The sector faces many issues including high credit risk and weak underwriting standards.
Bangladesh’s banking sector remains in doldrums as operating environment continues to be plagued by a plethora of credit-related and governance-related issues, reports S&P Global Ratings.
Credit risk remains extremely high, with weak foreclosure laws and underwriting standards, S&P noted in its latest banking assessment report for Bangladesh. This, along with weak governance in some banks and client concentration, led to sizable stressed assets in the banking industry.
Furthermore, although Bangladesh is implementing international regulatory standards, S&P notes that supervision has gaps and imposes only limited market discipline.
“Weak asset quality and capitalization of some banks in the country reflect gaps in monitoring and in the ability to address problems early,” S&P stated in the report.
“In our view, the banking system has overcapacity and market distortions. A supportive core customer deposit base and low reliance on external funding temper these weaknesses,” the report added.
On a more positive note, the ratings agency regards Bangladesh's economic risk trend as stable. A rebound in the export-focused manufacturing sector also supports growth prospects.
Also, whilst capitalization and asset quality for banks is forecasted to continue to remain extremely weak, it will be disguised by high levels of regulatory forbearance, especially in the wake of COVID-19. S&P also expects the central bank to continue to readily offer regulatory forbearance, although this meant that the banking industry’s regulatory reform has momentarily taken a backseat.
“Reforms in Bangladesh are taking a back step in light of the pandemic, similar to many countries. We expect a return to the reform agenda to be slow in the wake of a significant overhang of bad loans,” S&P said, adding that Bangladesh's strong deposit-driven systemwide funding will remain a relative strength.
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