Spillover effect of loan scams continues in the banking sector 

The country’s banking sector witnessed lowest return on assets in 10 years due to the rise in default loans.

Return on Asset (ROA) was declining since December 2010 from 1.8% to 0.6% in June 2014 thanks to maintaining higher provision against the bad assets, according to Bangladesh Bank monetary policy statement that announced on Thursday last for H2.

The banks, however, bagged highest return on assets above 1.5% during the year 2010 and 2011 when the private sector credit growth was also highest ever 24.2% and 25.8% respectively according to the Bangladesh Bank data.

The return on asset witnesses a sharp fall in the year 2012 as several loan scams took heavy toll on the banking sector.

Loans over Tk4,500 crore have been taken away from the banking sector through forgery by Hallmark and  Bismillah group between the year 2010 and 2012. Loan forgery of around Tk4,500 crore took place in BASIC Bank during the same period.

The spillover effect of the loan scams continued in the banking sector with eroding its earnings, said a senior executive of Bangladesh Bank.

The ROA increased to 0.9% in December 2013 mainly because of the temporary relaxation of loan rescheduling policy, according to the central bank monetary policy statement.

The required provision against bad debt for the year 2013 came down to Tk4,600 crore compared to Tk8,640 crore for 2012 thanks to huge loan rescheduling under the relaxed policy that was given from December 2013 to June 2014.

The earning ratio declined again to 0.6% at the end of June 2014 due to further increased amount of default loans and the net losses made by state-owned commercial banks, said the statement.

The private sector credit growth also remained in slower pace ranged between 10% and 12% during last one and a half year.

The return on asset of the state-owned commercial banks, including Sonali, Janata, Agrani and Rupali became negative in June 2014 from 0.6% in the year 2013, according to the central bank data.

The return of these four banks grew consistently since the year 2008 and reached to the highest 1.4% in the year 2011. Later, it turned negative in the year 2012 due to the huge corruption in loan disbursement.

The banks showed artificial return of 0.6% in the financial statement of the year 2013 through regularising huge amount of default loans under relaxed policy. But it did not sustain as clients fail to continue installment amid political unrest. As a result, the ratio of return again turned to negative in June last year.

The default loan rate also pushed the capital adequacy ratio of banking sector down to 10.6% at the end of September last year from 11.5% in December 2013. The private commercial bank though successfully maintaining the CAR standard of 10% since December 2010 but the state-owned commercial banks are still struggling to fulfill the regulatory requirements.

The rise of default loans continued during the first three quarter of 2014 because of the implementation of the new guideline for loan classification and rescheduling, Bangladesh Bank explained in its monetary policy stance.

In addition, the lack of profitability due to the uncertainties emanating from political factors contributed to this increased volume of default loans, said the policy.