Bangladesh Bank Governor Fazle Kabir says that the existing practice of banks to concentrate more on large loans is not good for the banking industry or for the economy.
Bangladesh need to enhance and diversify its exports to achieve developing country status, he said. But attaining the target will be difficult if banks do not provide credit and advances accordingly, he said.
The governor made the comments while addressing the opening session of the two-day "8th Annual Banking Conference 2019" at the Bangladesh Institute of Bank Management (BIBM) in Dhaka on Wednesday.
"Exports are declining. Private sector credit growth is also well short of the target, and this can hamper the pace of economic growth," warned the governor.
Terming the commercial banks' attitude unfortunate and negative, he said, "The polarisation of loan disbursement is not a good practice at all for the banking sector and the economy."
A study by the BIBM further clarified the governor's version. The study revealed that only 20 percent of banks disbursed loans to new industries in 2018, while the remaining 80 percent provided money to old businesses.
The study also showed that agriculture sector credit fell by nine percent on a year-on-year basis.
"In a bank-based economy like ours, any large-scale shock in the financial sector will hit the sector hard and inflict a huge burden on the economy of Bangladesh," observed the study.
The ongoing liquidity crisis has had an adverse impact on the disbursement of firm loans. The study described such a situation as a negative aspect of the banks' credit policy.
It also suggested that banks should resolve the situation immediately to retain fast economic growth.
During his speech, the Bangladesh Bank governor also requested chief executive officers of commercial banks to find ways to change existing banking practices.
He said, "…the current situation is not what we actually desire."
BIBM Director General Dr Md Aktaruzzaman presented the keynote paper titled "A review of the banking activities" in the opening session the banking conference.
The scarcity of reliable and accurate sources of industry data, including price verification, has long been impeding the credit operations in banks, the keynote paper stated.
Unhealthy competition among banks regarding loan takeover has resulted in vulnerability in the banking industry as most of the taken-over loans became defaulted, Aktaruzzaman said in his presentation.
"Due to the unhealthy competition among banks regarding loan takeover, banks provide money to borrowers beyond the borrowers' ability to repay."
Aktaruzzaman said financing a large corporate body by multiple banks leads to excess funding – more than the organisation actually requires.
It allows borrowers to divert excess funds for other purposes, mainly in speculative business or in procuring properties, he said.
"In this case, borrowers fail to generate sufficient cash flow from its operation to service debt. It compels borrowers either to become defaulters or to repay one bank with funds borrowed from another bank," he observed.
"Existing management practices have not adequately allowed internal audit to be carried out independently on various functions of banks."
The keynote paper suggested that the regulator detect the major irregularities at an early stage so that it can take preventive measures.
Addressing the issue, the governor during his speech said enhancing compliance and reporting requirements are the biggest challenges in the banking sector.
"Enforcement has been tough for the regulator while compliance has become expensive for commercial banks," added the governor.