AMERICAN INTERNATIONAL UNIVERSITYBANGLADESH (AIUB) FACULTY OF BUSINESS ADMINISTRATION REPORT ON Major problems of the banking industry and strategies to overcome them: A study on Bangladesh SUPERVISED BY Md. Joynal Abedin Faculty Member Department of Finance SUBMITTED BY Hasan, Md. Ashak Bin 13-24310-2 Maria 13-24380-2 Alam, Md. Iffat Ul 12-21933-1 Hossain, Md. Fahad 13-23440-1 Wahid, Syed Golam 13-23507-1 DATE OF SUBMISSION- 08 December, 2015 1 Major problems of the banking industry and strategies to overcome them: A study on Bangladesh ABSTRACT The main objective of the study is to find out the major problems of the banking industry and strategies to overcome them based on Bangladeshi bank. We discussed banking industry and banking system in Bangladesh. Besides this, we discussed major problems faced by Bangladeshi banking industry such as low quality of assets, lack of governance, accountability and transparency, inadequacy of effective risk management system etc. We also study and find out the possible strategies to overcome banking sector problems. We analyze some point like non-performing loan and capital adequacy based on Bangladesh ”ank’s Financial Stability Report . To prepare this paper we collect our data from several journals, articles, websites etc. means our project totally based on secondary data. To gather knowledge to prepare this paper we review many articles and journals and get idea about our subject that helps us to make this. To fulfill our project we analyze different variable like distribution of NPL as percentage of outstanding loans, Gross and Net NPL as percentage of outstanding loans at end December, 2014, Banking sector loan loss provisions: end December, Top 5 and Top 10 banks based on NPL Size which helps to make our project. To overcome the problems of banking industry in Bangladesh, we suggest some solution that will helps to overcome those problems which useful for several people who will study related this theme. Hasan, Md. Ashak Bin, Maria, Alam, Md. Iffat Ul, Hossain, Md. Fahad & Wahid, Syed Golam 2 Table of contents 1.Introduction …………………………………………………………………………........ 04 2. Literature Review ………………………………………………………………………. 04-06 3. Banking industry in Bangladesh ……………………………………………………… 06 4. Major Problem Faced by Bangladeshi Banking Industry …………………………. 06-12 4.1. Low quality of asset …………………………………………………………… 06-07 4.2. Lack of good governance, accountability and transparency ……………… 07-08 4.3. Inadequacy of effective risk management system …………………………. 08-10 5. Possible Strategies to Overcome Banking Sector Problems ……………………… 13-15 5.1. Risk Mitigation Strategies ……………………………………………………………. 14-15 6. Data and Method of Analysis …………………………………………………………. 15-16 6.1. Data Source ……………………………………………………………………………. 16 6.2. Project Design …………………………………………………………………………. 16 6.3. Data Analysis…………………………………………………………………… 16 7. Empirical Result and Discussion ……………………………………………………... 16-20 7.1. Non-Performing Loan (NPL) …………………………………………………….. 16-19 7.2. Capital Adequacy …………………………………………………………………….. 19-20 8. Recommendation ………………………………………………………………………. 21 9. Conclusion ……………………………………………………………………………… 21 10. References……………………………………………………………………………… 22-23 3 1. Introduction Banks are among the most important parts of sourcing money for businesses and are now very active in giving long term loans.). The main functions of banks are to earn money from deposits and loans. Commercial Banks follow this step strongly. The main function of a commercial bank is to mobilize deposits and to provide loans to people and organizations to finance their consumptions and business activities.(Siqqiqi, Parveen and Hossain, 2013). Thus banks encourage the flow of money to productive use and investment which accelerates the flow of economic growth (Ashraf Ali &Howlader, 2005). Bangladesh has improved in its economic sectors in recent years. The changes in governments have created lots of problems in the economic growth rate of the country. The problems in the banking sectors have arisen mainly from this problem.The problems in the banking sectors have arisen mainly from this problem. The Governmental decisions also have huge impact on the banking problems in Bangladesh. The Major problems are: 1. Low quality of Assets 2. Lack of good governance, accountability and transparency 3. Inadequacy of effective risk management system. 4. Weak institutional control 5. Pre-dominant of individual investors If there is anydevelopment in the economic reforms of this country only then there will be any development. Investment increases whenever there is a high level of growth in the economy. It will be possible by proper financial institutions and proper cash flows from banks to banks that the problems can be overcome (The Financial Express, 2015). 2. Literature Review The term corporate governance means the control and directions provided by the government bodies to maintain the process, system and relations in the corporations. It includes the rules and responsibilities for making decisions in the corporate world.Corporate Governance is a very important concept taken into account by most of the corporations and financial institutions. The main concept of corporate governance is a clear and equal relation between a corporation and its shareholders. This journal shows how far the corporate financial sectors practice the corporate governance and how much beneficial it is for the financial institutions.Corporate Governance helps to avoid big problems. The proper decisions helps in managing shareholders risks, task specialization and many more. 4 After the financial crises of 2008-2009, the value of corporate governance increased. It is different for banking financial institutions. The difference in the actions of financial and nonfinancialinstitutions regarding this is huge. Therefore it is very important for both of the sectors(Abedin&Arif, 2015). Internal mechanism of Corporate Governance points out the internal decision by the board of directors. Some factors involved in Corporate Governance: 1. Risk and Risk management 2. Culture of the Corporation 3. Market Discipline 4. Board of Financial Institutions. The research has evaluated five main corporate governance characteristics that has been practiced in Bangladesh. They are: 1. Legal framework 2. Regulatory frame work 3. Weak institutional control 4. Pre-dominant of individual investors 5. Limited transparence & weak disclosure practices etc. (Huq&Bhuiyan, 2012). Givoly and Hayn researched on the Conservatism of financial reporting in the years 20012005. After that there were not any indications found of Conservatism later on. This is what is reflects in this journal. Accumulated Accruals: Long time presence of accruals which are negative proves reporting of conservatism. Conservatism lies on the bad news of earnings rather than the good news of economic events. This concept is also becoming monotonous. Skewned earnings in negativity are calculated due to earnings recognition is done in negativity. Profitability: 1995-2000: Till 2002 profitability started to decrease while increasing losses. In 2003 it started to improve (Abedin, Alam and Shahid, 2012). The main objective of the study is to find out the problem and prospect of mobile banking in Bangladesh. Mobile banking has been started in Bangladesh but it is yet not so popular due to the may be low technological benefits. But still most of the private banks have started to adopt this technology (Ahmed, Rayhan, Islam &Mahjabin, 2011). There are a series of ongoing reforms in the Bangladesh Bank. After 1982 reforms adaptation, the assessment of their effect on the ”ank’s performance was reviewed by the Central Bank Strengthening project. The economic and political impacts on the bank reforms 5 are calculated by the GMT (Grilli-Masciandro-Tabellini). From the measurement of GMT, Bangladesh Bank lies in much lower position in competition with others (Ahmed, 2007). 3. Banking Industry in Bangladesh The Banking sectors of Bangladesh provide most of the finance in the country. It is different from the other developed countries. This is one of the Major Service sectors in Bangladesh economy. There are four categories of scheduled Banks: 1. Nationalized Commercial Banks (NCBs), 2. Government Owned Development Financial Institutions (DFIs), 3. Private Commercial Banks (PCBs), and 4. Foreign Commercial Banks (FCBs). Banks around the whole world has systemized to carry out the system in an ethical manner. In addition to 47 commercial banks in Bangladesh, the central bank has approved nine more banks in Bangladesh. Three new NRB commercial banks, sponsored by non-resident Bangladeshis, and six private commercial banks, have been approved aiming to help boost the inflow of foreign exchange and strengthen the ongoing financial inclusion programmers through bringing unbanked people under the banking network respectively. There have been major significant developments in the economy of Bangladesh since 20002001. The economy has grown and the banking system has become more competitive but there are still a large number of under-banked people in Bangladesh (The Financial Express, 2012). 4. Major Problem Faced by Bangladeshi Banking Industry 4.1.Low quality of asset The main assets of any bank which they use as their uses or investments are: Reserve, Cash item in process of collection, Deposits at other banks, Securities and most importantly Loans. But in our banking sector there are several problems related to the low quality of assets which banks are using day by day. During our study we have found two major problems related to the quality issue about the assets of our banking sectors. From the further part of our discussion we will try to focus on those particular problems. 6 The reserve requirement for our banking sector is 19.5% where Statutory Liquidity Ratio (SLR) is 19.5% including the Cash Reserve Ratio (CRR) 6.5%. If any bank maintain more money than their required reserve it will be known or stated as excess reserve. The adequacy of the required reserve of the bank is very important for any country’s economy because if any bank holds any excess reserve, the money that they are holding in their volts or other sectors it will be stated as idle money which brings no return. At the month of October and end of year 2013, total liquid asset of the banking sector stood at Tk. 1860 Billion which was more than 1.86 times higher than the liquid statutory reserve ratio (SLR). As we mention before that this excess money or excess reserve will not bring any return or will not contribute in our economy. Although during some last year a significant gap has been created in sources and uses of funds in our banking industry. Our banking industry is burdened with liquidity surplus and it still continuous if we see the statistics data of central bank and it shows that at the end of month may, 2014 the excess liquidity in banking sectors stood 102,223 core. The commercial banks have a tendency to deposit the excess liquidity with the central bank where central bank charges interest of 5.25% and on the other hand if banks borrow money from the central banks it charge 7.25% of interest rate. In the present situation commercial banks are depositing their more or excess money to the central bank rather than borrowing the money which increases the cost of the central bank or Bangladesh Bank. Another problem we want to introduce is NPL (Non-Performing Loan). In our banking sector the rate of Non-Performing Loan or NPL is continuously increasing and it has been reached to the amount of 567 Billion in the end of month of September, 2013. If we see the data of the NPL of the year 2012 it will show us that from the end of month December, 2012 to from the end of month September, 2013 the amount of NPL has increased over 33 percent during these few months. The NPL ratio has also increased from 10 to 13 percent from December end, to September end, . The loans are bank’s major source of asset which covers 74% of its whole asset portion. 4.2. Lack of good governance, accountability and transparency The banking industry of our country has continuously made considerable progress but despite this situation the foreign countries are consider our banking system or banking industry activities as questionable. This occurs because recent news about bank directors and chairmen’s involvement in political parties. “lso there has been a possibility to unhand bank’s important deals with using the bank’s goodwill which will question the factor that is our banking industry and its’ operations are independent & reliable? Because of the lack of good governance whatever the banks are publishing in their annual reports and regulatory paperwork’s and the data they are putting in those papers are they reliable or actually correct? Are those papers have been properly audited? These are the 7 questions which always knocks the financial experts or advisors because a commercial banks real competition is not only with its other banks but also it has to compete with the non-banking financial institutions and micro finance institutions. Our government is failing to achieve growth of the credit target which is contributing to the lower investment. The Incremental Capital Output Ratio (ICOR) which measure the investments of any country has shown us that the GDP of our country should be increased which is deteriorating over the past few years. At the Fiscal Year 2013-14 government tries to increase the investment rate at 32 percent of GDP for achieving the GDP growth rate of 7.2 percent. But due to the negative growth of credit in both private and public sector, the banks growth rate has been deteriorating which indicates the deregulation in financial sector of our country. In the year of 2013 the growth of credit in private sector was registered as 11.07 percent over the previous year 2012 which was lower than the growth of 19.88 percent which was witnessed at same period of the previous year. In recent years the growth of credit is also declining because of the consecutive monetary policy of Bangladesh Bank, political unrest, uncertainty in our country and most of all lack of infrastructure facilities and lawlessness. 4.3. Inadequacy of effective risk management system The risk management system is a combination of some terms which includes: asset quality, capital adequacy, non-performing loan, expenditure income ratio, return on Asset (ROA), & return on Equity (ROE). If we first talk about the capital adequacy we must have to say that this is a cushion for a bank that prevents bank failure. Capital adequacy is measured by the capital to Risk Weighted Asset. The regulation from the central bank is a commercial bank has to maintain 10% of risk weighted asset (RWA) or tk. 200 whichever is higher as the banks minimum required capital. If the banks cannot maintain or hold their required amount of capital then a situation came up this is referred to as Shortfall of Capital . In this situation the government would have to restore the capital position under the extended credit facility loans driven by the International Monetary Fund (IMF). At the end of year the bank’s capital shortfall amount was tk. 6 core. To meet the requirement of the IMF our finance minister has decided to revise the recapitalization of banks proposal and for that banking sector will distribute 4100 core in the first phase against their shortfall of capital. The management of the banking sector either it’s sound or not for that the only indicator is Expenditure Income Ratio (EIR). If the EI ratio is high that is not good or sound for the bank. In our country the reasons behind high EI ratio are: loan loss provision, high administrative, overhead expenses, interest suspense for classified loan and the lack of presence of prudential surveillance of the banking sector. 8 ROA stands for how much income have been earned from per unit of asset. If we follow BASEL instruction ROA should be more than 1 percent in any industry. But if we see the statistics data from 2007 to 2012, we can understand that the stated owned commercial banks have achieved nearly zero percent of ROA over the period of time. The situation is much worse in the Development Financial Institutions as their ROA is less than 1 percent over the period of time from 2010 to 2012. In the end of year 2012 the overall ROA in the banking sector was 0.60 percent where it was 1.3 percent in 2011. If this continues the overall ROA in banking sector may be decreased in the amount of 0.55 percent in 2013. ROE indicates that high productivity of equity. In year 2011 the overall ROE of the banking sector was . percent but in year the amount of ROE decreased and it’s reduced by 6.5 percentage points. Experts say that if this trend continuous the amount of ROE will be decreased to 6.80 percent in the year 2013. As we can see that every aspects of risk management system was affected with some problems and low amount of ROA and ROE indicates that the profit margin of our banking sector is not very high. Besides these major problems faced by our banking industry we would like to address some other issues related to our banking sector: 1. Industrial Loan Since April-June, 2011 the growth rate in the industrial term loans has been fluctuating with an irregular movement and growth rate was also negative. For adequate capital formation loan is a very important factor like the developing country of ours. 2. Agricultural Credit Disbursement The growth rate of agricultural credit disbursement and the recovery of credit have been declining after the month of September, 2013. In September, 2013 the disbursement of agricultural credit was 1149.04 core but in October, 2013 the amount decreased at 1086.56 core. The growth rate of disbursement of agricultural credit was decreased by 5.4 percent in October, 2013. 3. Disbursement of SME loan Except the specialized banking sector loans given by all banks and financial institutions has been increased to Tk. 473242.7 core at the end of September, 2013 from Tk. 466162.3 core at the end of June, 2013 but the SME loan has decreased by Tk. 9451.91 core at the end of September, 2013 from Tk. 24398.34 at the end of September. 2012. It shows that the growth rate in SME loan sector is negative. 9 4. Borrowing from the Govt. bank Banks are borrowing more money from the government since July-September, 2013. Because of the increase of borrowings in every year the expenditure are also going up because of the higher interest payment they have to pay to the government for their borrowings. 5. Credit Growth Credit growth is the increase in the loans for the private sector, individuals, establishments and public organizations.When credit is expanding or increasing, consumers can borrow and spend more and businesses can borrow and invest more. The expansion of credit tends to cause the price of assets such as property and stocks to increase, thereby boosting the net worth of the public. Increasing consumption and investment produces jobs and expands income and profits.However, every credit-induced economic boom comes to an end when one or more important sector of the economy becomes incapable of repaying the interest on its debt (Kgb answer, 2015). Domestic Credit Growth Rate was 10.78 on 2013 compared to 16 in the previous year. Growth Deposit on the other hand was above 18 percent at the end of 2013 compared to 19 percent over the last year. There has been a gap between sources and uses of fund in the banking industry. There has been a surplus of liquidity in the market. Total liquid Asset went up to Tk. 1860 billion which was higher than the statutory liquidity ratio. Advance Deposit Ratio decreased to 71.70 percent from 76.59 percent. In the Private Commercial Banks it went to 77 percent from 79.65 percent. 6. Non-Performing loans A non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If the debtor begins to pay on the NPL it becomes a Reforming Loan, even if the debtor has not caught up all the missed payments. Non-performing loans (NPL) has increased in Bangladesh as well. It went to Tk. 567 billion on the end of September 2013 with a percentage of 33. Therefore NPL ratio increased to stand at around 13 percent in 2013 against slightly over 10 percent of December at end of 2012. SCBs contribute mostly on the classified loan portfolio pie. PCB Non performing loans increased. The NPL ratio of PCB reached to record 7.30 percent. The deterioration of the asset quality adversely affected the resilience capacity of the PCBs. Bangladesh Bank relaxed the loan rescheduling policy for the next six months to facilitate financing in the business. Banks can improve their asset quality management and show 10 better financial performance. The prime focus of the banking sector would be the recovery of the loans that has been made last part of the previous year through the central bank’s directory. This might put the banks in distress if the correct amount is not repaid in at the particular times. These Banks need to keep additional capital against residual risk, credit concentration risk, liquidity risk, strategic risk, reputation risk, settlement risk Evaluation of core risk Operational Risk The increased capital requirement might put pressure on the capital requirement of a good number of banks having marginal capital adequacy(The Financial Express, 2015). Bangladesh Banks increased the number of Banks. They have thought it will help increase the quality of banking sectors in Bangladesh. For new banks the ratio of opening inside the rural area. No banks can focus on rural areas here after focusing on the urban areas. Granting so many licenses for lots of new banks have created alarming situation. The banking sector is already saturated with 47 commercial Banks. It was not logical to introduce more. There will be unhealthy competition (The Financial Express,2015). 7. Surplus Liquidity Surplus liquidity occurs where cash flows into the banking system persistently exceed withdrawals of liquidity from the market by the central bank. Surplus Liquidity: Implications for Central Banks. Sources of Surplus Foreign exchange reserves build Monetary Financing- asset is lending to government Bank rescue- asset is LOLR credit and is ultimately a loss(Gray, 2006) ”angladesh’s commercial banks are washed with idle money due to poor investment and lower credit demand. Due to political instability al the businesses remained stopped mainly due to elections. The excess liquidity increased by Tk240bn or 40% during January-September period of the current year and stood at Tk840bn from Tk600bn in January, according to the Bangladesh Bank data. The amount of surplus liquidity increased rapidly while credit growth dropped 11 continuously. The credit growth of the banks was 13.39% in January with surplus liquidity of Tk600bn, followed by 10.29% growth in March with Tk660bn in excess liquidity. The growth was 8.97% in June when the liquidity was Tk790bn and 7.40% in September as the liquidity rose to Tk840bn. The banks burdened with the huge idle money were looking for alternative investment window as reflected from their rising investment in the government securities. The banks’ investment in government securities increased by 26% to Tk1tn during the 9 months period till September from Tk bn in January, according to the central bank data. The investment opportunities for the banks shrunk due mainly for political unrest, lack of gas and electricity. Besides, they have also barrier to invest in share market according to the amended bank company act,’’ said a senior executive of a private bank. However, the banks were taking away investment from the capital market instead of reinvesting there as they are bound to keep their exposure limit at 25% of paid up capital and reserves, which also pushed the liquidity to go high, he said. He said credit growth also decreased due to inflow of low cost foreign loans in the private sector as provided by Bangladesh Bank. Banks burdened with excess liquidity (Dhaka Tribune, 2015). 12 5. Possible Strategies to Overcome Banking Sector Problems 1. Attract and retain clients Banks and financial services Firms have to stand out in the crowd by offering customers something extra. "The bottom line is there is nothing that can differentiate one bank from another, other than making a connection with customers," says Joe Sullivan, Chief Executive Officer of Market Insights. Sullivan's company helps financial institutions with business strategy, planning and marketing. "Make an emotional connection with the consumer and let them know you understand their financial needs. Then come at them with solution-based thinking, not product pushing. Sullivan says, The financial services providers that help customers take ownership of their finances and teach them to become better money managers will have larger client bases. 2. Knowing customer in a rapidly changing world Financial services providers must be aware that their customers are changing, too. According to Sullivan, Consumers are savvier and more aware of their finances than they were five years ago. The best providers engage customers and learn how their needs are evolving. If a bank or a business has not viewed at its market or its customers to learn "what is going on with them in the last year, you don't know your customers." Sullivan said. 3. Promote confidence in the economy The economic crisis that began in 2008 is still very fresh in customers' minds. Large financial firms collapsed and the government bailed out troubled banks. The stock market lost value and in much of the country the housing market eroded. 4. Using technology that customers expect Sullivan said, "Technology has changed the expectations consumers and small businesses have of their bank". Clients use information on the Internet to compare financial service institutions. Companies must react to changes in technology to keep reaching customers in the most effective ways. 5. Watching goodwill or reputation The financial services world is like high school in some ways: goodwill can be difficult to control or change. At the moment, consumers are not forgiving many of the companies that were front and center during the economic crisis. 13 6. In the wake of these challenges, banks must gain some sound strategies to weather the strong headwinds during the economic transition. First, banks should strengthen their risk pricing capability and put more emphasis on small-to-medium enterprises and retail business .To ensure business growth and maintain high profitability, banks must expand downward to develop SME and retail customer resources. 7. Second, innovative product lines plus integrated businesses. Economic transition means basic deposit and loan business will see continuous downward pressure on profitability and narrowing room for growth. Banks must need to adapt to the trends and the changing financial demands of customers by rolling out new products and services. 8. Third, banks must have optimized institutional structures with an enhanced corporate culture. Changes in customer mix and business innovation are founded upon organizational structure and corporate culture. In future, customers' needs will not be limited only to credit services, but also cover various aspects including investment services, settlement, and wealth management. This integrated mode of financial operations requires close cooperation and coordination among different divisions. Commercial banks should come up with an appropriate organizational structure for future development. 9. Banks should push for higher efficiency in capital utilization with more contribution from retail and intermediary businesses. Following the implementation of the new capital requirements, the previous continuous growth of the commercial banks is not sustainable .Under current market conditions, banks can only accumulate capital internally. 10. Meanwhile, banks need to realize capital cost in product prices through upgrades in IT systems. After all, the current bank-led financial system is closely associated to China's economic growth model in the past decade which used to rely heavily on exports and investment. During the process of economic transition and financial reform, both assets and liabilities of the banking sector will face stiff challenges and are superimposed against asset quality risk amidst the economic downturn. Consequently, we see lots of uncertainties in the foreseeable future while China's large banks can still be formidable names in the sector if they take correct and necessary steps as soon as possible. 5.1. Risk Mitigation Strategies 1. Record Management A number of strategies exist for minimizing the risks faced by the Bank. These methods are analyzed, record management is a universal way that can be used to manage and minimize the risks faced not only by the Bank but by all business entities. Poor record management 14 poses a risk to many organizations such as KCB in managing risks. A number of scholars such as Makhura (2008), Sydney University of Technology (2008), Sampson (2003) and Williams (2007) contend that weak records management programs, systems and practices have remained a problem and a major obstacle to developing watertight risk management strategies in the banking industry as well as in other financial institutions. 2. Credit Management Sound credit management is a prerequisite for financial institution stability and continuing profitability. Credit risks are increased by poor credit management policy. The prudent management of credit risk can minimize operational and credit risks. Deteriorating credit quality is the most frequent cause of poor financial performance and condition. Therefore a Sound credit management is a prerequisite for a financial institution’s stability and continuing profitability. Complying with the credit union’s lending license and by-laws is the first step in managing credit risk. To ensure the level of risk remains within acceptable limits, the loan portfolio is managed on an ongoing basis. 3. Insurance Insuring against risks is the most common way organizations, Banks included can minimize risks. Certain risks such as operational risk and risks occasioned by such perils as fire and hazards such as violence are minimized by insurance. Kenya Commercial Bank has major insurance policies by different insurance companies that cover a variety of policies. 4. Partnerships and Mergers to overcome this risk, the Bank can partner with local investors in the countries it operates in and even the local governments. This assures that in the event of political unrest, the Government in the country in question will protect its interest by assuring the ”ank’s assets are not damaged by the unrest. 5. Due Diligence the Bank is exposed to legal risks. Some of the legal risks are occasioned by the bank being sued by clients or the employees. Members of the public can also start legal action against the Bank especially in matters of public interest. 6. Data and Method of Analysis Methodology is a system of broad principle or rule from which specific method or procedures may be derived to interpret or solve different problems within the scope of a particular discipline (Sohel, Rayhan, Islam &Mahjabin, 2011). It is not a formula but set of practice. The study was conducted to identify major problems and strategy to overcome of the banking industry in Bangladesh. 15 6.1. Data Source At the beginning of the study, several journals, articles and several webpages from the internet and other secondary (source such as book) of literature were referred to gain an overall extensive viewpoint about the banking industry in Bangladesh and its problems and strategies to overcome in present economy. To further broaden our knowledge, we had discussion with our course instructor. The study is descriptive in nature of research. The data for this paper have been collected from only secondary source of information. Secondary data were derived from various sources including the website of different bank, different annual reports of relevant institution, journals & articles of related topics, different books and materials from libraries, the hand notes of the various seminars. 6.2. Project Design From the starting, we are studying several journal, article, book, magazine, website etc. So, our study based on secondary data and we design our project based on this. By reviewing, those secondary data, we gather different information related to major problems faced by Bangladeshi banking industry and strategies to overcome them. 6.3. Data Analysis After gathering all information, we review those again and analysis those information also trying to interpretation. We are trying to find out why these problems exist and how to overcome those fences. Subsequently analyzing of those problems and strategies, we find out some reason and policy to remove those fences. 7. Empirical Result and Discussion Problem of banking sector is widespread and is not related to banking system only. The regulatory entity should be independent but accountable. Prudential regulation should be limited to deposit-taking institutions and clearly separated from non-prudential regulation. 7.1. Non-Performing Loan (NPL) A non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms. A loan is nonperforming when payment of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement or payments are less than 90 days overdue but there are other good reasons to doubt that payments will be made in full. 16 According to the Bangladesh Bank financial stability report 2014 NPL loans slightly increased in 2014. Strengthening supervision in banks and the withdrawal of relaxation in loan rescheduling may be the reason for the increase in NPL loans. The overall NPL scenario however is quite similar to earlier years. Our discussion based on this report that NPL how attitude last year. Different situation and different topics are discussed here on the viewpoint of The Financial Stability Report 2014. Distribution of NPL as percentage of outstanding loans The NPL percentages of different categories of banks are shown in chart 1. The performances of the SDBshave improved at end- December 2014 compared with their performances at end-December 2013. The NPL ratio of these banks came down to 32.8 percent from 34.7 percent at the end of December 2013. Apart from the SDBs, NPL has increased in all other bank's category. The highest increase took place in SCBs, primarily due to the existence of very high NPLs in a bank, newly categorized as SCB. Chart 1: Distribution of NPL as percentage of outstanding loans The net nonperforming loans scenario at end December 14 depicts that banking industry has safeguarded itself against possible threat to capital erosion arising from increased NPLs. It ensures higher loss absorbent capacity of the banking system. 17 Gross and Net NPL as percentage of outstanding loans at end December, 2014 The graph suggests that the banking system is not that exposed to capital erosion due to poor asset quality. The overall net NPL ratio (net of specific provision) of the industry drops down to 4.2 percent from a gross NPL ratio of 9.7 percent after taking into account the specific provisions maintained. Other than the SDBs, all other types of banks have single-digit net Chart 2: Gross and Net NPL as percentage of outstanding NPL ratio. loans at end December, 2014 Higher NPLs required the banks to maintain higher loan loss provisions in CY14. The provision maintained in CY14 increased by BDT 32 billion. Though there has been observed a slight provision shortfall due to the higher provision requirement, the overall banking industry appears to have maintained provisions in line with current BB policies. Banking sector loan loss provisions: end December The non-performing loans have required banks to create cumulative provisions amounting to BDT 281.7 billion as at end of CY14, which is around BDT 32 billion higher than that of CY13. The following graph shows that the shortfall in maintained provision increased slightly in CY14. At end-December 2014, banks maintained 97.3 percent of required provisions. The overall provision shortfall in Chart 3: Banking sector loan loss provisions: end the banking sector increased December 18 from BDT 2.6 billion (as at end December 2013) toBDT 7.96 billion (as at end December 2014) The concentration among banks of nonperforming loans (in terms of NPL amount) has decreased marginally in CY14. Due to the size of their loan portfolios, SCBs and SDBs are often found in the top 5 or top 10 lists of banks accumulating the highest NPLs. The presence of SCBs and SDBs among the top 10 list in terms of NPL ratio is a matter of concern for the stability of financial system. Top 5 and Top 10 banks based on NPL Size (Chart 4) Nonperforming loan concentration ratios10 (based on NPL amount) of the worst 5 banks and worst 10 banks were 53.6 percent and 67.4 percent respectively at end-December 2014. Though NPL concentration ratios in top 5 banks decreased marginally compared to 2013, it remained unchanged for top 10 banks. These ratios were 54.5 percent and 67.4 percent respectively in 2013. It is to mention that the nonperforming loans in the state-owned commercial banks are higher than that of other banks. 7.2. Capital Adequacy The capital adequacy of the banking industry recorded a minor decline in the review year. Compared with end-December 2013, the proportion of banks compliant with the minimum capital adequacy ratio (CAR) remained mostly unchanged as of end-December 2014; 91 percent of the scheduled banks were able to maintain their capital adequacy ratio at 10.0 percent or higher in line with Pillar 1 of the Basel II capital framework. 19 Capital adequacy ratio of the banking sector Importantly, as evident from the charts, a quite substantial share of banking assets were concentrated in the CAR compliant banks at end December 2014; 34 banks' CARs were within the range of 10-16 percent and their assets accounted for nearly 79.0 percent of the total banking industry's assets, indicating a notable Chart 5: Capital adequacy ratio of the banking sector soundness of the banking industry The major risk of technological based banking includes operational risk such as security risk, system design, implementation and maintenance risk; Customer misuse of product and service risk; Legal risk like without proper legal support, money laundering may be influenced; Strategic risk; reputation risk; credit risk market risk and liquidity risk(Zaman&Chowdhury, 2012). The problem of lower profitability of bank is that it might reduce the tax and thus make a trace on fiscal system where bank is the number one source of tax under large tax unit of NBR. Moreover, the revenue target may face hurdle from another side where lower growth of credit may effect investment and growth and thus tax collection. 20 8. Recommendation There are several problems in banking industry in Bangladesh and Bangladesh Bank is trying to reduce those problems.Although they are trying to reduce, there are huge problems that are not control in a day or a year. In this paper, we find out several solutions to reduce those problems which will more reliable that will be implemented and BB will get benefit. Those are mostly theoretical which may be implementable. Bangladesh bank has to attract their customer and have to knowledge about customer what they want.There are number of banks that are not using technology. BB has to ensure that they serve the customer as fast as possible by using technology. They have to maintain or increase their reputation.There are number of problems in credit management that they have to mitigate those problems by forming strong management and strong observation.By strong controlling of BB, banking industry will go-ahead faster this is our desire. To making, this paper we faced several problems like we considered only secondary data. We suggest those people who will work related to this project as if they will considerboth primary and secondary data. 9. Conclusion In recent years, Bangladesh has increased in economic sector but there is created lots of problems due to government changes. Banks are increased in number last many years and they are trying to improve their asset quality management and show better financial performance. The main focus of the banking sector would be the recovery of the loans that has been made last part of the previous year through the central bank’s directory. ”ut in banking industry, there are several problems like low quality assets, lack of good governance, transparency, accountability and Inadequacy of effective risk management system. The non-performing loans are major concerning here. In this paper, we are trying to show some NPL related information that are helping us to take decision. The NPL percentage of different categories of banks is improved at end December, 2014 compared with their performance at end December, 2013.Gross and Net NPL as percentage of outsourcing loans in banking system is not that exposed to capital erosion due to poor asset quality. The NPL loans have required banks to create cumulative provisions accounting to BDT 281.7 billion as at end of 2014 which is around BDT 32 billion higher than 2013. The CAR is also good because 34 banks’ C“Rs were within the range of %-16%. Overall banking industries in Bangladesh are faced major problems and the central bank of Bangladesh BB are trying to solve those problems and BB get good result in recent years. 21 10. References [1] Challenges facing the banking sector. (2015, December 06). Retrieved fromhttp://old.thefinancialexpress-bd.com/2014/01/21/14753 [2] Abedin, M.J. &Arif, S. (2015). Sound Corporate Governance and Its Benefits in Financial Institutions: Does It Really Matter for Organizational Development. International Journal of Economics, Finance and Management Sciences, 3(5), 507-525. [3] Haq, B.I.A. &Bhuiyan, M.Z.H. (2012). Corporate Governance-Its Problems & Prospectsin Banking Industry in Bangladesh.World Review of Business Research, 2(2), 16-31. [4] Ahmed, H.A., (2007). Bangladesh Bank Reform.Centre for Governance Studies, CGS WP 4, 1-29. [5] BB RAISES RESERVE REQUIREMENT FOR BANKS. (2015, December 06). Retrieved fromhttp://www.thedailystar.net/bb-raises-reserve-requirement-for-banks-30061 [6] Banking sector challenges in Bangladesh. (2015, December 06). Retrieved from http://archive.thedailystar.net/newDesign/print_news.php?nid=154934 [7]Banking sector of Bangladesh past present and challenges ahead. (2015, December 06). Retrieved fromhttp://thedailynewnation.com/news/46666/banking-sector-of-bangladeshpast-present-and-challenges-ahead.html [8] 5 Ways to Overcome Today's Challenges in the Financial Industry. (2015, December 06). Retrieved from https://www.americanexpress.com/us/small-business/openforum/articles/5ways-to-overcome-todays-challenges-in-the-financial-industry [9] Banking on sound strategies to overcome challenges. (2015, December 06).Retrieved fromhttp://www.chinadaily.com.cn/bizchina/2012-11/16/content_15936399.htm [10] Banking industry, Associated risks and Mitigation Strategies. (2015, December 06).Retrieved fromhttps://www.academia.edu/1470560/Banking_Industry_Associated_Risks_and_Mitigati on_Strategies [11] Nyaoma, G. A. (2005). “Risk Management in Banks” Press statement issued on behalf of Central Bank of Kenya on the launch of risk management survey by the Central Bank of Kenya. [12] Njuguna, N. (2007). “Implementation of Basel II Risk Management framework within bank sand the prevention of financial crime” Address by Prof. Njuguna. [13] Ahmed, S.M. S., Rayhan, S.J., Islam, M. A., &Mahjabin, S. (2011). Problems and prospect of mobile banking in Bangladesh. Journal of Information Engineering and Applications, 1(6), 1634. 22 [14] Zaman,F., &Chowdhury, P. (2012). Technology Driven Banking in Bangladesh: Present status, Future Prospects and Challenges. BUP JOURNAL, 1(1), 56-78. [15] Non-performing loan. (2015, December 07). Retrieved fromhttps://en.wikipedia.org/wiki/Non-performing_loan [16] What is credit growth in an economic sense define credit growth. (2015, December 07). Retrieved fromhttp://www.kgbanswers.co.uk/what-is-credit-growth-in-an-economic-sensedefine-credit-growth/17564719 [17] Abedin, M.J., Alam, M.D. &Shahid, A. (2012). Has Financial Reporting Become More Conservative? An Update. Independent Business Review, 5(2), 26-46. 23
