Banking sector trapped by high interest rate, excess liquidity

Unnayan Onneshan, an independent multidisciplinary think-tank, yesterday revealed that the country’s banking sector is caught in a trap by high rate of interest, excess liquidity and declined growth in credit to private sector.
In its latest monthly economic update, Unnayan Onneshan also noted that high fraudulence due to lax oversight is resulting in truncated profits to shareholders.
It observed that politically determined directorship for the state-owned banks as well as nepotism in the appointment of directors of boards of private financial institutions are hindering the maintenance of any prudential system of management in the sector.
Despite the adoption of more than decade-long policy of liberalisation, deregulation and privatisation in the sector, the research organisation finds that the rate of interest and its spread are still too high to facilitate higher private investment which remained low for the last couple of years.
Unnayan Onneshan observed that captured governance through politically determined directorship for the nationalised banks, and family and friends domination in the board rooms of the private sector banks, meager actions against the perpetrators, and slack surveillance by the central bank hinder to maintain any prudential system of management.
Pointing to the increased non-performing loans and low returns on asset and equity, the think-tank also said that the sector is inundated with severe structural rigidities resulting in the disappointment of risk management in the sector.
During the period from January to April of FY 2013-14, the average rate of interest has been calculated at as high as 13.35 per cent and interest rate spread at 5.14 per cent, causing further decline in private investment.
Referring to the piling up of excess liquidity in the banks to the dispirited investment environment in the country, the Unnayan Onneshan reckons 64.09 per cent increase in the excess of liquidity between the periods of November 2013 to March 2014. Excess of liquidity in the banking system amounted to Tk 136201.24 crore at the end of March 2014, whereas the amount was Tk 83000 crore in November 2013.
Noting the linkage between expansion of credit and growth in investment, the Unnayan Onneshan notes that decline in the rate of growth in credit will further drag down investment and consequentially slide down the expansion of the gross domestic product (GDP).
As regards the public and private sector credit, the think tank states that domestic credits recorded a decrease of 11.32 per cent at the end of March 2014 over March 2013 against the increase of 11.86 per cent in corresponding period of the previous year. Growth of credit in private sector registered at 11.46 percent in March 2014 over March 2013 and witnessed lower than the growth of 12.72 percent at the same time of the previous year.
The research organisation pointed out that the disbursement of industrial term loan stood at Tk 9283.50 crore in the third quarter of the FY 2013-14, which is the lowest among the last five quarters.
The rates of growth of agricultural credit disbursement and recovery have been experiencing lower trend as well as negative rate of growth after December 2013. The rate of growth of the disbursement of the agricultural credit stood at -6.56 percent, 3.60 percent and 21.86 per cent in February, March and April of 2014 respectively. On the other hand, recovery of the agricultural credit has been increasing by an insignificant amount, says the think-tank.
Besides the incidences of large scale scams, the risk management have weakened to a dismal proportion, the research organisation says evincing that the non-performing loans have increased to 10.5 percent in March 2014 from 8.9 in December 2013.
The overall return on assets (ROA), which measures the efficiency of the management in generation of earning to assets, stood at 0.9 per cent in 2013 from 0.60 per cent in 2012, whereas the rate was calculated at 1.3 per cent in 2011. The return on equity (ROE), which is the amount of net income returned as a percentage of shareholders’ equity, reached 10.8 per cent in 2013, from 8.2 per cent in 2012.
The Unnayan Onneshan recommended the government for improvement in supervision and regulatory capacity of the central bank and streamlining of enforcement of prudential guidelines in order to check the incidences of scams and fraudulence and thus to ensure efficacy of risk management in the banking system.
“Besides, a farsighted harmonization of macroeconomic policies through adopting a monetary policy that will facilitate private investment and curb inflationary pressure and a fiscal policy that will channel adequate resources into productive sectors is required to reinvigorate the management of banks and recover credibility in the sector”, it said.