Bangladeshi Banking System

Topics: Bank, Bangladesh, Financial services Pages: 11 (3370 words) Published: June 4, 2011
Bangladesh  Country Report 

The Bangladeshi Banking System 
Summary Opinion 
The Bangladeshi banking system is one of the weakest in emerging Asia, with a weak operating environment contributing to persistently poor performance and solvency issues, especially among the systemically important state‐owned commercial banks (SOCBs). The system is undermined by very weak asset quality, inadequate provisioning for loan losses, poor capitalisation and constrained profitability. The operating environment in Bangladesh is characterised by a weak macro economy and political instabilities, both of which pose significant risks. The weakness in the operating environment is further exacerbated by frequent natural disasters. Bangladesh’s banking system is made up of 48 banks, which include four SOCBs, 30 private commercial banks, nine foreign commercial banks and five development banks. The four SOCBs accounted for 33% of the banking system assets at end‐2007 (1997: 68%). Although the SOCBs are still the most dominant, they are fast losing market share to private banks (52%) and to a lesser extent foreign banks (8%). Despite the various steps taken to turn around the ailing SOCBs — such as privatisation attempts, conversion into limited liability companies (LLCs) and the appointment of new management — progress has been slow. In addition to the challenging operating environment, Fitch Ratings notes that the very weak asset quality in Bangladesh (reported gross NPL ratio of 13% in June 2008) is also influenced by weak standards of corporate governance, underdeveloped risk management systems and directed lending. Asset quality in the SOCB sector is of greater concern given their very high reported gross NPL ratio of 29.3% at end‐ September 2008 (1999: 41%). Fitch also notes that 80% of system NPLs are in the loss category with low probability of recovery, while provision coverage of NPLs was well below the regulatory minimum, as a result of which the system’s net NPL/equity ratio was extremely weak at 105% at end‐2007. The agency also views the ‘valuation adjustment’ created during the conversion of three SOCBs — Sonali Bank, Janata Bank and Agrani Bank — into LLCs in 2007 as a book adjustment as it merely restated the equity position without any actual capital infusion to correct the underlying capital deficiency. In fact even after this ‘valuation adjustment’, the loss category NPLs still exceeded the restated equity position, underlying their technical insolvency. These risks are in fact reflected in the low Individual Ratings of ‘E’ assigned to the four SOCBs rated by the agency. An Individual Rating of ‘E’ indicates a bank with very serious problems, which either requires or is likely to require external support. Although Bangladesh’s banking system is less‐developed it does have a credit information bureau and a deposit insurance scheme which protects deposits up to BDT100,000 (USD1,450); however, the efficacy of both remains to be seen. Whereas prudential regulations governing banks have generally improved over the last few years, Fitch notes that there is further scope for alignment of these regulations with regional norms, especially with regard to asset classification standards which appear lax. While parallel computation of Basel II commenced in January 2009, its implementation is scheduled for January 2010, with the standardised approach for credit and market risks and the basic indicator approach for operational risk, which may put more stress on an already undercapitalised banking system. 

J Anandakumar +65 6796 7234 Arshad Khan +91 22 4000 1733 Ambreesh Srivastava +65 6796 7218 

10 March 2009 

Sovereign Overview 
Bangladesh is a low‐income country with an annual per capita income of less than USD500. It is characterised by widespread poverty (more than 40% of the...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • The Banking System Essay
  • The Development of Banking System in Vietnam Essay
  • Banking System in Malaysia Essay
  • Essay on Banking
  • Comparison of Us and Uk Banking Systems Essay
  • Essay on Inclusive Banking
  • China Mono-Banking System Essay
  • Uk Banking System Essay

Become a StudyMode Member

Sign Up - It's Free