Implications of Risk Management and Stress on Fiscal System

Presently, return on equity and return on assets of banking sector are low, which indicate the low profit of the bank and this might be lesser collection of taxes since bank is the number one source of tax under large tax unit of NBR and NBR collects the major portion of revenue from banking sector. In addition, the revenue target might fail to achieve the revenue target since lesser investment is witnessed from lower growth of credit. Gross and/or net non-performing assets or loans (NPA/NPL) are considered as
the most important indicators identifying problems with asset quality. Government dictated the credit
disbursement in the early years and political influence also played its part in the decision making for sanctioning loans from the banking sector. Besides, State Owned Enterprises also borrowed from the banking sector and these loans were never fully repaid. The privatization process along with the financial
sector reforms with globalisation necessitated further impetus in the process of reform. The reforms should continue for a smooth functioning of the financial market. Loans that are not paid on time and are nominated as troubled assets by banks are classified loans. Classified loans are usually issued according to terms and regulations of the bank. The extent of default loans increased in the third quarter due to
tightening the loan classification guideline, sluggish business activities during the political uncertainty and interruption in energy supplies. The percentage share of classified loan to total outstanding
loan has been increasing in every six year. At the end of September 2013, the percentage share of classified loan to total outstanding loan was 12.79 percent, whereas it was 11.91 percent at the end of June, 2013. If the trend remains as usual the percentage share of classified loan to total outstanding
might increase to 14.21 percent at the end of December 2013. The classified loans increased by Tk.4400 crore or 8 percent to Tk.56700 crore in the July-September quarter from Tk.52300
crore of the April-June quarter of this year, according to Bangladesh Bank data. The total classified loan was Tk.51000 crore in March this year, which was Tk.29000 crore in June, 2012.
The classified loans increased due to tightening the guideline. Besides, sluggish business during the political uncertainty and lack of gas and electricity pushed the classified loans up. According to the Financial Stability Report (FSR)-2012 brought out by Bangladesh Bank, it seems that the classified loans in the state-owned banks are high due to the nature of their operations (lack of efficiency in fund management, extending obligatory financing towards social and economical priority
sectors and politically motivated lending).