Banks in Bangladesh passed a critical year, surfing through an anti-business climate both at home and abroad in 2011.

Amid challenges, the banking industry witnessed a major change -- deregulation in some major areas including the interest rate and exchange rate, in the outgoing year.

Soaring inflation, huge bank borrowing by the government, sliding foreign investment, aid and remittances, a bearish stockmarket and lack of infrastructure were the main barriers at the local level that out banks in a tight spot.

A shift in imports -- from food grains to fuel oils and fertilisers -- also affected banks' businesses in the outgoing year. However, the liquidity crisis was the most discussed issue in 2011.

On the international front, the ongoing sovereign debt crisis in Europe, which is a major destination for Bangladesh's exports, and the troubled US economy, also hit local businesses.

“A lot of non-bank factors affected our business in 2011,” said Nurul Amin, managing director of NCC Bank. “The overall business climate, both domestic and global, was not favourable for banks.”

“There was a liquidity pressure, but not a crisis,” remarked Helal Ahmed Chowdhury, managing director of Pubali Bank, the largest private bank in terms of network, on the outgoing year.

After hefty profits in 2009 and 2010, driven by a surge in investment demand and whooping gains from capital market operations, banks felt the pinch in 2011, especially from the second quarter, and expected a slowdown in growth.

“Banks will not post healthy growth this year,” said Amin of NCC Bank, also the chairman of the Association of Bankers Bangladesh, a forum of private bank chief executive officers.

Bank operating and net profits surged in 2010, riding on gains from the stockmarket and a rebound in investment demand after two years' of sluggishness when the caretaker government was in power in 2007-08.

The banking sector's operating profits rose by over 47 percent to Tk 17,092 crore in 2010 from Tk 11,625 crore a year ago. Net profits also increased by nearly 54 percent to Tk 8,328 crore in 2010 from Tk 5,415 crore in the previous year.

The industry's return on assets (ROA) and return on equity (ROE) also increased alongside net profits. In 2010, the ROA increased by 34 basis points to reach 1.72 percent, while the ROE increased by 3 basis points in 2010 to reach 19.89 percent.

“Banks' investment opportunities were limited in 2011 due to a gas crisis. The housing sector and all consumer credit were also squeezed in the outgoing year,” said Touhidul Alam Khan, head of corporate affairs of Bank Asia.

Banks faced a lot of other challenges as well, of which, asset-liability management, deposit mobilisation, managing interest rates after withdrawal of the cap and declining remittance and volatility in the exchange rate were the major ones.

Banks overextended lending to make profits that created the asset-liability mismanagement situation in 2011, bankers said.

“Some banks tried to destabilise the market by distorting treasury management,” said Chowdhury of Pubali Bank.

Despite these challenges, banks tried to diversify lending to potential areas, said the corporate affairs chief of Bank Asia.

Power, construction and shipbuilding are some new avenues where banks invested in the outgoing year, Khan added.

“Managing the asset-liability issue was the biggest challenge in the outgoing year. But this will remain a big challenge in the coming year, following the requirements of Basel-II,” said Khan.

Banks have to be more cautious in their investments, he pointed out.

Even though 2011 was a challenging year for banks, they did get some freedom.

Banks got a decontrolled interest rate and liberalised norms for foreign exchange. Earlier, the central bank imposed a ceiling on the lending rate and intervened in the foreign exchange market frequently.

In 2011, Bangladesh Bank (BB) withdrew the cap on the lending rate that was imposed at different times to support the country's business sector. Now banks are competing with each other and offering good rates to grab customers.

Though lending rates are still competitive, exchange rate became volatile soon after the central bank kept itself away from intervention as in previous years.

In 2011, the taka depreciated by 15 percent and reached Tk 82 in exchange for a dollar at import levels.
“BB did not deregulate us. Rather it was a self-regulation,” said Amin, chairman of the bankers association.
“We had freedom, but the central bank monitored our activities efficiently,” said Chowdhury of Pubali Bank.

The Daily Star/Bangladesh/ 29th Dec 2011