Banks and Non-banking financial Institutions
Banks
Over the last few decades, Bangladesh has seen significant economic growth, leading to changes in its financial sector. The banking industry, guided by Bangladesh Bank (BB), has expanded, allowing the entry of private banks. Currently, there are various types of banks in Bangladesh. The banking sector’s performance in the second quarter of FY23 showed mixed results, including a reduced non-performing loan ratio, moderated banking sector capital adequacy, decreased industry earnings, and a slowdown of excess liquidity. Challenges persist, particularly in managing non-performing loans, ensuring capital adequacy, and establishing robust governance in bank management. The banking sector recorded 10.20% growth in private sector credit. However, the growth is still slightly below the monetary target of 10.90% set for the current fiscal year.
Bangladesh effectively addressed the challenges of the COVID-19 pandemic through a robust vaccination campaign and stringent lockdown measures. However, the rise in inflation, supply chain disruptions, increased interest rates, and financial sector instability pose new threats to the economy. Despite obstacles, Bangladesh’s GDP grew by 5.78% in FY 23, compared to 7.1% in FY 2022 and 6.94% in FY 2021.
In January 2024, the World Bank forecasted Bangladesh’s economic growth to slow to 5.6% in 2023-24. This is due to high inflation, which will affect private consumption, and low foreign exchange reserves hindering private investment. However, public investment is expected to remain strong. Both the IMF and the Asian Development Bank have also provided GDP growth projections for Bangladesh in 2023-24, with some variations.
The banking sector in Bangladesh is grappling with weak governance, poor asset quality, declining profitability, decreasing interest rate spreads, inadequate capital, liquidity stress, and deficient risk management. These challenges are particularly evident in state-owned commercial banks and specialized banks, leading to a lack of public confidence and prolonged liquidity constraints following scandals in several banks and non-bank financial institutions.
Sector at year-end 2023
The issue of non-performing loans is a significant concern in the banking industry, despite some improvement in asset quality by the end of CY2023. However, the overall health of the banking sector remained unstable due to significant classified loans and stressed assets. Public confidence restoration has been hindered by loan irregularities in some banks and subsequent deposit withdrawals.
Sector in 2024
As of the end of Q2FY24, the banking sector saw positive developments, with the non-performing loans (NPLs) declining to 9.00 percent from 9.93 percent at the end of Q1FY24. However, Specialized Banks (SBs) saw an increase in their gross NPL to total loan ratio. Total Classified loans of the banking sector stood at Tk. 1456.33 billion with a provision shortfall of Tk. 192.61 billion at Q2. Overall, the industry’s profitability declined, with a reduction in both return on assets (ROA) and return on equity (ROE). The banking sector faced tight liquidity conditions in Q2FY24 due to a contractionary monetary policy and consistent interventions by the central bank in the foreign exchange market. By the end of Q2FY24, excess liquidity decreased to $BDT 1644.05 billion from $BDT 1633.40 billion compared to the end of Q1FY24, with the surplus of the statutory liquidity ratio (SLR) declining to 8.9 percent from 9.2 percent.
Non-banking financial Institutions
Non-bank financial institutions (NBFIs) have significantly impacted Bangladesh’s economy over the past forty years. As of December 30, 2023, there are 35 NBFIs in Bangladesh, including three government-owned entities and 32 private NBFIs, with a total of 308 branches. They are regulated by the Financial Institution Act of 1993 and overseen by the central bank, BB. While traditionally focused on Dhaka and Chattogram, some NBFIs are now expanding into rural areas and diversifying their product offerings beyond these urban centers.
Based on the latest data from the central bank, non-bank financial institutions (NBFIs) hold total deposits of 4,483,018 Lac Taka across 431,221 accounts. The average deposit per account is 10.40 Lac Taka. In terms of loans and advances, the total amount is 7,375,919 Lac Taka in 219,705 accounts, with an average of 33.57 Lac Taka per account as of December 2023. The Bangladesh Bank’s 2023 annual report shows varied CAMELS ratings for NBFIs, reflecting the sector’s diverse performance.
Non-performing loans (NPLs) are a significant concern for non-bank financial institutions (NBFIs), indicating their asset evaluation and overall performance. As of June 2023, the NPL ratio for NBFIs was 27.65%, increasing to 30% by January 2024. Despite challenging conditions, our NPL rate has consistently remained below 5%, showcasing proactive management and a high-quality portfolio. We believe that a strong NPL monitoring process and optimal corporate governance enable sustainable growth and address challenges.