As of August 2020, there are 57 scheduled banks in Bangladesh, amongst which there are six state owned commercial banks, two specialised banks, 40 private commercial banks, and nine foreign commercial banks. Additionally, five non-scheduled banks are also operating in Bangladesh. The central bank of the country is called the Bangladesh Bank.
In 2019 Bangladesh was hailed by the Asian Development Bank as the fastest-growing economy in the Asia-Pacific region. In 2020, despite the impact of COVID-19 pandemic, Bangladesh is expected to grow by 5.2% in 2020 and 6.8% in 2021. In order to become a developed nation by 2041, a target set by the Bangladesh government, it is vital for Bangladesh to develop the country’s banking industry. Over the last three decades or so Bangladesh has seen spectacular expansion of the banking industry with the aim of promoting economic growth. The banking industry has promoted the financial inclusion of the very poor in rural areas of which microfinance and microcredit are the policy instruments to achieve that objective. Further, the Bangladesh Bank has focused on inclusive financing through small and medium-sized enterprise (SME) financing, micro finance, agriculture financing, special financing for vulnerable groups including youth and women and green financing.
The Microcredit Regulatory Authority (MRA) supervises and regulates the microfinance sector in Bangladesh. According to a 2018 report of the MRA, the total microcredit and microenterprise loan disbursed in 2017-18 was BDT1201.91 billion, which was 14.91% higher than the total disbursement of BDT1,046 billion the previous financial year. The number of borrowers rose to 25.40 million, 93% of whom were women, covering 15.88% of the total population of Bangladesh. Grameen Bank’s microcredit program disbursed BDT207.85 billion, Bangladesh Rural Development Board (BRDB) distributed BDT13.96 billion, and Jubo Unnayan Adhidoptor distributed BDT1.44 billion.
Expanding the commercial banks into rural areas is another step taken by the Bangladesh Bank to help the growth of the economy. The total number of branches of both private and public banks, countrywide, had increased to 10,467 by November 2019, up from 8,685 branches in December 2013. It is Bangladesh Bank’s policy that at least 50% of all branches opened in a year must be in the rural areas.Mobile banking has further revolutionised economic growth in Bangladesh especially in rural areas. The speedy growth of mobile phone subscribers and countrywide coverage of mobile operator's network has made the system available to every corner of the country. This is often cited as the fastest growing industry in Bangladesh. According to recent statistics, daily mobile banking transactions generate BDT9.94 billion and the total number of mobile banking users is reported to be 0.064 billion, of which 0.036 billion are making regular transactions. Bangladesh can be considered as a leading example of successful implementation of mobile banking services, and since its first introduction on 31 March 2011, the mobile banking system has undergone significant growth in the number of mobile banking users.
Mobile Financial Services, Blockchain and Cryptocurrency
In the Mobile Financial Services (MFS) sector, bKash, a sister of Brac Bank Limited, currently dominates the industry, holding more than half of the market and with the highest number of agents in both urban or rural areas. Its business has been further boosted by the usage of the strong and wide mobile network of five largest mobile operating companies in Bangladesh - Grameenphone, Robi, Banglalink, Airtel, and Teletalk. “Rocket” by Dutch Bangla Bank Limited holds the second position in the MFS market. User friendly and direct financial services are considered to be the main reasons behind the success of this system. According to Bangladesh Bank’s MFS statement, around BDT6 billion worth of merchant payments were made in May 2019. Nagad, an upcoming mobile service provider, has bigger plans to transform itself into Bangladesh’s first digital bank.
Another new revolution in the banking sector is likely to be the use of blockchain technology. The Standard Chartered Bank, in partnership with bKash of Bangladesh and Valyou of Malaysia, recently launched the first blockchain-based cross-border remittance service in Bangladesh, facilitating instant transfers from Malaysia.
Regarding cryptocurrency, the Bangladesh Bank notified that dealings in cryptocurrency are unlawful in Bangladesh.
Fiscal Year 2020-21
The national budget declared for Fiscal Year 2020-21 provides an expenditure estimate of BDT5,680 billion and a budget deficit BDT1900 billion. In order to finance this budget deficit, the government is anticipated to borrow an estimated BDT849.82 billion from the Bangladesh banking sector and BDT760.04 billion in foreign loans. Of the total BDT849.82 to be borrowed from the local market, the government plans to borrow BDT536.54 billion by issuing long-term bonds while the remaining BDT313.26 billion would be financed through treasury bills. The government has increased its bank borrowing target by more than 74% to BDT824.21 billion from the original goal of BDT473.64 billion for the financial year 2020-21.
The banking sector is currently experiencing a fragile period of time and faces three major challenges: a large volume of non-performing loans; the implementation of single digit interest rate; and the COVID-19 pandemic. The large budget deficit of the upcoming fiscal year will put extra pressure on the banking sector, on top of the three challenges highlighted here..
Steps taken by the Bangladesh Bank
One of the major steps taken by the Bangladesh Bank was instructing banks to set a maximum 9% interest rate on all loan products except credit cards and a maximum 6% interest rate for deposits effective from 1 April 2020, which was a huge reduction from prior double-digit figures. However, the borrowing interest rate of 7% for exporters who take loans before shipping products has remained unchanged. Banks have been directed not to lower the disbursement of funds flowing to the industrial sector below their average credit growth in the last three years from this year.
This notice came amidst fears that banks may cut loans to industries because of the new ceiling on the lending rates. It was expected that the lower interest rate would open new business opportunities for the investors as the cost of doing business would go down, leading to a rise in GDP and creating more jobs. However, most owners of private commercial banks opposed it by arguing that this rate cut will ultimately affect the banks’ profit margin and that this may disrupt market mechanism for funds because of depositors’ lower interest in depositing money with banks.
The World Bank, in the report “Bangladesh Development Update: Towards Regulatory Predictability”, praised Bangladesh for maintaining its “robust growth performance”. However, it also highlighted the challenges that made the banking sector weak: ineffective banking regulation and supervision, high numbers of nonperforming loans (NPLs) compounded by an eroding capital base, upward interest rate, corporate governance weaknesses and legal complexities in contract enforcement, to name a few.
Areas of Weakness
As the interest has recently been reduced by 3%, it is expected that the demand of credit facilities will increase resulting to a significant gap between demand and supply of loanable funds. This difference can lead to liquidity crisis of banks whilst keeping pressure for increasing the rates, however, the government also has plans to take control if any such risk materialises. Keeping 50% of the government’s deposits with private banks instead of state banks is one of them. However, the efficacy of these measures is yet to be tested.
The NPL issue is probably single most important problem that the banking sector of Bangladesh is suffering from. The NPL rate in Bangladesh is the second highest in Asia and 24th highest in the world. Back-to-back loans, poor risk management, weak corporate governance and supervision, political pressure to sanction loans and weak regulatory frameworks for recovering loans are considered to be the main reasons for the rise of NPL. If a recovery case is filed against a defaulter it usually takes several years to resolve, especially those involving large amounts. In order to reform the system, measures have been taken to amend existing laws and/or draft new legislations.
Currently, the number of NPLs in the banking system amounts to BDT1162.88 billion, or 11.99% of the total disbursed loans, according to the Bangladesh Bank. This figure was 9.31% in December 2019. According to the data available from the Bangladesh Bank, by the end of 2019, the average rate NPL of six state-owned commercial banks stood at 23.85%, or BDT439.94 billion of their total disbursed loans. Their total outstanding loans were BDT1844.04 billion. The NPLs of private commercial banks (PCBs) stood at BDT441.74 billion or 5.78% of the total disbursed loans. The total outstanding loans of PCBs were BDT7639.66 billion. NPL amount of foreign banks was BDT21.03 billion or 5.74% of total loans. Their total outstanding loans amounted to BDT366.22 billion. The NPLs of three specialised banks, ie, Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank and Probashi Kallyan Bank stood at BDT40.58 billion or 15.12% of total outstanding loans. Their total outstanding loans were BDT268.34 billion.
NPLs declined by BDT219.5731 billion in the three months following December 2019. Whilst some think that the increased amount of loan rescheduling and write-offs are worsening the situation others are of the view that large scale loan rescheduling took place in the final quarter of last year that helped reduce the high amount of NPLs in the banking sector. Bangladesh Bank reportedly approved loan rescheduling of BDT191 billion in 2017 and BDT200 billion in 2018 despite the increased number of NPLs.
In addition to loan rescheduling policy, the Bangladesh Bank recently took few other steps to reduce the high amount of NPLs - a special policy on loan rescheduling and one-time exit scheme for defaulters is one of them. Under this special policy, defaulters have the opportunity to regularise their loans for ten years, including a one-year grace period, by making 2% down payment. The interest rate for this will be 9%. According to directions of the High Court Division of the Supreme Court of Bangladesh, the Bangladesh Bank had extended the deadlines for several defaulters to reschedule their NPLs under this policy.
The overall banking situation is likely to get worse due to the COVID-19 pandemic. In order to curb the spreading of the pandemic, the government imposed a nationwide public holiday from 26 March to 30 May 2020, leading to the closure of businesses, government and private offices and courts, and banks operated with shorter working hours. This has affected the economy, in particular the cottage, micro, small and medium enterprise (CMSME) sector and the readymade garments (RMG) sector. The RMG sector has been hit by the cancellation of USD3 billion worth of orders from major retailers in importing countries. The country’s economy was further hit by the historic monsoon floods which affected close to four million people, leaving nearly one-third of the country underwater. Thus, the country’s agricultural production, which is considered to be the lifeline of the economy, was badly affected and this is likely to have ripple effect on the banking and finance sectors.
In order to combat the COVID-19 pandemic and assist the economy, both the Government of Bangladesh and Bangladesh Bank have implemented a series of economic policies. The main target is to ensure adequate mobility in the financial system. For this the Bangladesh Bank has announced that it will buy treasury bonds and bills from banks.
The repo rate was lowered from 6% to 5.75%, effective from 24 March 2020, and was further reduced to 5.25% from 12 April 2020. The repo rate was recently cut again from 5.25% to 4.75%, effective 30 July 2020. The cash reserve ratio (CRR) was reduced to 1.5% (daily basis) and 2.0% (bi-weekly basis) for offshore banking operations, effective from 1 July 2020, and 1.0% (daily basis) and 1.5% (by-weekly basis) for NBFIs, effective from 1 June 2020. The Bangladesh Bank has raised the average daily rate (ADR) to a maximum 87% from 85% and international depository receipt (IDR) has increased to 92% from existing 90% to aid credit to the private sector and improve liquidity in the banking system.
The Export Development Fund has been raised to USD5 billion for facilitating further import of raw materials. The interest rate is fixed at 2% according to the circular issued by the Bangladesh Bank on 7 April 2020 to implement the package and the refinancing limit increased. Bangladesh Bank has launched several other refinancing schemes amounting to a total of BDT380 billion for low income professionals, farmers, micro businessmen and credit guarantee scheme to support exporters, farmers and SMEs, and to facilitate the implementation of the government stimulus packages.
The Bangladesh Bank has taken some strong initiatives such as promotion of payment services, a refinance scheme of BDT50 billion for agriculture sector at a concessional rate, providing agricultural loans at 4% to the crop sector, a 360-day special repo, restrictions on dividend payment by banks, prohibition of worker lay-offs, maximum margin limit for import of child food, relaxations for holding meetings and regulatory reporting.
On 19 March 2020, the Bangladesh Bank announces moratorium on loan payments until 30 September 2020 so that borrowers will not be in default. Additionally, measures have been taken to relax the loan rescheduling policy for Non-Bank Financial Institutions (NBFIs), waive credit card fees and interests, suspend loan interest payments, impose restrictions on bank dividend payments, extend tenures of trade instruments and ensure access to financial services.
In another stimulus package, the government would provide BDT300 billion fund for banks to allow working capital loan facilities to the affected industries. The interest rate will be 9%, which would be shared between the borrower and the government as a subsidy. On 23 April 2020 Bangladesh Bank has established a revolving refinance scheme of BDT150 billion to ensure financing by banks. Banks can borrow 50% of loan disbursed from Bangladesh Bank at 4% interest rate. Further, the Bangladesh Bank also offers a BDT200 billion fund for banks to provide working capital loan facilities to small (cottage) industries and medium enterprises. The interest rate is 9%, of which 4% to be borne by borrower and 5% by government as a subsidy. To tackle the COVID-19 pandemic related disruptions facing importers, the Bangladesh Bank issued another circular on 12 April 2020 where it notified that bullet repayment will be permissible for other usance imports under supplier’s/buyer’s credit. As a result, the usance period can be below six months or above one year to become eligible for bullet repayment terms.
Foreign Exchange Regulations
In another circular dated 17 May 2020, the Bangladesh Bank eased foreign exchange regulations to facilitate trade transactions till 30 September 2020 in order to combat the pandemic. As per the circular, a bank may allow exporters to extend the tenure of realisation of export proceeds up to 60 days, as additional time from specified period of four months from the date of shipment, for bona fide grounds. The circular also said the usage period of back-t- back LCs opened under supplier’s or buyer’s credit can be extended, on banker-customer relationship, within the admissible rate of interest up to 180 days, as additional time from permissible period of 180 days, for bona fide grounds required to settle the payments. The Bangladesh Bank has also extended the period for receipt of export proceeds to six months from the existing limit of four months. To facilitate the import, provision has been introduced to submit bill of entry within six months instead of existing four months from the date of payment.
Any application for the extension of EDF loans for up to 180 days will be considered by the Bangladesh Bank, building on the prevailing extendable tenure of 90 days for settling payments against such loans on bona fide grounds. A bank may also grant exporters to repatriate export bills at a discounted price if they come bona fide to up to 10% of FOB value and for this no prior approval from Bangladesh Bank is required. However, the bank shall immediately inform Foreign Exchange Operation Department or respective area offices of the Bangladesh Bank details of discount allowed by them.
The Bangladesh Bank further relaxed the foreign exchange rules during the pandemic to provide foreign currency to the Bangladeshi nationals visiting abroad and facing problem while returning because of travel disruptions. They can now with the help of international cards avail foreign exchange up to USD12,000 for travel and/or medical entitlement. Banks can also transmit to designated accounts abroad by bank transfer or make funds available to them through exchange houses by credit. The foreign exchange rules have also been eased for foreign companies doing business in Bangladesh to get short-term working capital loans from their parent companies abroad to satisfy their actual needs for payments of three-month wages and salary. The Bangladesh Bank also took initiative to accelerate exports by introducing international factoring. The sales of US dollars were resumed to counterbalance extra pressure on the market due to lower remittance inflows as a result of the COVID-19 outbreak.
The year 2019 was a turbulent year for banking industry, as two non-banking financial institutions faced winding-up proceedings. The Bangladesh Bank, as the central bank and central regulatory body, commenced winding up proceedings against a non-banking financial institution, People’s Leasing and Financial Services Ltd (PLFSL), following reports of financial mismanagement by PLFSL and its inability to refund deposits to the depositors. This is the first case of the Bangladesh Bank instigating winding-up proceedings against a non-banking financial institution. The case is now pending before court. A winding up proceeding has also been instituted in 2019 against another non-banking financial institution, International Leasing and Financial Services Limited (ILFSL), by a depositor following severe financial difficulties faced by ILFSL.