The banking sector is seriously vulnerable to economic shocks, mainly due to the poor performance of state-

owned banks, Business Monitor International (BMI), a London-based research firm, found in a recent study.

The state banks have racked up a large amount of non-performing loans on their books, creating a flaw in

the banking system, the study said.

“This makes the banking system extremely vulnerable to shocks and impedes the efficient allocation of

financial resources in the economy,” the BMI said in its Bangladesh Commercial Banking Report 2014.

“Weak balance sheet brings risks to privatisation of state-owned banks.”

As of September 2013, the gross non-performing loan ratio of state banks stood at an elevated 28.8 percent

, an increase from 2011's 11.3 percent and 2012's 23.9 percent, while the speicalised banks' gross NPL ratio remained high at 29.4 percent, it said.  

The amount of default loans at the state banks was Tk 16,606 crore or 19.76 percent of their outstanding loans on December 31 last year, according to Bangladesh Bank.

Despite various reforms, the banking sector's health remains poor, and “a greater concerted effort from the regulators, specifically targeted at state-owned banks, is clearly warranted,” the study said.

As of September 2013, capital shortfall at state banks stood at Tk 8,860 crore, and the government has

already disbursed Tk 4,100 crore to strengthen their capital base, the BMI said.

The study also said last year's political unrest marred Bangladesh's image abroad.

A total of 206 fatalities "due to Islamist terrorism" have been recorded up to August last year, which is a

staggering three times more than the total over the past eight years, according to the study.

The report said the total assets of banks are expected to rise by more than 2.5 times to Tk 1,864,280 crore

in 2018, from Tk 708,410 crore in 2012.

Even in the gloomy outlook, some points to cheer remain, it said.

The Financial Action Task Force, an inter-governmental body for monitoring countries that are strategically

deficient in their compliance with its anti-money laundering and counter-terrorism financing rules, has recently removed Bangladesh from its watch list.

“This reflects the significant progress that has been made by Bangladesh to combat money laundering and terrorism financing in its banking system,” it said.  

While the central bank has relaxed its loan rescheduling policy to help affected businesses, this temporary

measure is unlikely to provide much reprieve to the continued deterioration in asset quality, the BMI said.

Bangladesh has 56 banks including nine new ones. Four state-owned banks -- Sonali, Janata, Agrani and

Rupali -- hold around a quarter of total industry assets and roughly a fifth of total outstanding loans.