FCBs are charging

interests at very high rates on their lending as

compared to the interest they are paying to

the depositors.

Infrastructure and Operating Results

5.25 A comparative analysis of branches

network, population and operating results by

35


Table 5.8 Net interest income by

type of banks(billion Taka)

Bank type 1997 1998 1999 2000 2001 2002 2003 2004

NCBs 2.7 2.2 3.1 -1.2 -1.8 -1.5 -0.3 -1.1

DFIs -0.1 0.5 -0.1 1.0 2.7 1.4 1.3 1.8

PCBs 1.7 2.3 3.0 6.1 9.2 10.2 12.0 13.7

FCBs 2.0 2.2 1.8 2.5 3.3 3.4 3.6 4.2

Total 6.3 7.1 7.8 8.4 13.4 13.5 16.6 18.3

Chart 5.8

Aggregate profitability-all banks

ROA ROE

Percent

0

2

4

6

8

10

12

14

16

18

1997 1998 1999 2000 2001 2002 2003 2004

Chart 5.9

Aggregate NII of the industry (billion Taka)

Interest income Interest expense

Net interest income

Interestincome&expense

Netinterestincome

0

10

20

30

40

50

60

70

80

90

1997 1998 1999 2000 2001 2002 2003 20040

5

10

15

20

25

30

35

40


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Table 5.10 Liquidity ratio by type of banks(Percent)

Liquid assetsBank types

1997 1998 1999 2000 2001 2002 2003 2004 1997 1998 1999 2000 2001 2002 2003 2004

Excess liquidity

22.7 24.4 25.2 26.5 25.7 27.3 24.4 22.8 2.7 4.4 5.2 6.5 5.7 7.3 8.4 6.8

16.9 16.6 15.7 16.2 15.3 13.7 12.0 11.2 9.7 9.2 8.7 9.9 8.9 6.9 5.8 4.7

24.2 24.8 25.9 24.8 24.2 26.3 24.4 23.1 6.0 6.7 8.0 6.8 6.2 8.5 9.8 8.8

31.2 39.8 51.3 34.7 34.1 41.6 37.8 37.8 11.2 19.9 31.4 14.8 14.3 21.8 21.9 21.9

23.3 25.2 27.0 26.1 25.3 27.2 24.7 23.4 4.5 6.4 8.3 7.5 6.7 8.7 9.9 8.7

NCBs

DFIs

PCBs

FCBs

Total

various types of banks during the last two years(2003 and 2004) has been conducted to indicate

the recent industry trends in these areas.

5.26 Operating expenses of NCBs in 2004

increased by Taka 0.5 billion from the previous

year. In case of PCBs, the operating expenses

increased by Taka 2.2 billion during the same

period with the increase in number of branches

by 40. Expenses of the DFIs also increased

from Taka 2.9 billion in 2003 to 3.2 billion in

2004. Expenses of FCBs were increased in

2004 by 0.1 billion than 2003.

5.27 Table 5.9 further shows that number of

employees per branch was the highest (43) in the

FCBs followed by the PCBs (22). Number of

employees per branch of NCBs was 17 and DFIs

12 in 2004. Expenses per employee of the NCBs

were Taka 182,300 and the DFIs Taka 201,600 in

2004. The NCBs and DFIs incurred loss in 2004.

Their losses per employee were Taka 15,600 and

Taka 12,600 respectively. The PCBs' profit per

employee was Taka 270,800 against expenses

of Taka 4,48,400 per employee. FCBs' expensesper employee were as high as Taka 2.0 million

against per employee profit of Taka 2.5 million in

the year 2004. Evidently, there exists a positive

correlation between the compensation and the

employee output in general.

Liquidity

5.28 Commercial banks deposits are at present

subject to a statutory liquidity requirement (SLR)

of 16 percent inclusive of average 4 percent (atleast 3 percent) cash reserve requirement (CRR)

on bi-weekly basis. The CRR is to be kept with

the Bangladesh Bank and the remainder as

qualifying secure assets under the SLR, either in

cash or in government securities. SLR for the

banks operating under the Islamic Shariah is 10

percent and the specialized banks are exempt

from maintaining the SLR. Liquidity indicators

measured as percentage of demand and time

liabilities (excluding inter-bank items) of the banks

indicate that all the banks had excess liquidity.

36


Table 5.9 Banking infrastructure and operating expenses

Number ofbranches

Number ofemployees

Operating expenses

(billion Taka)

Net profit(billion Taka)

Number ofemployeesper branch

Expensesper employee

(Taka)

Profit peremployee

(Taka)Banktypes

2003 2004 2003 2004* 2003 2004 2003 2004* 2004 2004 2004

NCBs 3,397 3,388 58,630 57,588 10.0 10.5 0.5 -0.9 17 182,300 -15,600

DFIs 1,314 1,328 16,420 15,877 2.9 3.2 -0.1 -0.2 12 201,600 -12,600

PCBs 1,510 1,550 31,905 34,343 13.2 15.4 4.3 9.3 22 448,400 270,800

FCBs 32 37 1,502 1,582 3.0 3.1 2.8 3.9 43 1,959,500 2,465,200

Total 6,253 6,303 108,457 109,390 29.1 32.2 7.5 12.1 18 294,400 110,600

* Provisional.


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5.29 Table 5.10 and Chart 5.10 show that the

FCBs are having the highest liquidity ratios

followed by the PCBs. This situation of constant

surplus of liquidity warrants creation of effective

demand for credit at lower costs.

CAMEL Rating

5.30 Performance indicators of the bankingindustry depict a trend similar to that of the

state-owned banks, which is understandable

due to their predominant market share. Ratings

done on the basis of the various indicators

discussed hereinbefore indicate that financial

performance of the PCBs and FCBs in general

has been better than that of the industry

average. However, 4 of the PCBs rated CAMEL

4 or 5 are still in the problem bank list out of 7

put in this category in the mid-nineties. Activities

of the problem banks are closely monitored by

the central bank with special guidance and care.One such bank was taken off the problem bank

list in June 2003 and 2 others in 2000 and 2001

because of improved performance. Newly 2

banks are included in the problem bank list for

their distressed financial position. At present 6

banks are in the problem bank list.

5.31 Presently Bangladesh Bank is employing

Early Warning System (EWS) of supervision to

address the difficulties faced by the banks in

any of the areas of CAMEL. Any bank found to

have faced difficulty in any areas of operation, is

brought under Early Warning category andmonitored very closely to help improve its

performance. At present, 7 banks are in the EWS.

5.32 Bangladesh Bank is also monitoring the

NCBs through its off-site supervision tools.

Government of Bangladesh (GOB), the owner of

those banks also adequately monitors them. At

present, the NCBs are experiencing huge capital

and provision shortfall, having large amount of

classified loans, low earnings and ineffective

management. Various restrictions have been

imposed by the Bangladesh Bank on the activitiesof the NCBs to put them on right track of business

operation and growth. All the 4 NCBs have been

made to sign Memorandum of Understandings

(MOUs) with the Bangladesh Bank to improve

their performance.

5.33 As of end 2004, CAMEL rating of 12 banks

was 1 or Strong; 15 banks were rated 2 or

Satisfactory; rating of 10 banks was 3 or Fair; 8

were rated 4 or Marginal and 4 got 5 or

Unsatisfactory rating. All the four NCBs had

Marginal rating.

Legal Reforms and Prudential Regulations

Policy on Loan Classification and Provisioning

5.34 In order to strengthen credit discipline and

bring classification gradually in line with the

international standards, it has been decided that

with effect from March 3, 2005: a continuous

credit, demand loan or a term loan which will

remain overdue for a period of 90 days or more,will be put into the " Special Mention Account" and

interest accrued on such loan will be credited to

Interest Suspense Account instead of crediting the

same to Income Account. Loans in the ''Special

Mention Account'' will not be treated as defaulted

loan for the purpose of section 27ka ka (3) of the

Banking Company Act, 1991 and the status of

loan (Special Loan) need not to be reported to the

Credit Information Bureau (CIB) of Bangladesh

Bank. This will help the banks to look at accounts

with potential problems in focused manner.

37


Chart 5.10

Aggregate position of excess liquidity

Percent

Liquidity maintained Excess liquidity

0

3

6

9

12

15

18

21

24

27

30

1997 1998 1999 2000 2001 2002 2003 2004


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Prudential Guidelines for Consumer

Financing and Small Enterprise Financing

5.35 Since credit disbursement in the Consumer

Financing sector has been significantly

increased and credit flow in the Small Enterprise

Financing sector has also been encouraged in

the recent time, two separate guidelines have

been issued to the banks for their better

management of credit disbursed in those two

sectors. However, implementation of these

guidelines will be observed by Bangladesh

Bank's inspection team while conducting their

regular inspection in the scheduled banks.

Single Borrower Exposure Limit

5.36 In order to enable the banks to improve

their credit risk management through restriction

on credit concentration BB has decided to

reduce the single borrower exposure limit from

50% to 35%. The total outstanding financing

facilities by a bank to any single person or

enterprise shall not at any point of time exceed

35% of a bank's total capital subject to the

condition that the maximum fund based creditfacilities do not exceed 15% of its total capital.

In case of export sector, single borrower

exposure limit remains unchanged at 50% of a

bank's total capital but funded facilities has

been fixed at 15% of its total capital.

Customer Complaint Cell

5.37 Banks have been advised to set up

"Complaint Cell" to deal with all sort of

complaints, either received directly by them orreferred through different agencies/institutions,

including BB. BB has also set up a "Complaint

Cell" headed by a Deputy General Manager

(DGM) in its Department of Banking Inspection

(DBI). This Cell will check the performance,

effectiveness and functioning of the Complaint

Cells of the Banks, and monitor the status of

customer complaints. Besides, a new page

regarding complains has been opened in

Website of Bangladesh Bank.

38


Cash Reserve Requirement (CRR)

5.38 The Cash Reserve Requirement (CRR)of the scheduled banks with the Bangladesh

Bank which was fixed on 21 July, 2004 at 4.0

percent of their total demand and time liabilities

(excluding inter-bank items). It was also

mentioned in the circular that this amount of

reserve must not be less than 3% in any single

day. In pursuance of the objectives of

monetary policy, CRR has been increased to

4.5% from 4% of their total demand and time

liabilities effective from March 1, 2005.

However, banks are allowed to maintain CRR

@ 4.5% daily on bi-weekly average basis

subject to the condition that CRR so

maintained should not be less than 3.5% in any

day.

Statutory Liquidity Requirement (SLR)

5.39 The Statutory Liquidity Requirement

(SLR) for the scheduled banks, excepting

banks operating under the Islamic shariah and

the specialized banks, has been re-fixed at16% from 20% on November 08, 2003 and

remained unchanged thereafter. The SLR for

the Islamic banks remained unchanged at 10.0

percent. The specialized banks continued to

remain exempt from the SLR.

Interest Rate Policy

5.40 Since 25 April 1994, interest rate band

for export credit had been fixed between 8.0

and 10.0 percent. From November 10, 2001,interest rate had been fixed at 7% for export

credit of readymade garments, frozen foods

and agro-based industrial products. However,

from 23 February 2003, the same rate had

been applied for export credit of leather made

goods and shoes. From 02 November 2003,

the lending rate for export financing of potato

had been fixed at 8%. Thereafter, interest rate

for all sorts of export credit has been fixed at

7% since January 10, 2004.


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With progressive deregulation of interest rates,

banks have been advised to announce the mid-

rate of the limit (if any) for different sectors andthe banks may charge interest 1.5% more or

less than the announced mid-rate on the basis

of the comparative credit risk. Bangladesh Bank

is keenly monitoring the movements of interest

rates.

Bank Rate

5.41 The bank rate has been revised downward

from 6 percent to 5 percent on 06 November

2003 and remained unchanged as on date.

Activities of Credit Information Bureau (CIB)

5.42 In the backdrop of huge non-performing

loan of the banking sector of the country during

the decade of the 1980s, a full-fledged Credit

Information Bureau (CIB) was set up in August

18, 1992 in Bangladesh Bank under FSRP of

the World Bank. The main objective behind

setting up of the Bureau was to minimize the

extent of default loan by facilitating the banksand financial institutions with credit reports of

the loan applicants so that the lending

institutions do not encounter any credit risk

while extending any lending or rescheduling

facility.

5.43 The workload of the Bureau kept on

increasing in terms of number of requests,

number of borrowers and owners, number of

reporting banks/financial institutions as well as

number of branches. CIB database consists of

detailed information in respect of borrowers,owners and guarantors; the total number of

which was 806,165 (end June, 2005) recording

an increase of 19.97 percent over the previous

period (672,000 as on end June, 2004). The

number of CIB reports supplied during FY05

stood at 377,350 compared to 338,741 in the

FY04 showing an annual increase by 11.4

percent. As per existing service standard, the

credit reports are supplied within 5 working days

of receiving the request the volume of which

was around 1300 per day during FY05.

5.4 The achievement of Credit Information

Bureau in fulfilling its objectives of bringing

down the extent of default loan has been foundquite remarkable. As per reporting of scheduled

banks, the classified loan continued to decline

during the FY05. The classified loan decreased

to 14.71 percent in June 2005 compared to

23.06 percent in the preceding year (end June

2004). A few years back, the percentage of

such classified loan was 34.9 percent (in

December 2000). It may be mentioned that with

effect from June 2004 quarter the amount of

'Write-off' was excluded from both classified and

outstanding loans while evaluating the percentage

of classified loans.

5.45 In order to ensure prompt collection of

credit data from the sources as well as

instantaneous delivery of credit report to the

users by applying latest computer technology,

the CIB would soon undertake a project aimed

at implementing on-line services between the

Bureau and the lending institutions by using

internet. The project of implementing on-line

connectivity between CIB and the head offices

of the banks and financial institutions is

expected to complete by the year 2006.

Inspection of Banks

5.46 Bangladesh Bank, being the Central

Bank of the country, is entrusted with the

responsibility to regulate and supervise the

banks and financial institutions of the country.

Inspection of banking companies is assigned

to Bangladesh Bank under section 44 of

Bank Company Act 1991. Two departments

of the Bank namely Department of BankingInspection-1 and Department of Banking

Inspection-2 are conducting the inspection

activities. These two departments conduct

on-site inspection on Nationalized Commercial

Banks (NCBs), Specialized Banks, Private

Commercial Banks (including Foreign Banks)

and other institutions including Investment

Corporation of Bangladesh (ICB) and Money

Changers. Basically, two types of inspections

are conducted namely (i) comprehensive

inspection and (ii) special inspection. In

39



12/13

comprehensive inspection, overall performance/

conditions of the banks such as capital

adequacy, asset quality, liquidity, earnings,management competence etc. are evaluated.

Based on their performance banks are rated

between 1-5 grades in ascending order.

Inspection is done according to the Annual

Inspection Programme (AIP) chalked out by the

departments well ahead of the beginning of

each calendar year. These departments also

monitor implementation of the suggestions/

recommendations made in the inspection

reports. Special inspections are conducted on

the banks on specific/particular issue(s) as well

as to investigate complaints received from the

depositors, general public or institutions.

Moreover to oversee risk management practice

of the banks/implementation of core risk

management guidelines by the banks, systems

inspection has been introduced from October

2004.

5.47 Commercial banks having CAMEL rating

between 3-5 are inspected every year. Banks

rated 1 or 2 are inspected once in two years.

Branches of scheduled banks covering around50 percent of total loans and advances are

normally brought under the comprehensive

inspection programme every year. Commencing

from 2004, inspections of the banks are

conducted based on four reference dates : 31

December, 31 March, 30 June and 30

September instead of only one reference date

i.e. 31 December of the previous year. This

system has been adopted to enhance the

effectiveness of on-site inspection and to reduce

the time-gap between on-site and off-site

supervision.

5.48 These departments inspected a total

number of 2,131 branches of bank companies

under comprehensive inspection programme

during FY05 including 51 head offices, 629 big

branches and 1,451 small branches. Under the

special inspection programme, a total number

of 1,476 inspections were carried out during

FY05 including 334 inspections on Money

Changers.

40


Non-Bank Financial Institutions (NBFIs)

5.49 NBFIs represent one of the most importantsegments of a financial system and play very

important role in mobilizing and channeling

resources. In Bangladesh, the non-bank financial

sector comprises investment and finance

companies, leasing companies etc. The Non-

Bank Financial Institutions (NBFIs) numbering

28 as of June 2005 (starting from the IPDC in

1981) are regulated by the Financial Institutions

Act, 1993 and the regulations made thereunder.

In view of their increased role in financing

industry, trade and commerce, and housing the

minimum capital requirement of the NBFIs was

raised to Taka0.25 billion as per FID Circular 2,

dated 29th June 2003. NBFIs were directed to

meet up the minimum 50 percent of the deficit in

capital within 30 June 2004 and the rest 50

percent of the deficit within June 2005. Most of

the NBFIs have raised their required capital by

June 2004. All FIs have been asked to raise

their required capital through IPO (Initial Public

Offering) within December 2005. The amount of

total paid up capital and reserve of NBFIs thus

increased to Taka12.46 billion as of June 2005.NBFIs are allowed to collect fund from the call

market up to 15 percent of their total assets for

their investment purpose. The financing modes

of NBIs are long term in nature. Total

investment by the NBFIs up to June 2005 was

Taka60.91 billion, which is 51.33 percent

higher than that of the previous year

(Taka40.25 billion as of June 2004). The rate of

default in the non-bank financial sector is quite

low. As of June 2005, classified loans and

leases of the NBFIs in aggregate were 6.81

percent (1.42% after deduction of provision and

interest suspense).

Financial Institutions Development Project

5.50 The Financial Institutions Development

Project (FIDP), administered by the Bangladesh

Bank, was formally launched in February 2000

as per the Development Credit Agreement

(DCA) signed between the Government of the


13/13

People's Republic of Bangladesh and the

International Development Association (IDA).

The duration of the project was five years.However, the project period has been extended

up to February 2006. The total project cost is

USD 57.69 million (IDA - USD 46.90 million,

GOB - USD5.41 million and others - USD 5.38

million). The major objective of the FIDP is to

promote the development of Financial Institutions

(FIs) and improvements in investment financing

on a sustainable basis through strengthening the

quality of intermediation with a view to

accelerating industrial growth in Bangladesh. The

project consists of two Components : (a)resource mobilization for FIs and (b)

strengthening of FIs through developing and

managing a credit bridge and standby facility.

Besides, establishing a strong capital market, the

FIDP aims to reform the National Savings

Schemes (NSS), activate a secondary market for

treasury securities and devise procedures for the

issuance and marketing of debt instruments.

Credit Bridge and Standby Facility (CBSF) has

already been established. Up to June 30, 2005 a

total of Taka2.4 billion (USD 42.31 million)

has been disbursed to the five Participating

Financial Institutions (PFIs) against 136 sub-

projects. The PFIs in turn have made a repaymentof Taka1.62 billion. Financial and technical

assistance is being provided to those PFIs who

want to mobilize mid term and long term

resources through issuing bonds and debentures.

The PFIs have mobilized resources through

issuing debentures/bonds to the tune of Taka

1328.33 million (IDLC-Taka343.33 million, ULC -

Taka415.00 million, GSP - Taka80.00 million and

IPDC - Taka280.00 million, PFIL-210.00 million).

All the debentures/bonds under the FIDP had to

be issued under private placement due to

regulatory and other impediments. Besides, steps

were taken to create an enabling environment for

the issuance of the securitized debt instruments.

So far three PFIs have been given NOC to form

SPV for the purpose of issuing Zero-coupon

Bonds with a total face value of Taka948.58

million (IPDC - Taka 358.58 million, IDLC - Taka

190.00 million, ULC - Taka400 million). Theprospect of securitizing the receivables of Jamuna

Multipurpose Bridge with the technical support of

FIDP is currently under consideration.

41


bangladesh banking sector regultions

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