Bangladesh Country Presentation on Financial Stability in SAARCFINANCE Governors' Symposium

1. Bangladesh Country Presentation • on • Financial Stability • in • SAARCFINANCE Governors' Symposium Ziaul Hassan Siddiqui Deputy Governor Bangladesh Bank Kerala June 10 2011

2. Outline • Steady, resilient growth trend of Bangladesh economy • Developments of Bangladesh financial sector • Trends of major financial indicators • Fiscal indicators rising gradually underpinning fiscal benefits for buoyant economic performance

3. Steady, stable trend in economic growth • Bangladesh economy has maintained resilient, stable growth in the face of repeated internal and external shocks; providing markets and entrepreneurs a predictable policy environment of low uncertainty. • Since Liberation in 1971, nominal GDP in USD has increased more than eighteen-fold, while the population has increased a little over two-fold. • Fiscal and monetary policies of Bangladesh are consistently on cautious, prudent stance. Fiscal deficits in recent years have remained below 4% of GDP.

4. Steady, resilient growth performance amid repeated internal and external shocks * Projections FY95: July 94-June95 Externalshocks Internaldisaster

5. Economic growth gaining pace • With brisk output activities meeting strong domestic and export demand, the economy is on course for near 7% real GDP growth in FY 11. The growth rate is projected to accelerate over the medium term to 8% by FY 15. * Projections

6. Inflation remains stable with core (non-food) inflation in low single digit • Active monetary policy management has kept core (non-food) inflation stable at low single digit level. • To contain inflation anchoring inflationary expectations, Bangladesh Bank (BB) announced a hike of 100 basis points in the repo and reverse repo rates on August 2010 and further rise of 75 basis points during March-April, 2011 to 6.25 and 4.25 percent respectively. Inflation rate, % (12-month average)

7. Fiscal indicators rising gradually underpinning fiscal benefits for buoyant economic performance In percentage • The expansionary fiscal stance, that contained fiscal stimulus measures during FY09-FY10, has broadly maintained fiscal sustainability. As a result, debt/GDP ratio showed declining trend in FY10.

8. A marked rise in external demand could have a significant effect on external sector stability as well as on the country's economy • The external position of Bangladesh significantly improved in FY10 due to remarkable inflow of remittances, healthy growth of RMG exports and low import cost.

9. The financial sector grew substantially and remains dominated by the banking industry In percentage In percentage • The ratio of banking sector assets to GDP increased gradually to 62.1 percent at end-December 2010 from 49.1 percent of end-June 2005.

10. The financial sector grew substantially and remains dominated by the banking industry (cont’d..) • Dominating the banking industry, the PCBs comprise of 59.3 percent of banking sector assets in 2010 followed by 28.1 percent of SCB and only 6.6 percent asset held by FCB.

11. Rapid deposit growth of PCBs has been contributing to the overall buoyant performance of the banking sector • Banking sector deposits to GDP ratio increased significantly • to 47.7 percent in end-December 2010 from 37.4 percent in • end-December 2005. • In end-December 2010, the PCBs owned 61.7 percent banking sector deposit followed by 26.7 percent of SCBs, 6.7 percent of FCBs and 4.9 percent of DFIs

12. Yield of different types of treasury bills and government treasury bonds • During September-December 2010, the yield rates of all short term treasury bills and long term bonds increased moderately due to tightening the credit flows in the banking sector.

13. Yield of different types of BB policy instruments • BB has been providing different types of special liquidity support to primary dealers against the holding of treasury bills and bonds in order to fine tune the liquidity situation.

14. Banks have sufficient funds for lending • Credit to private sector contributed lion's share in total domestic credit (more than 81.0 percent in end-December 2010).

15. Banking sector has been maintaining CAR based on Basel II accord under the guidance and supervision of BB • The overall capital to risk weighted asset ratio of banking industry in Bangladesh improved to 9.3 percent (above minimum required level is 9.0 percent up to June 2011 under Basel II) in end-December 2010 from 7.9 percent in end-June 2010.

16. NPL ratios have been showing better performance of asset growth in the banking system • In the banking industry ratios of gross NPL to total loans have been improving although the SCBs and DFIs have high level ratios of gross NPL to total loans above 15 percent and 24 percent respectively in end-December 2010. • On the other hand, FCBs have the lowest level below 3 percent and PCBs have lower level at 3.2 percent in end-December 2010.

17. The banking sector has been maintaining the required level of provisions against NPLs efficiently and achieved significant improvement • In 2009 the banking sector has been able to maintain 100 percent or more provision for the first time and thereafter the level came down to 94.9 percent in 2010. • The main reasons for the shortfall in provision adequacy was the inability of some SCBs, DFIs and PCBs which were in problem bank category to make sufficient provisions due to inadequate profits and transferred provision for write-offs.

18. The partial liberalization of interest rate, the increasing share of PCBs and market competitiveness narrowed down trend in interest rate spread • To encourage the private sector, BB instructed the scheduled banks to reduce their lending rates. As a result, the weighted average lending rate decreased to 11.2 percent in end-December 2010 from the highest level of 12.8 percent in end-December 2007

19. Banking sector's efficiency increased as expenditure-income ratio improved gradually • The aggregate expenditure-income ratio (EIR) in the banking sector decreased to 63.7 percent in 2010 from 92.1 percent in 2005. • The EIR of the DFIs was till very high (88.2 percent in 2010) due to huge operating loss incurred by BKB and RAKUB.

20. Average return on asset (ROA) increased in the banking sector • Due to huge provision shortfall, the ROA of the SCBs have been less than one percent, which is even worse in case of the DFIs. PCBs’ ROA ratio has an inconsistent trend though in satisfactory level and that of FCBs has been consistently strong in recent years.

21. Average return on equity (ROE) increased in the banking sector • The remarkable growth of ROE ratio in SCBs rose to 18.4 in 2010 from negative level of 6.9 percent in 2005.

22. Liquidity position reflects sufficient credit flows in the banking sector • The situation of constant surplus of liquidity warrants continued creation of effective demand for credit at lower costs.

23. NBFIs have been growing fast and structurally developing with better performance In percentage In percentage • In 2005, the share of NBFIs' asset to GDP was 3.4 percent which rose to 5.1 percent in 2010. • The year on year growth of assets of NBFIs increased gradually to 27.8 percent in 2010 from 21.0 percent in 2005.

24. Fallouts from stock market collapse contained In percentage Billion Taka • A sharp price correction occurred in the overheated domestic stock market in December 2010- January 2011.

25. Fallouts from stock market collapse contained (cont’d..) • BB oversight on capital market exposures of banks effectively contained knock-on effects from stock price correction. • Banking sector exposure to the capital markets amounted to 3.65% of their liabilities; 2010 profits on these exposures were required to be retained undistributed to absorb losses.

26. Many Thanks