MACROECONOMIC SCENARIO1

In FY12 the economy faced a different set of challenges related to rising inflation and balance of payments
pressures. Despite an unfavourable global economy, Bangladesh managed to attain 6.3% GDP growth in FY12
(FY11: 6.7%) which was in the line of average GDP growth (6.2%) of the country over the last ten years. The
economic slowdown in FY12 was attributable entirely to reduced contribution from agriculture sector due to
decline in crop production. However, the industry sector, driven by its manufacturing and construction sub-
sectors, improved its contribution to growth, with 2.8 percentage points.

Favorable international price trends and monetary tightening has reduced inflation. Consumer price index (CPI)
declined steadily from the second half of FY2012 settling at 8.6% in June 2012 and easing further to 7.4% in
September down from 12.0% in September 2011. This decline has largely been due to lower food price
inflation. During FY12 Bangladesh economy experienced a mixed picture in terms of various factors associated
with output growth. Remittance grew significantly and continued in first quarter (Q1) of FY13. Private sector
credit observed moderate growth of 19.7% in FY12 and continued in Q1 of FY13 considering the tightening
monetary policy. However, export growth and import growth was low pointing to slower economic expansion.

The euro area crisis has already affected exports. Although the year-on-year decline in exports observed since
February 2012 came to a halt in July-September. Garment orders from new markets appear to have offset
declining shipments to Europe in July-September. This may not be sustained if orders from Europe continue to
decline. Export of knitted ready-made garments remained flat while woven garments grew by 13.9 percent in
FY12. In July-September 2012, knitwear exports declined by 1.5 percent while woven garments grew by 9.9
percent. Among other export sectors engineering products, agricultural products and leather goods witnessed
the growth in FY12. On the other hand, Jute goods and frozen food export growth was negative. Because of
higher domestic production, import of food grains decreased significantly by 53.1 percent during FY12. Import
of capital machinery recorded a 5.5 percent growth during FY12 compared to 28.6 percent growth during FY11.

In FY12, the industry sector registered 9.47 percent growth, compared with the 8.20 percent actual growth in
FY11 contributed mainly from SME sector growth by 7.18 percent in FY12, compared with the 5.84 percent in
FY11. The disbursement of industrial term loans grew by 9.68 percent to BDT 352.78 billion in FY12. However,
disbursement experienced a sharp growth of 30.69 percent in the Q1 of FY13 over the same period of FY12.

MONETARY & FINANCIAL DEVELOPMENT1

Despite central banks restrictive monetary policy, broad money (M2) growth moderated to 19.01% year-on-
year at the end of 2012 resulted from slower growth in export payment as well as higher remittance inflows.
Even after monetary tightening, excess liquidity of scheduled banks remained high at BDT 579.90 billion at the
end of December 2012. The higher lending rates of commercial banks and sluggish business environment
reduced demand for credit, contributing to a buildup of excess liquidity in the banking system.

The interbank call money rate was high during the first half of 2012 but came down at the second half of 2012
because of central banks policy support. The BB has introduced a new policy effective from August 1, 2012
which requires the 15 primary dealers to buy 60 percent of the unsubscribed T-bills and bonds and the rest 40
percent will have to be bought by the 25 non primary dealer banks. The weighted average nominal (takadollar)
exchange rate depreciated from Tk 76.2 = $1 at the end of October 2011 to Tk 83.42 = $1 at the end of
January 2011 (a depreciation of about 9.47%). However, dollar price remained stable between Tk.81.52 to
Tk.81.87 from March 2012. Bangladesh Bank occasionally intervened in the interbank foreign exchange market
to limit the excessive volatility in the exchange rate, while at the same time allowing taka to depreciate to ease
pressure on the reserves.

Total deposit liabilities (excluding interbank items) of the scheduled banks increased by 13.22% during the first
three quarters of 2012 and reached BDT 5040.41 billion at the end of September 2012. About 62.84% of the
total deposit shared by private sector banks (PCB) followed by state owned banks (SCB) having 26.01% and
foreign banks (FCB) having 6.34%. Private sector credit of the scheduled banks experienced a moderate growth
of 16.6% at the end of December 2012 and reached BDT 4328.9 billion at the end of 2012. Economic purposes
classifications of private sector credit show that major portion of bank advances belonged to trade financing at
the end of 3rd quarter of 2012 followed by advances to industry sector and working capital financing.

The interest rate spread of the banking system dropped to 5.33% in December 2012 from 5.46% in December
2011. The weighted average lending rate rose to 13.9% at the end of September 2012 from 12.7% at the end of
September 2011. The deposit rate rose to 8.4%, from 7.4% in the same period.

At the end of December 2012, the gross NPLs of the banking system accounted for 10.03% of outstanding loans
compared with 6.12% in December 2011. Some irregularities in state-owned commercial banks (SCB) branches
were not detected until the amount went well beyond the threshold allowed. The recently exposed cross-
acceptance of inland trade bills of unscrupulous private business people increased inter-bank defaults
especially SCBs. Gross NPL ratio of SCBs experienced a sharp rise to 23.87 at the end of December 2012 from
11.27% in December 2011. Gross NPL ratio of private commercial banks (PCBs) witnessed a rise to 4.58% in
December 2012 (Dec 2011: 2.95%). Foreign commercial banks (FCB) asset quality also deteriorated as gross
NPL ratio increased to 3.53% at the end of 2012 (Dec 2011: 2.96%). However, net NPL ratio of the industry was
4.38% at the end of December 2012.

1 Source: Please see annexure.

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CRAB I CRAB Ratings on Bank Credit Digest I
 The risk weighted capital asset ratio (RWCAR) for all banks decreased to 10.46 percent at the end of December
2012 from 11.31 percent at the end of June 2012 due partly to higher provisioning in anticipation of the
impending implementation of BBs new provisioning guidelines by some banks as well as an increase in NPLs. At
the end of December 2012, RWCAR (under Basel II) of PCBs was 11.38%, FCBs was 20.56% and SCBs was
8.13%.

Provision maintenance ratio at the end of June 2012 for PCBs was 101%, FCBs was 107.1% and SCBs was
96.6%. Profitability in the banking sector dropped sharply in 2012 due to lower income from investment as well
as increase in non performing loans. At the end of 2012, return on assets (ROA) of the FCBs was 3.27% (2011:
3.24%) and PCBs was 0.92% (2011: 1.59%).

Overall asset quality of the banking sector weakened in 2012. However, banks appear to be quite resilient to
various kinds of market risks and shocks such as change in interest or exchange rates. The Bangladesh Bank
(BB) is taking proactive steps to maintain stability.

INDUSTRY OUTLOOK2
The continued global economic slowdown with likely negative impact on Bangladeshs trade and investment
outlook, real economic growth in FY2013 is expected to be similar to the 6.2% average growth over the last ten
years. Agriculture growth is expected to be higher than last year, aided by government policy support and
benefitting from the lower base. Industry growth will slow because of decreasing export growth and subdued
domestic demand. However, the steady rise in remittance inflows may continue in FY13which will impact
positively to the overall economy.

Monetary stance in second half of FY12 will take recent economic developments into account and pursue a
restrained monetary growth path in order to curb inflationary and external sector pressures, while ensuring
adequate private sector credit to stimulate inclusive growth. Credit to the private sector is envisaged to remain
at a healthy 18.3% well in line with growth target.BB will continue to focus on the quality/composition of private
sector credit and on interest rate spreads. BB will aim to ensure that the composition of this credit is focused on
productive sectors with an envisaged reduction in the share of consumer credit. SME and agricultural credit are
expected to take a larger share of the loan portfolios of the banking sector in order to promote financial
inclusion.

References:

1. Bangladesh Bank Publications.

2. Quarterly Economic Update by ADB.
3. Bangladesh Economic Update by World Bank- October 2012.

2 Source: Please see annexure