banking sector reforms in bangladesh and its impact · gradation of the banking system is must for...
TRANSCRIPT
Banking Sector Reforms in Bangladesh and
Its Impact
Muhammad Mustafizur RahmanMuhammad Mustafizur Rahman
Examination CommitteeDr. Juthathip Jongwanich
Dr. Sundar VenkateshDr. Sununta Siengthai
o Objectives of the Study
o Research Methodology
o Background of the Reforms
o Banking Sector Reforms in Bangladesh
o Impacts of Reforms on
Agenda of the Presentation
o Impacts of Reforms on
• Financial Development
• Performance of Banking Sector
o Conclusions and Policy Inferences
o Review the banking sector reform programs;
o Assess the development of the financial system;
o Compare the financial performance of the banking system; and
Objectives
banking system; and
o Suggest some policy measures for strengthening the restructuring mechanism.
o Banking sector is divided into four groups
o Main sources of data are secondary
o Data collected from different sources are compared with those of BB departmental database
Research Methodology
database
o Development in the financial system is assessed by time series data since 1993.
o Trend analysis of time series data since 1997 is done to indicate the banks' performance.
o Banks' performance is assessed using the components of CAMEL framework.
Background of Reform
1972 to 1982
o Branches increased
o Population per branch reduced
o Poor credit analysis
o Aim to achieve economic objectives of govt.
o Rigid government o Poor credit analysis
o Lending rates were low
o Poor debt recovery
o Profitability declined
o Operational efficiency deteriorated
o Rigid government control
o Fixed interest rates
o Directed credits
o Directed expansion of branches
Background of Reform
1983 to 1989
o Customer service improved
o Undue influence of the vested interest groups
o Two NCBs denationalized
o PCBs allowed to operate
o Excessive government interference o Profitability of the
industry declined
o The four NCBs were technically insolvent
interference
o Regulations based on economic consideration
o Absence of prudential regulation
o Inadequate legal support for debt recovery
Instigation of Reforms
National Commission on Money, Banking and Credit was formed in 1986 in order
o to identify the major problems, and
o to suggest remedial measures for the efficient management of the banking systemmanagement of the banking system
Reforms Programs
Financial Sector Reform Program
Objectives
o To remove distortions and bringcompetitiveness in the financial sector,
o To make NCBs commercially viable forsubsequent privatization, and
o To help PCBs to increase their marketo To help PCBs to increase their marketshare in total commercial banking.
Commercial Bank Restructuring Project
Objectives
To identify the urgent course of actions
needed for continuing the development of
commercial banks.
Major Reform initiatives
Policy
Reforms
o Risk-Based Capital adequacy
o Loan Classification and Provisioning
o Credit Risk Grading
o Interest Rate Deregulation
o Performance Planning System
Institutional
Reforms
o Off-site Supervision
o Credit Information Bureau
o Large Loan Reporting System
Legal
Reforms
o The Banking Companies Act, 1991
o Artha Rin Adalat Act, 1990
o Bankruptcy Act, 1997
Impact of Reforms
Financial Sector Development
o Financial Deepening
• Size and Depth
• Mobilization of savings
• Improvement in the cash flows towards the banking system
o Competitiveness within the industry
o Profitability of the banking industry
Impact of Reforms on Financial Sector
Size and Depth
20.0%
30.0%
40.0%
50.0%
60.0%
M2/GDP Ratio
0.0%
10.0%
20.0%
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
12.0%
17.0%
22.0%
27.0%
32.0%
37.0%
42.0%
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
Private Credit/GDP Ratio
Impact of Reforms on Financial Sector
Mobilizing Savings
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
Cash flows to Banking System
y = 18.3 - 0.009x y = 0.11 + 0.0001x
M1/M2 Ratio
22.0%
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
78.0%
79.0%
80.0%
81.0%
82.0%
83.0%
84.0%
85.0%
86.0%
87.0%
1998
2000
2002
2004
2006
2008
2010
2012
y = -17.12 + 0.009x
y = 21.9 - 0.11x
Cash flows to Banking System
M2/M3 Ratio
Impact of Reforms on Financial Sector
0.00%
20.00%
40.00%
60.00%
2006 2007 2008 2009 2010 2011
Concentration ratio within the total deposits
Competitiveness of the Banking Industry
2006 2007 2008 2009 2010 2011
Top Bank Top 5 Banks Top 10 Banks
0.000
0.020
0.040
0.060
2006 2007 2008 2009 2010 2011
Herfindahl-Hirschman Index
Deposits Loans
Impact of Reforms on Financial Sector
Profitability of the Banking Industry
0
0.5
1
1.5
2
Y = 26.86 - 0.01X
Y = -341.8 + 0.17X
Return on Assets
10
12
14
16
18
20
22
24
Y = -255 + 0.13XY = -2202 + 1.1X
Return on Equity
0
1996 1998 2000 2002 2004 2006 2008 2010 2012
0
20
40
60
80
100
120
140
1996 1998 2000 2002 2004 2006 2008 2010 2012
Tak
a in
Bil
lio
ns
Y = - 4130 + 2.07X Y = - 27897 + 13.9X
Net Interest Income
1996 1998 2000 2002 2004 2006 2008 2010 2012
Impact of Reforms on Bank Performance
Measures of Performance
o Capital Adequacy
o Asset Quality
o Management Efficiency
o Earning Performances
o Liquidity
Impact of Reforms on Bank Performance
Capital Adequacy: Capital to Risk Weighted Assets Ratio
0
5
10
15
20
25
30
Per
cen
t
-10
-5
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Financial Year
SCBs DFIs PCBs FCBs
Impact of Reforms on Bank Performance
Capital Adequacy: FCBs and PCBs
10
15
20
25
30
Per
cen
t
0
5
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Financial Year
PCBs FCBs
Impact of Reforms on Bank Performance
Asset Quality: Non-Performing Loans to Total Loans Ratio
30
40
50
60
70
80
Per
cen
t
0
10
20
30
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Per
cen
t
Financial Year
SCBs DFIs PCBs FCBs
Impact of Reforms on Bank Performance
Management Efficiency: Expenditure-Income Ratio
100
120
140
160
180
200
Per
cen
t
40
60
80
100
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Financial Year
SCBs DFIs PCBs FCBs
Impact of Reforms on Bank Performance
Management Efficiency: FCBs and PCBs
70
75
80
85
90
95
100
Per
cen
t
50
55
60
6519
97
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Financial Year
PCBs FCBs
Impact of Reforms on Bank Performance
Earning Performances: ROA, ROE and NII
-6
-4
-2
0
2
4
619
97
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Per
cen
t
Financial Year
Return on Assets
-200
-150
-100
-50
0
50
100
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Per
cen
t
Financial Year
Return on Equity
Financial Year
SCBs DFIs PCBs FCBs SCBs DFIs PCBs FCBs
-20
0
20
40
60
80
100
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Tak
a in
bil
lio
ns
Financial Year
Net Interest Income
SCBs DFIs PCBs FCBs
Impact of Reforms on Bank Performance
Earning Performances: FCBs and PCBs
0
2
4
619
97
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Per
cen
t
Financial Year
Return on Assets
01020304050
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Per
cen
t
Financial Year
Return on Equity
Financial Year
PCBs FCBs PCBs FCBs
-20
0
20
40
60
80
100
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Tak
a in
bil
lio
ns
Financial Year
Net Interest Income
PCBs FCBs
Impact of Reforms on Bank Performance
Liquidity: Liquid Assets/Deposits
0
10
20
30
40
50
60
Per
cen
t
Liquid Assets/Deposit
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Financial Year
SCBs DFIs PCBs FCBs
0
5
10
15
20
25
30
35
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Per
cen
t
Financial Year
Excess Liquidity/Deposit
SCBs DFIs PCBs FCBs
Conclusion
o Following restructuring initiatives, financial system has been developed in terms of
• Financial deepening,
• Competitiveness within the industry, and
• Profitability scenario of the banking industry.
o Defaulted loans can be identified easily and monitored continuously for recovery and necessary provision can be made;
o Classified loans, provision shortfall and loan losses are now more transparent;
Conclusion
o An improvement and better performance of capital adequacy of banks helped to restore the interest of the depositors and shareholders;
o Management performance in monetary terms is on increasing trend;
o In terms of profitability the banking sector had mixed o In terms of profitability the banking sector had mixed experience;
o All types of banks have much liquid assets excess of their requirements.
Conclusion
o The performances of the foreign banks are better in comparison to the local banks in some aspect.
• FCBs could be able to maintain a CRAR which is higher than that maintained by the domestic banks.
• Non-performing assets of FCBs are negligible comparing with their assets. comparing with their assets.
• Though FCBs maintained a substantial amount of liquidity, their profitability is higher than the domestic banks.
• FCBs were capable to control their expenditure-income ratio lower than the domestic banks.
Conclusiono FCBs are performing much better than the domestic
banks perhaps due to following reasons:
• FCBs have to comply additionally with the policies and guidelines issued by their head office,
• They are exploiting the international best practices in their operation, their operation,
• They are audited by their head offices regularly which help them to have more controlling systems,
• They get support from their head office in analyzing risks including credit risks and operational risks,
• They can easily track the recovery of loans as they have limited branches and customers, and advanced MIS and AIS.
Recommendations
1. Solvency: The undercapitalized banks should be allowed/motivated to raise new capital from the capital market.
2. Management of NPL : All bad or non-performing loans of banks can be put under separate management within the same institution. within the same institution.
3. Auditing: An international standard based audit of the loan portfolio, assets and liabilities, and capital adequacy may be performed.
4. Road-map: Banks with problems and weakness may be asked to submit a plan of corrective actions along-with a time schedule to overcome the problems.
Recommendations5. Strengthen legal enforcement: Special tribunals having
simplified procedures, quick disposal, and effective enforcement have to be ensured.
6. Reduction of Interference: Government interference, political involvement, pressure from the trade unions, connected lending have to be reduced for smooth functioning of the banks. functioning of the banks.
7. Technological Advancement: Technological up-gradation of the banking system is must for a better and an efficient banking sector in Bangladesh.
8. Extensive Training: Large scale training program for both central bank and commercial bank officials should be arranged to achieve effective outcome from the reforms.
Thanks Thanks