Only five state-owned banks (SoBs) had 63 per cent of non-performing loans (NPL) in the country's banking system as on December 31 last due mainly to their inefficiency in fund management. 

"The classified loans in the state-owned banks are higher due to the nature of their operations (lack of efficiency in fund management, extending obligatory financing towards social and economical priority sectors and politically motivated lending)," the central bank said in its Financial Stability Report (FSR)- 2012, released Sunday. 

The Bangladesh Bank (BB) has taken different measures including signing of memorandum of understanding with three state-owned commercial banks (SoCBs) and two specialised development banks to improve their overall financial health. 

"We've taken stringent policy to reduce the amount of their NPLs," Deputy Governor of the BB SK Sur Chowhudry told reporters after releasing the report. 

The FSR also said default loans scenario has been improving, but still almost 67 per cent of NPLs is bad loans. 

Among the worst 10 banks, based on the NPL amount, four are state-owned commercial banks, three domestic private commercial banks, and three specialised development banks. 

However, among the worst 10 banks, considering the NPL ratios, three are state-owned commercial banks, two domestic private commercial banks, three specialised development banks and two foreign banks. 

"It is a matter of concern that two foreign banks have been included among the worst 10 banks based on the NPL ratios though their total loan amount is not so significant," the report noted.

The central bank has recommended policymakers to introduce consolidated supervision in the banking industry, develop resolution regimes for banks, strengthen cooperation among various regulators of financial intermediaries and more stringent supervision of banks and other financial institutions.

The Deputy Governor also said the banks will have to improve their internal control and compliance with ensuring accountability and transference. 

He also said the BB has recommended introducing risk-based capital adequacy framework for insurance companies in line with the Basel-II and developing risk management framework therein. 

The central bank found that factors which adversely affect the financial sector stability are capital market still demonstrating price correction with lack of confidence of the market participants, some financial soundness indicators of the banking sector such as profitability, capital adequacy ratio, and non-performing loans ratio.

Besides, there has been recurrence of various scams in financial institutions, particularly in banks, leading to confidence problem in the financial intermediaries and decline in real gross domestic product (GDP) growth rate, the report said.

Regarding risks, the FSR said credit risk represents 86 per cent of banking sector risk and only ten banks share 45 per cent of it. Market risk, on the other hand, was not vibrant but it generated mostly from the equity market. 

In 2012, the BB put increased emphasis on macro-prudential regulation, stringent on-site supervision and off-site surveillance of financial intermediaries, close collaboration among various regulators, together with increased risk awareness of the stakeholders of the financial system with a view to letting them withstand and adapt to plausible shocks well ahead of their potential materialisation, according to the report. 

"The overall macroeconomic environment was favourable, and the financial intermediation process demonstrated considerable resilience amid unfolding of some financial scams in the banking industry," it noted. 

"A series of efforts and policy actions by both BB and the government contributed to maintaining financial stability. Nevertheless, there is no scope to remain complacent." 

The report also said stakeholders of the financial system should remain aware of the potential risks and vulnerabilities with a view to withstanding and adapting to those accordingly.

BB Governor Dr. Atiur Rahman earlier unveiled the FSR giving emphasis on ensuring stability in the country's overall financial sector. 

He also said although there is no immediate risk in the stability of financial sector at micro level, the state of stability in all banks is not at the same level.

The central bank chief also noted that the BB has already issued detailed guidelines for banks regarding ensuring good governance in internal audit and control but their effective implementation is not reassuring at all.