Financial stability report out: Shock resilient in 2014: Dr Atiur

Financial stability report out: Shock resilient in 2014: Dr Atiur

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Financial Stability Report 2014 was unveiled on Sunday by Governor Dr. Atiur Rahman of Bangladesh Bank (BB), in a ceremony held at Jahangir Alam Conference Hall of the bank. The program was chaired by Deputy Governor Shitangshu Kumar Sur Chowdhury in the presence of other Deputy Governors and senior officials of Bangladesh Bank and chief executives of Banks and Non-Bank Financial Institutions.
In his welcome speech, Deputy Governor Chowdhury highlighted the recent development initiatives taken by Bangladesh Bank aimed at safeguarding financial stability outlining the purpose of Financial Stability Report-2014. He pointed out that remarkable changes have taken place in the financial system of Bangladesh attributable to lower assets concentration and operation of newly established banks. He said that the banking sector had temporarily moved to safe liquid investments. He also added that though the net profit in the banking system has declined due to the provision requirements but the resilience of the system increased manifold. As a regulator, Bangladesh Bank attaches equal importance on stability of financial sector along with its main goal.
The Governor in his speech stated that the financial system of Bangladesh was stable and shock resilient in calendar year 2014 on an overall basis. He added that our financial sector was able to stand on strong base despite different obstacles and achieved 6.1 percent GDP growth on an average. Major macroeconomic indicators maintained steady growth due to appropriate and timely policy measures taken by the Government and Bangladesh Bank. The foreign exchange reserve has touched the landmark of USD 25 billion which is ranked second highest among the SAARC countries and is also a record in the history of Bangladesh. On the other hand, Bangladesh has already become a lower-middle income country with per capita income of USD 1314. Bangladesh Bank, like the central banks of many other developing countries, has encouraged financing socially responsible, inclusive and environment friendly sustainable sector for managing the risks from instability and imbalance in financial sector. This initiative is helping reduce poverty rapidly. In the last few years, remarkable changes also took place in terms of regulation and supervision of financial intermediaries.
Dr. Atiur Rahman said, capital base of banks has improved in last five years due to transferring of a major portion of banks’ profit into capital. Re-capitalization and decline in provision shortfall have strengthened the base of financial sector. He pointed out that banks might face the challenges in adopting new business model in coming years. Mentioning loan default as a matter of concern, he emphasized on exerting relentless effort in reducing the rate of the defaulted loan. Various advanced tools have been introduced in identifying risk and vulnerability in the banking sector, he expressed expectation that introduction of these tools will contribute to maintaining stability in the financial sector. He further added that some new departments have been created in Bangladesh Bank to intensify oversight role of Bangladesh Bank on internal control and corporate governance in the banks.
The report in brief –
Microeconomic Development:
•         The GDP growth rate remains stable and the inflation rate remains at a tolerable level. Foreign exchange reserve reached the record level of USD 25 billion. Balance of trade decreased owing to increase in export earning which is favorable for macroeconomy and the banking sector as well.
•         The growth of Real GDP in Bangladesh continues to be stable. The growth rate of GDP increased to 6.1% in FY 2013-14 which was 6.0% in FY 2012-13.
•         Monetary Policy of Bangladesh Bank played crucial role in keeping the inflation rate at tolerable level.
– Inflation rate declined from 7.4% in June 2014 to 7.0% in December 2014. Notably, both Food and Non-food inflation declined during later part of CY14.
•         Foreign exchange reserve stood at USD 22.3 billion which was 23.3 percent higher than that of end-December 2013 and was adequate to meet more than six months’ import payments.
•         Trade deficit narrowed due to larger export earnings in comparison with increase in import payments.
Banking Sector Performance:
•         Banking sector Capital Adequacy Ratio (CAR) was 11.4 percent at end-December 2014 slightly higher than the minimum requirement of 10.0 percent.
•         Banks having CARs within the range of 10 to 16 percent covers a large proportion of banking sector assets (79.0 percent) which indicate financial stability.
•         Banking sector profitability declined in 2014. ROA & ROE decreased by 20 & 260 basis points respectively from the ratios of 2013 and reached to 0.7 & 8.1 percent respectively. Increase in classified loans in a state owned commercial bank is one of the prime reasons of it.
•         Liquidity stress remained at an acceptable level in 2014 due to stable call money rate and desired level of Advance-to-Deposit Ratio (ADR) (70.98 percent). Call money rate was within 6-8 percent range. However, ADR recorded a notable increase in the later part of the year indicating an expected rise in economic activities in the near future.
•         The share of term deposits was 56.4 percent of total deposits which shows banking sector’s greater reliance on term deposits and contributes to the stability of the financial system. Almost half of the deposits (51.7 percent) was concentrated in 10 banks. This concentration is expected to be reduced gradually as 9 (nine) new banks commenced business.
•         The capacity of the Deposit Insurance Trust Fund (DITF) is BDT 363.6 Crore which is expected to reach over BDT 1000.0 Crore in 2019. The current fund is capable to reimburse the deposit claims in 26 banks (lowest in consideration of deposit).
•         The banking sector classified loans increased slightly in 2014 and reached to 9.7 percent (8.9 percent in December 2013). But, higher maintained provision has increased the loss absorbing capacity of the banking sector. It is mentionable that adjustment of maintained provision with the classified loans makes the rate of net classified loan 4.2 percent which is less than half of the gross classified loan.
•         New 9 (nine) banks’ classified loan and profitability ratios are  lower than the banking sector, however, capital adequacy ratio (29.9 percent) is relatively higher than that of the entire banking sector. A higher portion of safer investment in liquid assets is one of the prime reasons of it.
Banking Sector Risks:
•         At end-December 2014, credit risk appears to be most significant, attributed 85.7 percent of the total Risk Weighted Assets (RWA) of the banking system. The risk was mostly from on-balance sheet items.
•         A stable credit rating and very little downward migration of rating of the rated entities in 2013-2014 confirm resiliency of the financial system.
•         Stress Testing results reveal that the individual banks and the banking system, as a whole, are resilient enough to different level of stress scenarios. Banks are resilient for more than 5 business days with severe liquidity stresses.
Non-Bank Financial Institutions (NBFIs):
•         Asset quality of the non-bank financial institutions improved in 2014. Classified loans and leases dropped by 30 basis points and reached to 5.3 percent. On the other hand, capital adequacy ratio (CAR) increased 290 basis points and reached to 21.2 percent. Stress Testing results revealed that 23 (twenty three) out of 31 (thirty one) NBFIs were resilient in 2014.
Capital Market:
•         Capital market was fairly stable in calendar year 2014 compared to preceding calendar year although a slight volatility was evident in the second half of the year. 18 (eighteen) new companies issued IPO in 2014 and market capitalization ratio also increased promptly compared to total nominal GDP in the stated year.
Foreign Exchange Market:
•         Despite a little depreciation of Real Effective Exchange Rate (REER) from January 2013, the nominal foreign exchange rate movement was quite stable and resilient during CY14. Both the issuance and settlement of Letter of Credit increased. Export proceeds and inward wage earners’ remittance also increased.
Microfinance Institutions:
•         Size of Microfinance Institution (MFI) sector is relatively small compared to the banking sector (asset size of the MFI sector is only 5% of the banking sector). It does not pose any immediate threat to the stability of the financial system. Besides the lower NPLs (4.18% in MFIs) compared with that of the banking industry (9.7% in Dec 14) suggest presence of effective check and balance mechanism in the MFIs.
Developments in Financial Infrastructure:
•         In 2014 Bangladesh Bank decided to commence implementation of Basel III framework from 2015 with a view to strengthening the capital base of the banking sector and enhancing risk resilience of the banks.
•         Bangladesh Bank took different initiatives to bring under banking services the unbanked people through agent banking and mobile financial services and bringing mass population under the umbrella of financial inclusion.
•         With the aim of ensuring and maintaining financial stability through strengthening policy coordination among financial regulators and to avoid contradictions and unnecessary duplications, Bangladesh Bank has taken an initiative to develop a ‘Coordinated Supervision Framework’ for the financial system.
•         Bank Health Index & Heat Map for assessing banks’ health and Early Warning System for non-bank financial institutions are in process of implementation.
Representatives of Association of Bankers, Bangladesh and Bangladesh Leasing & Finance Companies Association also spoke. – BB press release

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