Sat, 23 Mar, 2013 12:40:24 AM
Risk management in the banking sector of Bangladesh is relatively a newer practice, but has already shown to increase efficiency in governing of these banks as such procedures tend to increase the corporate governance of a financial institution. After implementing the Basel committee, it’s guiding the world’s banking sector regarding risks issues. Like other countries’ central banks, Bangladesh is also following various Basel pact viz., Basel-I, Basel-II and others core risk guidelines implemented by Bangladesh Bank.
The financial sector in various economies like that of Bangladesh is going through a monumental change taking into account the global events such as the ongoing banking crisis across the world. The 2007–present recession in the USA has highlighted the need for banks to incorporate the concept of risk management into their regular procedures. The various aspects of rising global competition in Bangladesh with foreign banks, increasing deregulation, introduction of innovative products, and financial instruments as well as innovation in delivery channels have highlighted the need to be prepared in terms of risk management.
Bangladesh Banking sector has been making great advancements in terms of progress in technology, quality, quantity as well as stability as they have started to expand and diversify at a great pace. The total deposit and banking advance went up as much as 9908 taka billion with 47 banking companies. The external sector has been growing as high as $72 billion comprised with $24 billion export, $36 billion import and $12 billion NRB remittance. However, such expansion brings these banks into the context of risks, especially in the face of increasing globalization and liberalization. In banking, risk plays a major part in the earnings of a bank. Higher the risk, higher is the return; hence, it’s most essential to maintain parity between risk and return.
As per Basel-I, only credit risk was considered, but in Basel-II along with credit risk, operational and market risks have been brought in consideration. Apart from these risks, some others are in the banking sector viz., financial risk, concentration risk, interest rate risk, currency risk, equity risk, commodity price changes risk, liquidity risk, legal risk, reputational risk and profit risk. In early 2003 and 2004, Bangladesh Bank issued guidelines on the six core risks: Credit Risk Management (CRM), Asset Liability Risk Management (ALCO), Foreign Exchange Risk Management, Internal Control and Compliance Risk Management, Anti Money Laundering Risk Management and Information Technology Risk Management.
When the whole world exposed to an acute recession in 2008-09 and heavily affected global economy, due to simple and insignificant size of financial system in Bangladesh, our banking was not severely affected. Bangladesh Bank introduced Risk Management Unit (RMU) to supervise all core risks which would assist to create business environment with analysis of risk and to reduce the risk associated in banking.
Subsequent implementation of core risk management guidelines by the Bank, all banks are following the guidelines properly and some banks have already established separate division namely RMD (Risk Management Division) headed by CRO (Chief Risk Officer). Some banks have tighten their risk management policy, especially credit risk by setting up CRM (Credit Risk Management) Division. Some banks are following centralized banking model from branch-based banking model and separate their business unit from credit approval unit. Though some of our foreign banks viz., SCB, HSBC, Citi NA have been following these tighten risk management systems.
In spite of various risk management measures and tools followed by different banks, some financial scams have occurred in different banks. Export-related scams with two large groups are burning examples which have rocked the sector. Due to commodity price fluctuation risk, some of the groups from Chittagong have already lost their money and are struggling to survive.
About 19.29 per cent appreciation of USD against the local currency [Rate of dollar stood at 84.45 taka on 29 January 2012 up from 70.79 taka on 2 January 011] caused huge loss to some of the companies. Recent trend of depreciation [84.45 taka to 79.00 taka per dollar] of USD against our local currency could be the reason of losses for the local companies. NPL ratio of banking sector has been gone up to 10.03 per cent in December quarter with total NPL 42,726 crore taka which revel that credit risk in our banking sector needs to be taken care of properly.
In the above backdrop, we can say that our economy vis-à-vis the banking sector has become large; some large scams have taken place, so Risk Management tools and techniques of our banking sectors need to be tighten further and revisited meticulously so that our banking sector can remain unhurt.
The author is a vice president , Corporate Banking Division of a private commercial bank in Chittagong. He may be reached at firstname.lastname@example.org. Views expressed in this piece are that of author’s.