Bangladesh’s Banking Sector Heading For Collapse? – OpEd

The country’s central bank, Bangladesh Bank (BB)’s latest report has found more than two-thirds of the banks in the country in the weak to very weak category, hovering in the “Red Zone” or the “Yellow Zone” and only a few are stable enough be in the “Green Zone” in good condition.

Of the 54 banks, 12 are in critical condition, of which nine have already moved to the red zone. The other three out of 29 banks in the yellow zone are very close to the red zone, says the report titled “Bank Health Index and HEAT Map”.

On the other hand, only 16 banks, including eight local ones, have found a place in the green zone, it said.

This report has been prepared based on data from 54 banks for the past six semi-annual periods, spanning December 2020 to June 2023 by the BB’s Financial Stability Department .

They have been preparing the Bank Health Index and HEAT Map on a half-yearly basis following a comprehensive methodology based on six different ratios used in CAMELS rating (capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk) excluding the sensitivity to market risk but including the leverage ratio proposed in Basel-3, estimating Z-scores.

Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank and ICB Islamic Bank have been excluded from analysis because their data points differ significantly from other observations/data of the sample banks, while Bengal Commercial Bank, Citizens Bank, Community Bank Bangladesh, and Probashi Kallyan Bank have not been taken into account due to a lack of historical data.

“The central bank’s report revealing such horrific information came at a time when the discussion of merging weak banks with strong banks is gaining momentum in the country,” said an analysis in the country’s most credible financial newspaper, ‘The Business Standard’.

But surprisingly BB spokesperson Md Mezbaul Haque denied any knowledge of the report . “I don’t know anything about which department has made the list of weak and strong banks,” he told mediapersons even when the report was all over the press.

But Haque elaborated that “the new Prompt Corrective Action Framework enunciated last December classifies troubled banks into four categories based on their non-performing loans (NPLs) and Capital to Risk (Weighted) Assets Ratio (CRAR). It will be effective from May 2025. According to the PCA Framework, the banks of the country will be classified into 4 categories.”

Business Standard however quoted a senior BB official speaking on condition of anonymity that, “The central bank regularly categorises banks based on various indicators every six months. I think even those banks that are shown as strong banks in this list are weak.”

In a meeting with bank owners last week, Bangladesh Bank Governor Abdur Rouf Talukder said that about 10 banks in the country will be merged by January 2025. In that case, the weak banks have the option to coordinate with the bank they want to merge with, he said.

Former Bangladesh Bank governor Salehuddin Ahmed thinks there are far too many banks in the country considering the size of the economy.

“A significant portion of those that have been established has been influenced by political considerations or taken over by someone close to power,” Mr Ahmed said.

Out of six state-owned commercial banks, four banks (BASIC Bank, Janata Bank, Agrani Bank and Rupali Bank), four private commercial banks (Padma Bank, Bangladesh Commerce Bank. National Bank and AB Bank) and one foreign bank (National Bank of Pakistan) fell in the red zone.

The yellow zone contained 3 commercial banks (Bangladesh Development Bank and Sonali Bank, First Security Islami Bank) that........

© Eurasia Review