Moody’s projects grim picture of banking sector

Shakhawat Hossain   | Published: 00:19, Dec 03,2019


The asset quality of the country’s banks will deteriorate further in coming days unless poor governance and loan recovery status improve.

Moody’s Investors Service, a leading international credit rating agency, made the projection in its report released on November 29 from Singapore.

Moody’s report also said persistent weakness in asset quality – a result of poor corporate governance, as well as weak laws and regulations – drove its ‘negative outlook for the Bangladesh banking system’.

It criticised the country’s banking regulator as it observed regulatory forbearance resulted in further understatement of asset risks and hampers loan recovery.

From June 2019, banks are allowed to defer classifying a term loan as defaulted until it is nine months overdue, compared with three months previously while regulators also offered a one-time package to borrowers to allow them to reschedule defaulted loans on relaxed terms since May.

Economic analysts said the Moody’s report  mirrored the actual picture of the country’s banking sector that has been under stress for long in absence effective regulations.

The main finding of the report is that health of the major economic sector is bad, said former Bangladesh Bank economist Mustafa K Mujeri.

Such rating will not give any positive message to the global investors and the lenders, he said, adding that foreign banks’ confidence in local banks would decrease.

According to Moody’s report, bad loans, including rescheduled and restructured loans classified as performing, have been rising, and increasing rescheduling of problematic accounts is leading to a further understatement of asset risks.

In addition, borrowers can obtain stay orders from courts, blocking banks from classifying those loans as defaulted and recovering them, the report added.

The Moody’s report found that non-performing loans with large corporates had been growing fast and now account for more than half of banks’ stressed assets.

According to the BB data, the amount of defaulted loans swelled to Tk 1,16,288 crore in September from Tk 1,12,425 crore in June.

The Moody’s report also criticised the performance of the state-owned banks as it found that bad loans, including nonperforming ones, rescheduled and restructured loans, amount to about half of total gross loans at the public banks. 

‘In addition to having to fulfil policy mandates, these banks are embroiled in high-profile loan frauds, highlighting significant lapses in corporate governance,’ said the report  

Commenting on the country’s private sector banks, the Moody’s report said bad loans were also piling up at private sector.

Former Bangladesh Institute of Bank Management director general Taufic Ahmed said local experts and research organisations had been urging to address the problems of the sector.

But there is no effective step from the government, he said.

In 2018, Moody’s outlook was also negative for the county’s banking sector.  

While commenting on the latest report, Tengfu Li, a Moody’s analyst, said they expected asset quality would continue to deteriorate at Bangladeshi banks, due to poor corporate governance in particular at state-owned banks, while weak laws and regulations are hampering loan recoveries.

‘Profitability will also remain pressured by rising credit costs, while capital is set to decline further as internal capital generation weakens, he added.

The Moody’s report also said the negative outlook on the banking system contrasted with the country’s robust growth prospects, with real GDP set to grow 7.8 per cent in the fiscal year ending June 2020, underpinned by strong domestic consumption and exports.

Finance minister AHM Mustafa Kamal projected 8.2 per cent growth in the current fiscal.

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