Banking Sector in Thesis Paper

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  • Topic: Bank, Commercial bank, Economics
  • Pages : 6 (1967 words )
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  • Published : February 4, 2011
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B A N G L A D E S H

R E S E A R C H

Swinging Banking : Not Very Promising
A u g u s t 1 3 , 2 0 0 2

Not too bad if you may claim so ….. The Bangladesh banking sector relative to the size of its economy is comparatively larger than many economies of similar level of development and per capita income. The total size of the sector at 26.54% of GDP dominates the financial system, which is proportionately large for a country with a per capita income of only about US$370. The non-bank financial sector, including capital market institutions is only 3.22% of GDP, which is much smaller than the banking sector. The market capitalization of the Dhaka Stock Exchange was US$1,025 million or 2.19% of GDP as at mid-June 2002. In contrast, the size of the total financial sector in India, including banks and non-banks as well as the capital market is 150% (March 2002) of its GDP, with commercial banks accounting for 58.3% of GDP.i Access to banking services for the population has improved during the last three decades. While population per branch was 57,700 in 1972, it was 19,800 in 1991. In 2001 it again rose to 21,300, due to winding up of a number of branches and growth in population. Compared to India’s 15,000 persons per branch in 2000, Bangladesh is not far behind in this regard. This indicates that access to the banking system in the country is not a significant problem. However the story tells a different tale The finance sector remains predominantly bank-based, accounting for 96% of the sector’s resources. While there are sound banks, based on IAS, the banking sub-sector as a whole is technically insolvent. Consolidated data reported tend to have significantly understated provisions. Adjusting partly for the understatements, the financials of the banking sub-sector are characterized by about 32% NPL ratio, US$720 million shortfall in provisions, US$1,106 million shortfall in provisions and capital combined, and losses of US$685 million after adjusting for the shortfall in provisions in mid 2001. The adjustments would possibly be larger if provisioning as followed by major international auditors were applied. State-owned Commercial Banks (SCBs) also have disproportionately large and unexplained “Other Assets” that include, in particular, jute and other subsidized credits, suspense accounts and various receivables. To what extent these questionable assets have been provisioned remains unclear. Wonder why so ? The large capital deficiency, operating inefficiencies and recurring losses of the banking system is the product of a combination of different factors including: a) weak corporate governance (bank-wide structures, policies, systems and procedures, especially credit risk management); b) deficient executive and staff banking skills; c) absence of professionalism, accountability and

incentives; d) policy lending (particularly to jute and other loss-making State-owned Enterprises or SoEs); e) political patronage and directed lending in the SCBs; f) insider lending in private local banks; g) pervasive systemic default culture; h) non-cost recovery for governmental services extended; i) loss-making branches; j) unproductive assets; k) politically-influenced recruitment, extraordinary staff redundancy, bank-wide security of tenure, and disruptive union activity; and l) poor IT/MIS that hinders efficient and cost-effective operations. Who is who ….. At mid-2001, the US$13 billion stock of financial market instruments was predominantly tilted toward banking products (72.2%), basically in the form of term deposits, and secondarily toward non-bank debt instruments (27.8%), with private sector obligations accounting for 0.4% of all non-bank debt instruments and GOB-related instruments making up for the balance of 99.6%. Of the GOB-related instruments, Savings Schemes, redeemable instruments with disproportionately high yields, accounted for 59.3%, the balance made up of T-Bills (26.7%) and Treasury Bonds (13.9%). Private sector...
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