No bank rated as strong
Industry Report: The banking sector of Bangladesh has passed the 2019 as a period of internal consolidation to sustain the achievements. Bangladesh Bank (BB) has also amended and adopted some prudential policies and regulatory measures to help the banking sector in its quest to attain sustainability. The major prudential policies and regulatory measures taken, but not limited to, were as follows: adaptation of guidelines for Internal Credit Risk Rating System, re-fixation of educational qualification of CEO, policy for Off-shore banking operation of banks, investment in long term infrastructure projects and investment in non-listed securities by banks, amendments of loan write-off policy, loan classification and provisioning policy, policy to provide incentive to good borrowers, Risk Management guidelines for banks and regulation regarding investment in capital market by banks.
It is expected that amendments and adaptation of these policies and regulatory measures will help to overcome the limitations and enhance the strive towards the stability of the banking sector. The performance of the Risk Management Committee at the board level of banks is being evaluated regularly by BB.
As a part of supervisory activities, regular and special on-site inspections have been conducted throughout the year by the central bank. Moreover, special monitoring has been conducted by BB to oversee the liquidity level of the banking sector which results in a sufficient level of aggregate excess liquidity at the end of 2019. Besides, a part of continual effort, steps have been taken to reduce the overall non-performing loan (NPL) of the sector. At the end of 2019, the overall Capital to Risk weighted Asset Ratio (CRAR) stood at satisfactory level which indicates a more resilient banking sector.
Banking Sector Performance
The performance of the banking sector described the provisional data in most cases, is best comparable with the year-end data rather than fiscal year based data. To make a reasonable comparison, end June 2019 data has also been provided on the basis of availability.
Depending on the ownership structure, there are four categories of scheduled banks in Bangladesh:
01. state-owned commercial banks (SCBs)
02. state-owned development financial institutions (DFIs)
03. private commercial banks (PCBs) and
04. foreign commercial banks (FCBs)
Total number of scheduled banks operated in 2019 was 57. Two (02) new banks have received license but their operation and started operations in the later part of 2019. Further, two more banks have got BB license but they are yet to start operation. The number of bank branches increased to 10,286 at the end of December 2019 from 9,955 of December 2018. On the other hand, depending on the mode of operations (e.g. Conventional and Islami Shariah based), there are three types of banks:
a. full-fledged conventional banks
b. full-fledged Islami Shariah based banks and
c. banks with dual operation
In 2019, the SCBs held 25.6 percent share of the total assets which was 25.9 percent in 2018. PCBs’ share of the total assets slightly decreased from 67.1 percent in 2018 to 67.0 percent in 2019. The FCBs held 5.2 percent share of the total assets in 2019, showing an increase of 0.6 percentage point over the previous year. The DFIs’ share of the total assets was 2.2 percent in 2019 against 2.4 percent in 2018. At the end of December 2019, total asset of banking sector was Tk 14,572.9 billion which was 11.59 percent higher than the previous period year.
Total deposits of the banking sector stood at Tk 10798.7 billion in 2019 which was Tk 9874.9 billion in 2018, showing an increase of 9.36 percent. From the year 2018 to 2019, considering the share in total deposit of the banking sector, SCBs’ share decreased from 27.3 percent to 26.6 percent, PCBs’ share increased from 65.9 percent to 66.0 percent, FCBs’ share increased from 4.0 percent to 4.8 percent and DFIs’ share decreased from 2.8 percent to 2.6 percent.
Banking network by branches
As on December 2019, total number of branches of the 57 scheduled banks were 10,396. Among these, 48.35 percent (5027) of the bank branches were in rural areas and the rest were in urban areas. The SCBs had 1994 rural branches and 1765 urban branches. Specialized banks had 1125 rural branches and 350 urban branches. Private commercial banks had 1908 rural branches and 3186 urban branches. Foreign commercial banks have 68 urban branches and no rural branch.
In 2019, total assets of the banking sector stood at Tk 14,572.9 billion showing an increase of 11.59 percent over the total assets in 2019. During this period, the SCBs’ assets rose by 10.43 percent and that of the PCBs’ increased by 11.55 percent. The aggregate banking sector assets consisted of Tk 9,229.0 billion as loans and advances (63.33 percent of total assets), Tk 139.9 billion as cash in tills including foreign currencies, Tk 834.9 billion as deposit with BB including foreign currencies, Tk 1,643.1 billion as investment in treasury securities and Tk 2,726.0 billion as other assets during the period.
Deposits continued to be the main sources of funds of the banking industry and constituted 74.10 percent of the total amount of liability and shareholders’ equity in 2019. Total shareholders’ equity of the banks was Tk 930.97 billion in 2019 as compared to Tk 910.31 billion in 2018
Capital adequacy focuses on the total position of bank’s capital and the protection of depositors and other creditors from the potential losses that a bank might incur. It helps absorb possible losses due to credit, market and operational risks that a bank might be exposed during its normal course of business. Under Basel-III, banks in Bangladesh are instructed to maintain the Minimum Capital Requirement (MCR) at 10.0 percent of the Risk Weighted Assets (RWA) or Tk 5.0 billion as capital, whichever is higher. The aggregate amount of regulatory capital of the banking sector was Tk 986.93 billion as on December 2018 which increased to Tk 1025.60 billion at the end of December 2019.
The Capital to Risk Weighted Assets Ratio (CRAR) by type of banks observed that the CRAR of SCBs, PCBs and FCBs, on 31 December 2019, were 10.34, 12.80 and 25.92 percent respectively. Both the DFIs failed to maintain MCR on risk weighted assets basis. Besides, 1 SCB, 2 PCBs and 1 FCB could not maintain the minimum required CRAR. The CRAR of the banking industry as a whole was 12.06 percent at the end of December 2019 as against 10.83 percent at the end of December 2018. The CRAR of the banking sector was 11.74 percent at the end of December 2019.
The most important indicator to demonstrate the asset quality is the ratio of gross Non-Performing Loans (NPLs) to total loans and net NPLs to net total loans. At the end of December 2019, the gross NPL ratio of the banking sector stood at 10.3 percent.
PCBs had the lowest and SCBs had the highest gross NPL ratio during the period. PCBs’ gross NPL ratio was 5.5 percent, whereas those of SCBs, FCBs and DFIs were 30.0, 6.5 and 19.5 percent respectively at the end of December 2019. The ratio of gross NPLs to total loans and advances indicates a mixed trend in the banking sector during 2011-2019.
The NPL ratio of the sector started to decline gradually from 2008 until it reached at 6.1 percent in 2011. But the ratio sharply increased in 2012 mainly due to adaptation of new loan classification policy. From 2013, a fluctuating trend of NPLs was observed. At the end of December 2019, it stood at 11.7 percent.
Comparatively poor assessment and inadequate follow-up and supervision of the loans have eventually resulted into the current situation of poor asset quality of SCBs and DFIs. However, various measures (i.e. strengthening of recovery unit, special recovery program, etc.) for increasing recovery against loans have been taken by the banks. Besides, several policy initiatives have also been taken by BB to reduce NPLs through restructure, rescheduling, recovery, one time exit and write-off in 2019.
The Net NPL ratio of the banking sector was 2.2 percent in 2019 for the overall banking sector. The net NPLs ratios were 11.3, 5.7, 0.4 and 0.7 percent for the SCBs, DFIs, PCBs and FCBs respectively at the end of December 2019. Net NPL ratio of the sector stood at 2.5 percent at the end of December 2019.
During this period, the amount of NPLs of SCBs, DFIs, PCBs and FCBs have increased by Tk 369.5 billion, Tk 5.8 billion, Tk 319.7 billion and Tk 19.4 billion respectively. As of December 2019, the NPL of the banking sector was Tk 1124.2 billion. The aggregate amount of NPLs, the required provision and the actual provision maintained by the banks during the period 2009 to 2019.
During the year 2009 and 2011, there were provision shortfall against NPLs in the banking sector. In 2009 and 2011, provision maintenance ratios were 102.3 and 103.0 percent respectively. The ratio showed declining trend from 2014 to 2017 and in 2018 the situation was slightly improved with the ratio stood at 88.4 percent. As of December 2019, provision maintenance ratio of the banking industry was 87.10 percent. It is observed that DFIs, PCBs and FCBs, except SCBs, were able to maintain required provision against loans from 2018 to 2019. PCBs along with SCBs could not maintain required provision in 2019. However, provision maintenance ratio of SCB is in increasing trend.
In order to rectify an unnecessarily and artificially inflated size of the balance sheet, a uniform guideline for loan write-off was introduced in 2003. A new policy was introduced in February 2019 in this regard via BRPD circular no. 01 dated February 6, 2019. Banks may write off bad/loss loans complying with the conditions covered by the new policy guidelines.
Sound management is one of the important pre-requisites for the strength and growth of any financial institution. Although there is no direct means to measure management soundness but total expenditure to total income, operating expenses to total expenses, earnings and operating expenses per employee and interest rate spread are generally used to determine management soundness of a financial institution. Besides, issues such as technical competence and leadership of mid and senior level management, compliance with banking laws and regulations, compliance of sound internal policies, ability to implement strategic plan and undertake timely initiatives, etc. are taken into consideration to measure the quality of management.
The Expenditure to total Income (EI) ratio of banking sector was at 76.6 percent at the end of December 2019. The EI ratio of the DFIs was the highest among the bank categories in 2019 which was mainly attributable to higher operating expenses. The EI ratios of the SCBs, PCBs and FCBs were 80.5 percent, 76.7 percent and 47.5 percent respectively, showing a decreasing trend in SCBs and increasing trend in other two categories from 2016-2018. The decreasing trend in EI ratio of SCBs indicates some improvements in the level of efficiency of those banks. At the end of June 2019, the EI ratio of banking industry, however, stood at 81.3 percent.
Earnings and Profitability
Various indicators are used to determine earnings and profitability, the most representative and widely used ones are return on assets (ROA), return on equity (ROE) and net interest margin (NIM). Earnings as measured by ROA and ROE differ among the bank categories. ROA and ROE of four types of banks during 2010- 2019 analysis reveals that the ROA of the SCBs and DFIs were less than the industry average. The ROA of SCBs further decreased in 2019. On the other hand, after showing an increasing trend from 2012 to 2016, ROA of PCBs has gradually declined. Though ROA of FCBs showed a decreasing trend from 2014 to 2018 but it always remained in a strong position. ROA of the banking sector stood at 0.30 percent in 2019.
The ROE of the SCBs stood at -29.61 percent in 2018. It has drastically dropped in 2019 as compared to 2018. ROE of DFIs also fell down to negative 13.47 percent. ROE of PCBs decreased to 10.98 percent in 2018. ROE of FCBs has declined since 2014 but in 2018, it increased to 12.42 percent. ROE of the banking sector stood at 4.68 percent in 2019.
The Net Interest Margin (NIM) of the banking industry stood at 3.22 percent in 2019 which was 3.13 percent in 2018. The NIM for the SCBs and PCBs inched up whereas for DFIs and FCBs, it decreased in 2019 compared to 2018. Analysis of the indicator reveals that NIM for PCBs and FCBs was higher than the industry average. NIM for SCBs was negative (-0.3) in 2013, afterwards it showed a mixed trend during 2014-2019.
However, NIM for overall banking sector was significantly high in 2014, afterwards it exhibited broadly a downward trend upto 2017 before it increased again in 2019. NIM for overall banking sector stood at 2.99 percent at the end of 2019.
Effective liquidity management helps to ensure bank’s ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents’ behavior. Indicators like advance-deposit ratio (ADR), statutory liquidity ratio (SLR), interbank call money rate, and repo rate show the real picture of liquidity of the banking sector. On the other hand, one can evaluate bank’s strength to withstand against any liquidity stress situation through liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) by assuming a hypothetical scenario.
Overall advance deposit ratio (ADR) in the banking sector stood at 77.5 percent in 2019.The prudential limits of ADR for Conventional and Islamic Shariah based banks were 83.5 percent and 89.0 percent respectively (these limits are reset at 85.0percent and 90.0 percent respectively from 2019).
All scheduled banks have to maintain Cash Reserve Ratio (CRR) averaging 5.5 percent daily on a biweekly basis against average total demand and time liabilities (ATDTL) of the second preceding month, with an obligation to maintain daily minimum 5.0 percent cash against the same ATDTL held by the bank. The current rate of SLR (statutory liquidity reserve) for conventional banks is 13.0 percent of ATDTL. In case of Islamic Shariah based banks, the rate of SLR is 5.5 percent of their ATDTL. Three banks (two specialized banks and BDBL) are exempted from maintenance of SLR, but these banks have to maintain CRR at the same rate like other scheduled banks. Banks maintain CRR with Bangladesh Bank in cash. 5.27 Banks having Off-shore Banking Operation (OBO) have to maintain CRR and SLR for the liabilities arising from their operation at the same rate applicable for Domestic Banking Operation (DBO) from 01 September 2019. A circular in this regard was issued on February 2019.
FCBs have the highest ratio followed by the SCBs. The ratio for DFIs is shown zero as they do not need to maintain SLR.
In 2019, the LCR in the banking sector as a whole, was 177.28 percent (against minimum requirement of 100 percent), indicating that almost all the banks had a reasonable buffer of high-quality liquid assets to cover the cash outflow for a minimum of next 30 calendar days under stressed scenario. In 2019, the NSFR in the banking sector as a whole, was 111.56 percent, indicating that banks are more depended on stable funding rather than volatile fund to expand their business activities.
In 2019, out of 57 banks in Bangladesh, 08 PCBs operated as full-fledged Islami banks and 15 conventional banks (including two FCBs) were involved in Islamic banking through Islami banking branches. The Islami banks have continued to show strong growth as reflected by the increasing market share in terms of assets, financing and deposits of the total banking system.
Total deposits of the Islami banks and Islami banking branches of the conventional banks stood at Tk 2321.3 billion at the end of December 2019 which accounted for 20.8 percent of total deposits (Tk 11165.3 billion) of the banking sector.
On the other hand, total credit of the Islami banks and the Islami banking branches of the conventional banks stood at Tk 2264.6 billion, contributing of 24.5 percent of total credit (Tk 9246.4 billion) to the banking sector.
Risk Based Capital Adequacy (RBCA) for Banks
According to the road map of the phase-in arrangements, December 2019 is the final timeline for the implementation of Basel III framework by the banks. Basel III framework requires increasing the level as well as quality of capital that banks must hold. Banks are expected to maintain a minimum total capital ratio of 10.0 percent, where 6.00 percent is to be maintained as Tier-1 capital. Besides, all banks must hold Common Equity Tier 1 (CET1) capital (the highest quality and most loss absorbing form of capital) in an amount of at least 4.50 percent of total Risk Weighted Assets (RWA) at all time.
Banks have been maintained capital adequacy following new Basel III accord from the quarter ended in March 2015. It is found that Capital to Risk Weighted Asset Ratio (CRAR) of the banking industry stood at 11.74 percent at the end of 2019 while CET1 was 8.06 percent which accomplished Basel III Capital Adequacy Requirements. However, at individual level, 6 and 10 banks out of 57 schedule banks failed to maintain CET1 and minimum capital requirements, i.e CRAR respectively.
Under Basel III, banks will have to build up additional Capital Conservation Buffer (CCB). Maintenance of CCB has started from 1.875 percent in 2018 and will end up with 2.50 percent in 2019. CCB of the banking industry stood at 1.74 percent at the end of 2019. Besides, at individual level, 31 banks have already fulfilled the CCB requirements. In order to avoid building-up excessive on and off-balance sheet leverage in the banking system, Bangladesh Bank introduced the minimum requirement of Leverage Ratio as 3 percent. This ratio of the banking industry stood at 4.84 percent at the end of 2019 where at individual level, 48 banks have already fulfilled the minimum requirement.
Internal Capital Adequacy Assessment Process (ICAAP), as a part of the implementation of Pillar II of Basel III, is going on. Banks have to evaluate their internal processes and strategies to ensure adequate capital resources covering all material risks and submit the ICAAP reports to BB. Supervisory Review Evaluation Process (SREP) inspections are conducted by the concerned departments of BB. Based on the findings of ICAAP reports (base year 2017) and SREP inspection reports as on December 2017, a series of bilateral meeting with the banks had already been completed till May 2019.
It was observed that 46 banks maintained adequate capital in terms of total capital needed under pillar I and pillar II of Basel accord. In addition, it was observed in the last three years that estimated additional capital requirement for residual risk, which arises mainly due to documentation error, was the highest among the pillar II risks. Apart from that, strategic risks and appraisal of core risks management practice were the other major concerns for the banks.
Banks were advised to take necessary measures based on the guidelines of central bank.
With a view to facilitating the existing business environment and aligning with the macroeconomic cycle, amendments were brought in the objective criteria of loan classification policy of BB declared in 2013. A circular has been issued in this context on April 21, 2019 from BB.
Supervision of Banks
CAMELS rating continue to be one of the major supervisory tools for evaluation of banks. However, quest for developing more effective supervisory tools is going on to evaluate the rating. For example, improving the comprehensive risk management rating of banks as part of risk-based supervision is under process.
According to the threat bearing evaluation of the performances of different banks operating in Bangladesh; no bank performs ‘strong’ rating during the year 2019, while 40 banks perform ‘Satisfactory’ rating, 8 banks perform ‘Fair’ rating, 7 banks perform ‘Marginal’ rating and two banks perform ‘Unsatisfactory’ rating.
With a view to promoting and maintaining soundness, solvency and systematic stability of the financial sector as well as protecting the interest of depositors, BB carries out two types of supervisory activities namely
(i) off-site supervision and
(ii) on-site inspection.
Department of Off-site Supervision (DOS) of BB is accountable for conducting off-site supervision of banks. The department along with the prevailing tools and procedures for intensive and rapid analysis of the financial health of the banks has undertaken some more innovative initiatives to strengthen banking supervision during 2019.
Risk Management Activities
BB has revised six core risks management guidelines to ensure robustness, efficiency and effectiveness of risk management systems for the banking sector. At present, BB is monitoring the implementation of various instructions of those guidelines by banks. Besides, the guideline issued in 2012 named ‘Risk Chapter-5 Banking Sector Performance, Regulation and Bank Supervision 44 Banking Sector Performance, Regulation and Bank Supervision Chapter-5 45 Management Guideline for Banks’ has been revised and already been put into effect to facilitate banks in adopting contemporary methods to identify, measure, monitor and control the risks and improve their resilience capacity.
BB assigns a comprehensive risk management rating for each bank on half yearly basis based on available information in the Comprehensive Risk Management Report (CRMR), minutes of executive risk management committee (ERMC) and board risk management committee (BRMC) meetings, compliance status of BB instructions submitted by the concerned bank and other sources.
Under the continuous supervision and surveillance system, the overall financial condition of the banks operating in Bangladesh is monitored throughout the year on the basis of periodic on-site inspections conducted by the concerned departments of BB.
The department conducts on-site inspection on SCBs, DFIs, PCBs (including banks under Islamic Shariah), FCBs and other institutions including Investment Corporation of Bangladesh (ICB) and money changers. These departments conduct mainly two types of inspection, which may be summarized into three major categories like
(i) Comprehensive/ regular/ traditional inspection
(ii) Core risks evaluation and
(iii) Special/surprise inspection.
The overall performance of the banks (such as capital adequacy, asset quality, liquidity, earnings, management competence, etc.) is evaluated in a comprehensive inspection and banks are rated from “1” to “5” scale in ascending order based on the evaluation. The on-site inspection departments also monitor the compliance of the suggestions or recommendations made in the previous inspection reports. Inspection is also conducted to examine the compliance of the core risk management guidelines on Asset Liability Management, Credit/Investment Risk Management, Internal Control & Compliance, and Information Systems Security issued by Bangladesh Bank. Special/surprise inspections are conducted for specific purposes or to investigate complaints received from the banks’ customers.
During 2019, DBI-1 conducted a total of 875 inspections on 29 banks, among which 402 were comprehensive inspections and 473 special inspections. Head offices/country offices (FCBs) of the banks as well as one branch of each bank have been taken under the purview of the core risk inspection. Moreover, to review the accuracy of the statement of ICAAP of banks, the department carried out inspections in this regard. The department also arranged meeting of Supervision Committee of BB on bi-monthly basis presided over by the Deputy Governor, in-charge of major supervision departments, where different policies and operational issues covering supervision were discussed.
During 2019, DBI-2 conducted a total of 684 inspections on 06 State-owned Commercial Banks (namely Sonali, Janata, Agrani, Rupali, BASIC and BDBL) and Investment Corporation of Bangladesh (ICB). The department conducted 629 comprehensive inspections (on 06 head offices, 62 large branches and 561 small branches) and 50 special inspections including 33 inspections on Core Risks on various branches and Head Offices of the SCBs. It also conducted comprehensive inspection on the Head office and 04 branches of ICB.
DBI-3 has to conduct comprehensive inspection on specialized banks, namely Bangladesh Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKUB), Ansar-VDP Unnayan Bank, Karma-Sangsthan Bank, Grameen Bank, Probashi Kallyan Bank and SME activities of all banks and NBFIs. During 2019, DBI-3 conducted comprehensive inspection on 428 bank branches which included 06 Head Offices, 10 large branches, 412 small branches including 225 SME service centers and SME/Agriculture branches. At the same time, 01 special inspection was conducted along with 09 inspections on Core Risks.
DBI-4 conducts supervision on 08 Shariah-based Islami banks, 03 NRB banks (established by non-resident Bangladeshis) and 09 foreign commercial banks with special emphasis on regulatory and supervisory compliances. During the 2019, DBI-4 conducted a total number of 355 inspections on banks’ head/country offices and branches.
During the period, DBI-4 conducted comprehensive inspections on 105 branches and on 20 head/country offices of the banks. Within this time-frame, the department carried out inspection on Core Risks on 20 branches and 20 head/country offices to review the implementation progress of Core Risk Management Guidelines. Moreover, to review the accuracy of the statement of ICAAP of the banks, the department carried out inspections in this regard.