Financial sector's input to GDP drops for second year

FT ONLINE

Irregularities and problems of various nature in the country's banking and financial sector have hit its growth, as the sector's expansion rate has fallen in the last fiscal year (FY), 2018-19, for the second consecutive year, analysts said.

The rate of the financial intermediation's contribution to the country's Gross Domestic Product (GDP) has dropped by 0.52 percentage points to 7.38 percent in the last fiscal, official data showed.

In the previous FY, the growth also maintained the same trend shedding 1.22 percentage points to 7.90 percent from that of impressive growth in FY 17.

In FY 2017, the performance of the banking and financial sector was the best in the recent past years, as its growth expanded at 9.12 percent from that of 7.74 percent in FY 16, the Bangladesh Bureau of Statistics (BBS) data showed.

Analysts and economists said the recent scams, irregularities, and people's mistrust on financial institutions severely affected the growth of the sector, a key auxiliary to investment, employment and the GDP growth.

The country's banking and financial sector has been hit hard, as its private sector credit growth has dropped, non-performing loans (NPLs) have been rising, and profit shrinking.

The BBS has recently unveiled its final GDP data, where it showed that the growth rate of the banks (monetary intermediation) sub-sector has declined the highest by 1.13 percentage points to 7.38 percent in FY 19 from that of 8.51 percent in FY 18.

In FY 17, the growth rate of the banking sector was better, 9.95 percent, compared to that of 8.85 percent in FY 16.

Meanwhile, the growth rate of the insurance sub-sector unusually jumped by 3.33 percentage points to 4.96 percent in FY 19 from that of 1.63 percent in the previous FY.

Similarly, the growth rate of other financial auxiliaries sub-sector also increased by 2.50 percentage points to 11.55 percent in last fiscal compared to that of 9.05 percent in FY 18.

Economists termed the year-on-year growth of insurance and other financial auxiliaries sub-sectors "unusual". They also questioned how could those expand amid the poor performance of the banking sector.

The World Bank's former lead economist Dr. Zahid Hussain said they did not see any significant development in the insurance sector over a year.

"So, how did its growth jump by 3.33 percentage points within a year during FY 18 and FY 19?"

Meanwhile, the growth of the country's financial sector has dropped to single-digit over the last seven years, compared to its impressive double-digit growth in FY 11 and FY 12.

In the last fiscal, the growth of financial intermediation has dropped further to 7.38 percent.

The country's financial sector, especially the banks, has been experiencing hard times with the highest amount of NPLs, poor private sector credit growth, lower net profit, provisioning of the highest amount of classified and non-classified loans, the Bangladesh Bank's (BB) reserve heist, and liquidity crisis etc.

The growth of credit to the private sector of the banks and non-banking financial institutions plunged to a nine-year low of 10.04 percent in October this year.

In September 2010, the credit growth was recorded at the lowest at 6.09 percent. After that month the growth was recorded at more than 10 percent rates in the subsequent months.

The volume of NPLs in the banks has increased to a record high of Tk 1.16 trillion until this September, the BB data showed.

Dr. Zahid Hussain also said the banking sector's troubles and irregularities have affected the customers' confidence over the years.

If the volume of NPLs continues to rise, the financial sector's profit will obviously drop, and its contribution to the GDP will also fall, he said.

"If the bank fails to contain the NPLs, regain the confidence of the customers, check irregularities, and establish governance, the sector's growth, as well as the country's overall GDP growth, will not be sustainable," he added.

Distinguish Fellow of the Centre for Policy Dialogue (CPD) Dr. Debapriya Bhattacharya said the growth rate of the financial sector might even drop further if the NPL provisioning method is followed perfectly.

"I think the state of the country's financial sector is much vulnerable than it is reflected in the BBS data. If the NPL provisioning method is made perfect, the real banking profit will fall further, and its growth will also plunge."

If the higher volume of NPL continues, the banks' paid-up capital will be affected, and they will suddenly fall, he said.