Wednesday, March 2, 2011

Banks under stress

The private commercial banks (PCBs) are facing tough times to mobilise deposits for maintaining their liquidity in line with the statutory requirements of the central bank, according to some close observers of the situation in the country's financial sector.
Furthermore, the banks are in difficulties in meeting their obligations for settlement of import letters of credits (LCs) and also for providing credits to their clients, in keeping with their earlier commitments, due to a heavy pressure on their currently available funds.

Some PCBs are offering deposit rate at even over 13 per cent, particularly for term deposits, though the central bank has earlier instructed them verbally not to accept any deposit above 12 per cent rate of interest.
The Bangladesh Bank (BB) can not enforce compliance by all the PCBs with its "instruction" about deposit rate, the sources said.
Meanwhile, the lending rate capping at 13 per cent for key credit operations has put the banks in a tight position.
In a situation where term deposit rate is on the rise, this reflects a critical situation in the country's banking sector whose implications can be "more damaging" than that of the capital market, in the coming months, if immediate measures are not taken to address the emerging problems effectively, said some insiders in the sector.
Without a reasonable spread between deposit and lending rates, the operational viability of banks will be in a jeopardy, the sources said.
The real problems, if the current situation is not properly addressed, will adversely impact the overall economy.
The economy will face some more critical constraints because of an unabated the inflationary pressure, the unrest in the Arab World where a majority of the overseas workforce of Bangladesh are concentrated and whereform a large chunk of remittance funds come, and the soaring petroleum prices in the international market in a situation when the global commodity markets are also heated up, the analysts observed.
Meanwhile, Bangladesh Association of Bankers (BAB) on Wednesday drew the attention of Prime Minister Sheikh Hasina, when its members met her at her office, to the problems prevailing in the country's financial sector.
The BAB made strong pleas for taking steps to remove the cap on lending rate of the banks, because now the latter are mobilising deposits at a higher rate as a result of which their cost of fund has increased and the spread has reduced.
This situation "has an ultimate negative impact on banks' profitability. Small or no profit will generate low or no tax for the government", it said while noting that private banks has been contributing about 10% of the national tax revenues.
The BAB suggested credit-deposit ratio should be re fixed at 90% for conventional banks and at 95% for Islamic banks.
It noted that the prices of commodities like food items, cotton etc., have increased in the global market as a result of which banks can not maintain the existing credit deposit ratio (CDR) limit.
The BAB also called for reduction of cash reserve requirement (CRR) and statutory liquidity ratio (SLR) by 1.0% for giving liquidity support to the financial institutions.
"Now financial institutions in Bangladesh are facing a severe liquidity crisis. At present, import of food grains is hampered as banks are unable to open L/Cs due to liquidity crisis", it noted.
It further stated that BASEL 11 would require more capital for banks to maintain capital adequacy ratio.
Mentioning that all scheduled banks will, under a circular issued by the BB on March 10, 2010, have to maintain regulatory capital adequacy ratio (CAR) at 9.0% up to June 30, 2011, BAB suggested that the deadline should be extended to December 31, 2011 and from January 01, 2012, the CAR may be set at 10%.
The association also felt that REPO should be 100% or as the same as earlier and the banks should be allowed to recover the credit funds that were diverted from areas for which those were sanctioned, to the capital market by December 31, 2011.
While pointing out that under the BB guidelines, banks' holding position in shares is currently considered on the market price basis, the BAB called for considering this 'position' on the cost/purchase price.
"One year time should be given to those who have invested more than 10% of their liability to the share market", it further suggested.
Noting that merchant banks are currently allowed to invest up to five times of their paid-up capital in the stock market, it pleaded for extension of this limit up to ten times.
The emphasis should be placed on lending operations by the banks in the productive sectors and lending in un productive sectors must be stopped, it observed.
Furthermore, the BAB suggested that corporate tax rate should be revised and the tax on provision for unclassified, classified loans and advances and off-balance sheet exposures should exempted.
While pointing out that the, while keeping a reserve of more than US$10 billion, the BB has been asking the commercial banks to purchase dollar from outside for settlement of their L/C payments, the association observed that the central bank, under this situation, could provide dollar to the private banks to keep the foreign exchange market stable.
It made pleas for removing the bar on placement of government deposit and suggested that the ratio should be at 50:50 between the state-owned banks and the private banks.
Income, in the form of capital gains, from investments in shares which is subject to 10% tax should be fully removed, it observed.
The BAB also suggested that its participation should be ensured by the central bank in the latter's policy-making process.

News Source: 
 The Financial Express

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