Global credit rating agency Standard and Poor’s has put the Bangladesh’s banking sector at higher risk category amid rising non-performing loans, supervision gaps, overcapacity of banks and other irregularities in the sector surfaced in recent months.
The S&P placed the country’s banking sector in the group ‘8’ on a scale of 1 (lowest risk) to 10 (highest risk) under its Banking Industry Country Risk Assessment report published on Monday.
Some banks in Bangladesh will continue to face asset quality challenges, with sizable reported nonperforming loans, in addition to a high level of restructured loans, the report said.
‘Bangladesh is in the process of implementing international regulatory standards. However, we believe supervision has gaps and imposes limited market discipline. Also, the banking system has overcapacity and market distortions,’ it said.
A supportive core customer deposit base and low reliance on external funding temper these weaknesses.
Currently, the country’s banking sector is overcrowded with 57 banks including nine which got licences in 2013.
The government is planning to give licence to more new banks following intense lobbying despite opposition of the central bank.
The agency expects Bangladesh Bank continue to address the banking industry’s legacy stressed assets and gaps in governance, it said.
The report observed that Bangladesh’s economic risk trend as stable and its growth prospects remain steady, supported by good performance in the export-focused manufacturing sector. The country’s industry risk trend is also stable.
‘We consider that banks operating in Bangladesh face substantial credit risks, with weak foreclosure laws and underwriting standards, weak governance at some banks, and client concentration leading to sizable stressed assets,’ it stated.
Bangladesh has healthy growth prospects and moderate economic imbalances with credit growing in line with nominal GDP, moderate inflation, and a satisfactory current account position, it said.
Former BB governor Salehuddin Ahmed echoed with the observations of the report and said that the banking sector was really at risk.
Everyday different types of irregularities both in state-owned and private banks are being exposed, the amount of NPL is rising and the quality of assets is deteriorating day by day, he said.
He said that the government should address the issues immediately otherwise the findings of the report might be reflected in the credit ratings of Standard and Poor’s and Moody’s Investors Service that would ultimately affects investment and international trade.
Banks are not compliant while the central bank makes delay in taking action that encourage corrupt people to be involved in irregularities, he said.
According to the report, in economic risk and industry risk Bangladesh scored 8 on a scale of 1-10 in the BICRA.
On the other hand, it scored 5 in economic resilience, 2 in economic imbalances, 6 in credit risk in the economy, 6 in institutional framework, 5 in competitive dynamics and 3 in system wide funding on a scale of 1 (lowest risk) to 6 (highest risk).
It also used the term ‘uncertain’ on the issue of government support.
According to the report, S&P bank criteria use BICRA economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating.
The anchor for banks operating only in Bangladesh is ‘bb-‘.
Only a rating committee may determine a rating action and this report does not constitute a rating action, it said.