How do we fix the banking sector?
The turmoil in the banking sector is on the rise. A lack of good governance, rampant corruption, and political and managerial interference in management have led to this scenario. As the prices of daily commodities are on the rise, people are focusing less on new savings and on the contrary, using their prior savings to meet their daily needs.
The dollar crisis is creating further problems for the sector.
Banks usually make money from remittances and imports and exports. However, as the opening of letters of credit has slowed due to a lower inflow of dollars, banks are struggling to make revenues. As a result, foreign trade has come to almost a standstill, leading to stretched liquidity. Despite the central bank's assurances that depositors' money is safe in banks, many are withdrawing.
Analysts say there has been a lack of good governance in banks for a prolonged time. Influential people close to governments, bank directors and top-level bankers of several banks have been accused of being involved in Anti-Corruption Commission cases. Many top individuals involved in the fraud are yet to be brought into account.
Almost all loans taken through fraud have now turned into defaults. A portion of those loans has also been reportedly smuggled abroad. Special leeway has been given to some defaulters to prevent further deterioration of defaulted loans.
On the face, the banking book looks healthy, but the inside is becoming increasingly hollow. Due to the coronavirus pandemic, loan recovery was not possible for 2020 and 2021. Owing to the Russia-Ukraine war, there are some more concessions in debt repayments now.
Many feel that it is not right to give any discount to defaulters. Instead, discounts should be given to good customers and legal action should be taken first against those involved in defaults and corruption. Good governance must be established. It is also important to reform the banking sector.
Risky assets of banks have increased due to an increase in non-performing loans and provision deficits. The capital has also decreased. In June last year, the capital adequacy of banks was 13.33 per cent. This June it decreased to 9.53 per cent. During the same period, defaulted loans increased and the revenue could not be drawn to the reserve fund. This reduced the capital against risky assets.
While deposits in the banking sector are falling, loans have increased by 16 per cent. According to conventional rules, the growth of deposits must increase more than loans. Due to the decrease in deposits, the liquidity crisis may worsen in the coming days.
As the rate of inflation is higher than the interest rate on deposits, the money kept in banks is depleting instead of increasing. Currently, the inflation rate is more than 8 per cent and the average yield on bank deposits is 4.9 per cent.
Income from banks' capital and assets have decreased. Income from assets was 0.46 per cent in March-June last year. This year, it has decreased to 0.35 per cent.
The return on capital was 7.48 per cent during the same period last year. It has decreased by 6.34 per cent. Seven banks could not generate any income from assets.
Bad smells are coming from several banks and financial institutions run by the same beneficiary owners and importantly, close to the political government. Regulators seem to be helpless when the question comes to disciplining those institutions. Hence, ensuring minimum discipline in the financial sector is linked to bringing in minimum accountability in the government and in the regulatory agencies.
The author is an economic analyst.