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Major problems of the banking industry and strategies to overcome

them: A study on Bangladesh


Md. Joynal Abedin

Faculty Member

Department of Finance


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

Major problems of the banking industry and strategies to overcome
them: A study on Bangladesh


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
Bank’s Financial Stability Report 2014. 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

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

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.

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 non-
financialinstitutions 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 2001-
2005. 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 Bank’s performance was reviewed by the
Central Bank Strengthening project. The economic and political impacts on the bank reforms

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 2000-
2001. 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,

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.

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, 2012 to September end, 2013. 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. Also 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

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
2013 the bank’s capital shortfall amount was tk. 8863 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

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.

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 14.3 percent but in year 2012 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.

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

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)

Bangladesh’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

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 Tk990bn 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).

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.

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

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

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 Bank’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.

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.

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.

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

from BDT 2.6 billion (as at end
December 2013) toBDT 7.96
billion (as at end December

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.

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

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.

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. But 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’ CARs were within the range of 10%-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.

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