Asset quality of the country's banking sector deteriorated in the last calendar year as the gross non-performing loan (NPL) ratio showed an upward trend throughout the year, according to the central bank.
"Particularly, rising NPL ratio in the state-owned commercial banks (SoCBs) appeared to be a concern as these banks have dragged down overall asset quality of the banking sector," it explained.
The gross NPL ratio in the banking sector rose to 10.3 per cent in 2018 from 9.3 per cent a year back, according to the Financial Stability Report (FSR) 2018 released on Tuesday.
Such classified loan ratio was 9.2 per cent in 2016.
Poor performance in the SoCBs was not due to their exposure to any particular sector or their involvement in financing public enterprises, the Bangladesh Bank (BB) said in the FSR.
"Rather, overall inefficiency in loan management seems to be the prime reason behind deterioration in asset quality of the SoCBs," the central bank noted.
It also said a large amount of NPLs augments a bank's provision requirement, reduce profitability and eventually erode capital base leading to bank insolvency, which may trigger system-wide instability in the financial sector.
Besides, due to NPLs, it is difficult for banks to reduce lending cost, which hinders private investment and economic growth, it added.
However, net NPLs as a percentage of total loans outstanding in the banking sector of Bangladesh are relatively low among the neighbouring South and East Asian countries, according to the FSR.
"Within SAARC countries, the ratio is much lower compared to that of India and Bhutan," the BB noted.
On the other hand, higher non-performing assets along with rescheduled advances pushed up the overall stressed assets ratio as a percentage of total loans and advances outstanding in 2018.
The stressed assets ratio rose to 20.5 per cent at the end of December 2018 which was the highest in the past three years, according to the FSR.
Within a year, the gross NPL ratio increased by 100 basis points while rescheduled standard advances ratio by 40 basis points and restructured advances ratio by 10 basis points.
"Accumulation of a large volume of stressed assets affects profitability of the banks, raises the cost of capital, widens the possibility of asset-liability mismatch and hinders the financial intermediation process," the BB observed.
Under such scenario, the banks are expected to improve their efficiency and effectiveness in managing stressed assets, comply with the regulatory instructions and also strengthen recovery units for smooth collection of outstanding loans and advances.
High proportion of bank loans held by top non-financial corporations (NFCs), generally known as large business groups, and high debt-equity ratio of large NFCs are found to be the two key risk factors for Bangladesh's financial system.
However, net profit of the banking sector fell significantly in 2018 mainly due to higher provision requirement against increased classified loans.
Banking sector's net profit dropped by 57.5 per cent to Tk 40.4 billion in 2018 from Tk 95.1 billion a year ago while operating profit rose by 8.1 per cent to Tk 266.4 billion from Tk 246.5 billion.
Meanwhile, the total maintained provision increased by 98.6 per cent to Tk 146.2 billion in the last calendar year from Tk 73.6 billion in 2017.
However, return on asset (ROA) dropped to 0.3 per cent at the end of December 2018 from 0.7 per cent at the end of December 2017.
"The amount of profit earned declined comparing to the banks' total assets due to lack of efficiency in asset management," the FSR explained.
Besides, return on equity (ROE) decreased by 6.0 percentage points and reached 4.4 per cent in 2018 from 10.4 per cent a year ago.
"Non-performing loans and loan loss provisions were built up which had negative impact on ROA," it added.
In 2018, the overall net interest margin (NIM) for the banking industry increased slightly to 2.2 per cent from 2.0 per cent in 2017.
The banking sector liquidity was relatively tight in 2018 compared to the preceding year as evident from higher advance-to-deposit ratio (ADR) and rising call money borrowing rate.
Overall ADR of the banking industry increased to 77.6 per cent at the end of December 2018 from 75.9 per cent at the end of December 2017 and 71.9 per cent at the end of December 2016 as the growth of loans and advances continued to outpace the deposit growth during the review year.
As of the end of December 2018, 10 new banks, nine of which incorporated in 2013 and the latest one in 2016, aggregately accounted for 4.3 per cent of the total banking industry assets.
Aggregate loans and advances of these banks were 75.4 per cent of their total assets during the period under review. The gross NPL ratio of these banks rose to 8.3 per cent in 2018 from 2.8 per cent a year back.
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