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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.


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

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