General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
June 08, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Bangladesh. Directors emphasized that stronger banking regulation and supervision is necessary to address banking sector weaknesses. Noting the high non-performing loans (NPLs), particularly in state-owned commercial banks (SOCBs), they called for an accelerated resolution of the NPLs, a shift toward risk-based supervision, and strengthened bank internal controls and risk management systems. Directors encouraged the authorities to avoid regulatory forbearance and put in place a robust resolution framework for troubled banks.

The staff report highlights that banks continue to struggle despite the strong economy. The authorities viewed the overall banking sector as stable, despite capital adequacy concerns in a few banks. The ratio of NPLs to total loans remains high and continues to grow. Private commercial banks (PCBs) remain well-capitalized at nearly 12% of regulatory assets, but two PCBs are below the 10% regulatory requirement. For SOCBs, the average capital ratio is only 5.6%, with three out of six SOCBs having capital levels below the regulatory requirement. The recent amendment of the Bank Company Act has also raised governance concerns, as it increases the number of family members allowed to sit on private bank boards from two to four. The tenure of directors has also been extended from six to nine years. Additional banking licenses under consideration could further challenge banking supervision and regulation.

Macro-prudential measures have been used to restrain unproductive lending, including closer surveillance of banks’ adherence to Asset Liability Management and Forex Risk Management guidelines, strict surveillance of end use of bank loans, and encouragement of banks to limit medium- and long-term investment loans to corporate borrowers. The authorities pointed out that the monitoring framework of SOCBs has been strengthened, which should gradually improve the situation. Key policy recommendations of IMF are as follows

  • Banking sector weaknesses need to be addressed by strengthening banking regulation and supervision, ending regulatory forbearance, adopting risk-based supervision, and improving banks’ internal control and risk management systems, particularly in SOCBs.
  • NPL resolution needs to accelerate. High NPLs and weak bank governance point to potential financial stability risks from rapid credit growth and call for macro-prudential measures to mitigate these risks.
  • The legal and financial framework needs to be enhanced to expedite the loan recovery process and strengthen creditors’ rights.
  • The authorities need to establish a resolution regime that can be used to resolve banks effectively, in line with the international best practices.
  • Reforming National Savings Certificates should remain a priority for the development of the capital markets.

The selected issues report highlights the risks posed by SOCBs’ and recommends short, medium, and long-term reforms to deal with this issue. The report reveals that the asset share of the SOCBs in total banking sector assets has declined from about 55% in 1993 to nearly 27% in 2017. Not only do the SOCBs have a significantly higher share of NPLs, but their capital adequacy ratio (CAR) is much lower compared to the PCBs and the FCBs. The SOCBs’ CAR has been declining (below 6%) despite several rounds of recapitalization by the government. In contrast, the PCBs’ CAR has been relatively stable and above the minimum CAR requirement of 10%. The NPL problem is particularly acute for the SOCBs, with NPLs approaching 30% of total loans and provisioning being below required levels. The IMF recommendations to deal with SOCB issues include the following:

  • In the short to medium term, BB and the government should strictly enforce the existing bank regulations and rules. The current practice of no punitive action for not observing the annual performance agreement with the Ministry of Finance or the failure to meet the goals set out in the MoUs with Bangladesh Bank should be reconsidered. In performing its regulatory responsibilities, BB should be free of political pressure. Independent management should be put in place in the SOCBs that meet the fit and proper criteria. The SOCBs should be gradually recapitalized to meet the regulatory capital standards.
  • The authorities should formulate and implement a long-term plan for SOCBs and their role in the financial system. The government should consider the reduction of the number of the SOCBs by either merging or privatizing some of the existing SOCBs. In the long run, there could be one or two SOCBs, financed from the budget, that would be tasked with pursuing specific mandates given by the government. Other SOCBs could be divested.

 

Related Links

Keywords: Asia Pacific, Bangladesh, Banking, Securities, Article IV, NPLs, Capital Adequacy, IMF

Related Insights
News

EBA Finalizes Guidelines on the STS Criteria in Securitization

EBA published the final guidelines that provide a harmonized interpretation of the criteria for a securitization to be eligible as simple, transparent, and standardized (STS) on a cross-sectoral basis throughout EU.

December 12, 2018 WebPage Regulatory News
News

OSFI Sets Domestic Stability Buffer for D-SIBs at 1.75%

OSFI set the level for the Domestic Stability Buffer at 1.75% of total risk-weighted assets, as calculated under the Capital Adequacy Requirements (CAR) Guideline.

December 12, 2018 WebPage Regulatory News
News

FSI Publishes Paper on Proportionality in Insurance Solvency Rules

FSI published a paper on proportionality in the application of insurance solvency requirements.

December 11, 2018 WebPage Regulatory News
News

BCBS Updates Framework for Pillar 3 Disclosure Requirements

BCBS published the updated framework for Pillar 3 disclosure requirements.

December 11, 2018 WebPage Regulatory News
News

EBA Issues Revised List of Validation Rules for Reporting

EBA revised the list of validation rules in its implementing technical standards on supervisory reporting.

December 11, 2018 WebPage Regulatory News
News

IMF Reports Assess the Stability of Financial System in Brazil

IMF published a report on the results of the Financial System Stability Assessment (FSSA) on Brazil.

December 11, 2018 WebPage Regulatory News
News

FED Governor Examines Pros of Imposing Capital Buffers on Large Banks

At the Peterson Institute for International Economics in Washington D.C., the FED Governor Lael Brainard summarized the financial stability outlook, highlighted areas where financial imbalances seem to be building, and touched on the related policy implications.

December 07, 2018 WebPage Regulatory News
News

US Agencies Propose Rule on Appraisals for Real Estate Transactions

US Agencies (FDIC, FED, and OCC) proposed a rule to increase the threshold level at or below which appraisals would not be required for the residential real estate transactions from USD 250,000 to USD 400,000. Comments will be accepted for 60 days from publication in the Federal Register.

December 07, 2018 WebPage Regulatory News
News

EBA Single Rulebook Q&A: First Update for December 2018

This week one answer was published as part of the Single Rulebook Questions and Answers (Q&A).

December 07, 2018 WebPage Regulatory News
News

FED Updates Reporting Form and Instructions for FR Y-14Q

FED published the updated reporting form FR Y-14Q for Capital Assessment and Stress Testing, along with the associated instructions.

December 06, 2018 WebPage Regulatory News
RESULTS 1 - 10 OF 2325