Bearish mood prevails over banking sector

The recent London-based BMI research has highlighted the vulnerability of the banking sector of Bangladesh, particularly the state-owned banks. It has pointed out several weaknesses - moderate shocks, underdeveloped risk management systems, weak governance and uneven distribution of loan exposures. These are ominous signs for the country's overall growth prospect. Though various restructuring plans have been taken in the last few years still there is little prospect of improvement in the short-term due to slow progress of those reform initiatives. 

Containing the incessant rise of non-performing loans (NPL) in state commercial banks is another big challenge. The current ratio of bad loans (80 percent of total NPL) to total loans for state commercial and specialised banks is 22.2 percent and 32.8 percent, respectively. These loans are typically unrecoverable, and seriously impinge on the banks' profitability, even leading to bank failure. The government should seriously take the BMI research findings and expedite the reform process to strengthen the loan related risk management system.

The research also apprehends that spiralling threat of extremism might again destabilise the political situation which would have a crippling effect on the banks' credit growth. Earlier, violent conflict between the two major political alliances following the 2014 national elections badly affected the sector. The political parties should rise above their rivalry and jointly fight against the extremist elements which also have adverse effects on the banking sector.