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Credit System of the Banking Sector in Bangladesh

CHAPTER 4
An Overview of the Credit oeration in the Banking sector of
Bangladesh!
4"# Bank Credit
4"$ Credit%&eosit Ratio
4"' Cash Reserve Re()irement *CRR+
4"4 Stat)tory ,i()idity Ratio
4"- .nterest rates on &eosits and advances
4"/ Asset ()ality
4"0 ,oan loss Provisioning of the Banks
Credit Administration! A case st)dy of 1irst Sec)rity Bank ,td" 35
Credit System of the Banking Sector in Bangladesh
An Overview of the Credit oeration in the Banking sector of Bangladesh!
In this Chapter the Bank Credit,Credit/deposit ratio,cash reserve requirement,statutory
liquidity ratio, interest rates on deposits and advances asset quality of the loan portfolio
the ratio of non-performing loans to total loans are discussed.
4"# Bank Credit!
utstanding !ank credit"e#cluding foreign !ills and inter !ank items $ increased !y taka
%&%.' !illion or %(.) percent to taka '(&.5 !illion in *+)&, against increase of %3.(
percent in *+ )3.f the components of Bank credit advances increased !y taka %%&.'
!illion or %&.5 percent, ,hile !ills purchased and discounted ,ent up !y -k .( !illion or
/&.) percent in *+ )&,against increases of %3.5 percent and %/ percent respectively in
*+)3.-he higher gro,th of !ank advances is attri!uta!le to decline in the average
lending rate, indicating steady gro,th of economic activities. In this respect , do,n,ard
revision of !ank rate and 012 during 3ovem!er *+ )3 played a vital role. -he increase
in !ills outstanding in *+)& reflected the steady gro,th in trade volume. It may !e
mentioned that rela#ation of interest rate for all sorts of e#port credit and increased
Ta2le 4"# Bank Credit31454 ()arterly osition
Billion Tk.
Outstanding as of Advances Bills Total
30-Jun-03 790.4(94.9) 42.2(5.1) 832.6
30-Sep-03 823.5(94.9) 44.6(5.1) 868.1
31-Dec-03 850.7(94.2) 52.4(5.8) 903.1
31-Ma-04 859(93.8) 56.9(6.2) 916
30-Jun-04 905.3(92.9) 69.2(7.1) 974.5
!i"ue# in paen$%e#e# in&ica$e pecen$a"e c%an"e
0ource4 5nnual report of Bangladesh Bank.
gro,th of import of industrial ra, materials and intermediate goods accelerated the
gro,th rate of !ank credit. -he quarterly position of the !ank credit components may !e
Credit Administration! A case st)dy of 1irst Sec)rity Bank ,td" 3/
Credit System of the Banking Sector in Bangladesh
seen at -a!le &.%.-he asset composition of all !anks sho,s a high proportion of loans and
advances "/) percent appro#$. 5 high proportion of loans and advances indicate
vulnera!ility of assets to credit risks especially since the portion of non-performing assets
is significant. 5 large non performing loan portfolio has !een the ma6or predicament of
!anks, particularly of the state o,ned !anks. -he share of loans and advances is follo,ed
!y the investment in government !ills and !onds estimated at %).( percent. 1ooking at
regional concentration of !ank credit !y division, in total !ank credit //). percent and
%(./ percent are concentrated in 7haka and Chittagong respectively and the remaining
e#posure is in other cities vi8 9hulna "5.' percent$, 2a6shahi "/.' percent$, Barisal "%./
percent$ and 0ylhet "%.' percent$.
4"$ Credit%&eosit Ratio!
-he credit/deposit ratio of the scheduled !anks,e#cluding the speciali8ed !anks, increased
to ).(' as of end :une )& from ).(/ as of end :une )3,reflecting credit delivery gro,th
after the reduction of 012 in 3ovem!er .))3.
4"' Cash Reserve Re()irement *CRR+!
-he Cash 2eserve 2equirement "C22$ for the scheduled !anks ,ith the Bangladesh !ank
remained unchanged in *+ )& at &.) percent of their total demand and time lia!ilities
,hich ,as set at this level on cto!er )%,%'''.
4"4 Stat)tory ,i()idity Ratio!
;ffective from 3ovem!er )<,.))3,the 0tatutory 1iquidity 2atio"012$ for the scheduled
!anks e#cepting !anks operating under the Islamic 0hariah and the specialised !anks,,as
revised do,n,ard to %/ percent of their demand and time lia!ilities , e#cluding inter-
Credit Administration! A case st)dy of 1irst Sec)rity Bank ,td" 3(
Credit System of the Banking Sector in Bangladesh
!ank items from .) percent. -he 012 for the Islamic !anks remained unchanged at %).)
percent. -he specialised !anks continued to remain e#empt from the 012.
4"- .nterest rates on &eosits and advances
-a!le &.. contains ,eighted average interest rates of scheduled !anks on deposits and
advances along ,ith the spread during *+ )% to *+ )&.-he data as reported in -a!le &.%
indicate that !oth the deposits and advances rates ,ere declining during *+)% to
*+)3.=o,ever,!ecause of recent steps taken !y the Bangladesh Bank, the spread
!et,een the advance and deposit rates came do,n to 5.3 in *+ )&.
Table 4.2 Weighted average interest rates of scheduled
banks
Sec$o a# o' en& June
!(01 !(02 !(03 !(04
Dep#oi$# a$e 7 6.7 6.3 5.7
)&*ance# a$e 13.8 13.2 12.8 11
Spea& 6.7 6.4 6.5 5.3
Souce+ Ban"la&e#% Bank )nnual epo$.
4"/ Asset ()ality!
5s per the prudential regulations of Bangladesh Bank, Banks are not allo,ed to
approve large loans in favour of any individual or group of !orro,ers in e#cess of 5)
percent of their total capital. -he portion of funded loan in the approved large loan
shall not !e more than .5 percent of the !ank>s total capital. =o,ever the proportion
of large loans of nationali8ed commercial !anks "3CBs$ is very high %3.& times of
their o,n funds, ,hereas in case of private commercial !anks"?CBs$,foreign
commercial !anks"*CBs$ and development finance institutions"7*Is$ large loan to
their o,n funds is 5.(,3.),3.5 times respectively.
Credit Administration! A case st)dy of 1irst Sec)rity Bank ,td" 3<
Credit System of the Banking Sector in Bangladesh
-he most important indicator used to identify pro!lems ,ith asset quality in loan
portfolio is the percentage of gross and net non-performing loans to total assets and
total advances .*CB>s have the lo,est proportion ,hile 7*Is have the highest
proportion of non-performing loans"3?1s$ 3)./ percent 3CBs have gross 3?1s to
total assets of %/.( percent ,hereas in case of ?CBs, *CBs the ratio is the (.' percent
and %./ percent respectively. 0imilarly 3?1s net of provisions to total assets .%.%
percent is %/.. percent, 5.) percent for 7*Is,3atioanli8ed commercial !anks "3CBs$
and ?CBs and 7*Is respectively.*CBs have e#cess provision on their 3?1s of -9.
3&<.% !illion.
-he ratio of non-performing loans "3?1s$ to total loans of all of the Banks sho, an
improving trend since its decline from a peak of &%.% percent in %''',although the
aggregate ratio is still as high as ...% percent in 7ecem!er .))3.@ery high 3?1s of
the 3CBs and the 7*Is are the main reasons for this high ratio.
-he 3CBs and 7*Is continue to have very high 3?1s mainly due to su!tantial loans
provided !y them on considerations other than commercial and under directed credit
programmes,especially during the ()s and <)s .?oor appraisal and inadequate
follo,up and supervisions of the loans dis!ursed !y the 3CBs and 7*Is in the past
eventually resulted in massive !ooking of poor quality assets ,hich continue !urden
the portfolio of these !anks. *urthermore the !anks ,ere reluctant to ,rite off the
historically !ad loans !ecause of poor quality of underlying collatterals and to to
avoid any possi!le legal complication due to loopholes in legal frame,ork.2ecovery
Credit Administration! A case st)dy of 1irst Sec)rity Bank ,td" 3'
Credit System of the Banking Sector in Bangladesh
of 3?1s ho,ever sho, some signs of improvedment,mainly !eccause of the steps
taken ,ith regard to internal restructuring of these !anks to strengthen their loan
recovery mechanism and recovery drive.
5n analysis of the aggregate 3?1s !y type of !anks and type of loans as of 7ecem!er
.))3 indicates that the highest ratio of 3?1s are o!served for term loans of the 7*Is
follo,ed !y micro and agricultural loans of the 3CBs. 3?1 ratios of term loans given
!y the 3CBs ,ere also very high. 5lthough the overall trend is decreasing,the peace
of improvement appears rate of progress seems to !e very slo, for 3CBs.
Chart &.% graphically displays the amounts in 3?1s of the & types of !anks since
%''' through 7ecem!er .))3 amount of 3?1s of the 3CB0 decreased from taka
%.<.' !illion in %''' to taka %)5.( !illion in 7ecem!er .))3 .-he ?CBs also
recorded a increase of -k ..3 !illion in their 3?1 accounts, ,hich stood at -9 &<.5
!illion in 7ecem!er .))3.as against -k &5.). !illion in %'''.-he amount of 3?1s of
the 7*Is decreased to -k&(.3 !illion in 7ecem!er .))3 from tk. /3.3 !illion in %'''.
-he decline in 3?1 ratios in the recent years can !e attri!uted partly to some progress
in recovery of long outstanding loans and partly to ,rite of s of loans classified as
A!ad> or Aloss> for over 5 years.
Credit Administration! A case st)dy of 1irst Sec)rity Bank ,td" &)
Chart 4.1 Year wise Co!arative
!osition of "#$s b% T%!e of Banks
0
50
100
150
1999 2000 2001 2002 2003
Year
B
i
l
l
i
o
n

T
k
,-B#
D!.#
/-B#
!-B#
Credit System of the Banking Sector in Bangladesh
4"0 ,oan loss Provisioning of the Banks!
-he ta!le &.3 sho,s the aggregate amounts of 3?1s of all !anks from %''( to :une
.))3,amounts of provision required to !e maintained and the amounts actually provided
!y the !anks during %'''-.))3. Chart &.. sho, the information in graphical form.
-a!le &.3 and chart &.. indicate that in aggregate the !anks have !een continuously
failing to maintain the required level of provisions against their 3?1s. 7uring the years
from %'''-.))3 provision maintenance ratio reached a high of /).5 percent in
.))%B,hich declined thereafter to &).3 percent !y .))3. -he main reasons for the
continuous shortfall in provision adequacy is the ina!ility of the 3CBs and some of the
?CBs including those in pro!lem !ank category to make sufficient provisions due to
inadequate profits and also failure to make transfer provision for ,rite off. 5s e#pected
the *CBs are much !etter in that they have !een a!le to make adequate provisions in the
recent years. 5 comparative provision as of end .)). and .))3 is sho, in ta!le &.&.
Ta0le 4.3 &e'uired !rovision and !rovision aintained all banks in 0illion Tk
All Banks 1((( 2))) 2))1 2))2 2))*
)1oun$ o' ,/2# 238.8 228.5 236 238.6 203.2
3e4uie& po*i#ion 100.2 98.4 101.6 106.8 92.5
/o*i#ion 1ain$aine& 51.5 58.1 61.4 59.6 37.3
56ce#(7)
S%o$'all(-)
-48.7 -40.3 -40.2 -47.2 -55.3
/o*i#ion
1ain$aenance a$io
0.58 59.18 60.58 55.88 40.38
Souce + )nnual epo$ o' Ban"la&e#% Bank
Credit Administration! A case st)dy of 1irst Sec)rity Bank ,td" &%
Credit System of the Banking Sector in Bangladesh
0ource 4 5nnual report of Bangladesh Bank.
5lthough some individual ?CBs could make adequate provisions, the aggregate position
did not improve mainly !ecause of the huge provision shortfall of the !anks in A?ro!lem
Bank> category.
Table 4.4+Co!arative !osition of !rovision ade'uac% (0illion
Tk.)
Year ,tes "CBs -.,s #CBs .CBs
2002 3e4uie& po*i#ion 61.5 17.1 27.9 1.2
/o*i#ion 1ain$aine& 18.9 17.3 22.8 1.6
/o*i#ion 1ain$enance a$io 30.88 101.28 81.98 127.68
2003 3e4uie& po*i#ion 53.3 14.7 23.1 1.4
/o*i#ion 1ain$aine& 3.5 14.6 17.5 1.7
/o*i#ion 1ain$enance a$io 6.68 99.28 75.48 125.28
Souce )nnual epo$ o' Ban"la&e#% Bank
xxx------xxx
Credit Administration! A case st)dy of 1irst Sec)rity Bank ,td" &.
Chart 4.2 #rovision ade'uac% !osition of all
banks
0
100
200
300
1999 2000 2001 2002 2003
Year
B
i
l
l
i
o
n

T
k
0.08
20.08
40.08
60.08
80.08
)1oun$ o' ,/2#
/o*i#ion 1ain$aine&
/o*i#ion
1ain$aenance a$io