City University

Assignment
On
The Recent trend and changes in the banking sectors in Banglaesh during Covid 19
Course Title : Management of Bank and financial institutions
Course Code:FIN605

Submitted To
Udayshankar Sarkar
Lecturer
Department of Business Administration
City University

Submitted By
Md.Shahalam
ID: 1935207044
Batch :52th
Program : MBA
Department of Business Administration
City University

Submition Date:10-12-020
COVID-19 (Coronavirus) has affected day to day life and is slowing down the global
economy. This pandemic has affected thousands of peoples, who are either sick or are being
killed due to the spread of this disease. The most common symptoms of this viral infection
are fever, cold, cough, bone pain and breathing problems, and ultimately leading to
pneumonia. This, being a new viral disease affecting humans for the first time, vaccines are
not yet available. Thus, the emphasis is on taking extensive precautions such as extensive
hygiene protocol (e.g., regularly washing of hands, avoidance of face to face interaction etc.),
social distancing, and wearing of masks, and so on. This virus is spreading exponentially
region wise. Countries are banning gatherings of people to the spread and break the
exponential curve. Many countries are locking their population and enforcing strict
quarantine to control the spread of the havoc of this highly communicable disease.
COVID-19 has rapidly affected our day to day life, businesses, disrupted the world trade and
movements. Identification of the disease at an early stage is vital to control the spread of the
virus because it very rapidly spreads from person to person. Most of the countries have
slowed down their manufacturing of the products. The various industries and sectors are
affected by the cause of this disease; these include the pharmaceuticals industry, solar power
sector, tourism, Information and electronics industry. This virus creates significant knock-on
effects on the daily life of citizens, as well as about the global economy.
Presently the impacts of COVID-19 in daily life are extensive and have far reaching
consequences. These can be divided into various categories
This COVID-19 has affected the sources of supply and effects the global economy. There are
restrictions of travelling from one country to another country. During travelling, numbers of
cases are identified positive when tested, especially when they are taking international
visits.5 All governments, health organisations and other authorities are continuously focussing
on identifying the cases affected by the COVID-19. Healthcare professional face lot of
difficulties in maintaining the quality of healthcare in these days.
This is likely to be worse in developing economies with poor financial market architecture.
As a case of emerging economies, this paper considers Bangladesh and examines the possible
impacts of the pandemic on the country’s banking sector. Bangladesh’s banking sector
already has a high level of non-performing loans and the pandemic is likely to worsen the
situation. Using a state-designed stress testing model, the paper estimates the impacts of
COVID-19 pandemic on three particular dimensions - firm value, capital adequacy, and
interest income under different NPL shock scenarios. Findings suggest that all banks are
likely to see a fall in risk-weighted asset value, capital adequacy ratio, and interest income at
the individual bank and sectoral levels. However, estimates show that larger banks are
relatively more vulnerable. The decline in all three dimensions will be disproportionately
larger if NPL shocks become larger.. Findings call for an immediate and innovative policy
measures to prevent a large-scale and contagious banking crisis in Bangladesh. The paper
offers lessons for other developing and emerging economies similar to Bangladesh.
In most developing and many emerging economies, banks are the engine of economic growth
as they are the dominant source for both long-term and short-term capital financing. The role
and power of banks is immense particularly in countries where the financial system is
underdeveloped due to the weak existence or non-existence of securities markets, the lack of
effective and adequate legal infrastructure, the unavailability of innovative and necessary
financial instruments.
Furthermore, in many emerging economies, banks dominantly fuel the faster economic
growth; and a damage to the fund mobilization process may cause significant downside
economic effects. All considered, the COVID-19 pandemic could substantially threaten the
performance, survival, and growth of banks in developing countries, particularly in those
where banks play a dominant role in the economy. Therefore, understanding how the
pandemic could affect banks in emerging economies could render valuable information about
the implications of the pandemic for developing countries. It however requires a careful case
by case examination.
Finally, the banking sector is already overburdened with a high default rate and non-
performing loan/asset (NPL) ratio, which puts Bangladesh among the top of the countries
with high NPL ratios; for example, NPL ratios are much higher in Bangladesh compared to
the other countries in Asia and the Pacific . It could be useful for other countries to see the
possible consequences of credit risk add-on due to the pandemic. All considered, examining
the case of Bangladesh could render lessons for other emerging and/or developing
economies, particularly for those with a similar economic and financial architecture. The
paper begins with presenting a theoretical framework of the possible implications for banks
in general, which is equally applicable for Bangladesh’s banking sector. Then, using a stress
testing model designed and prescribed by Bangladesh Bank - the Central 5 Bank of
Bangladesh, the paper estimates different the pandemic’s effects under different NPL
scenarios on three critical dimensions of banks: firm value, capital adequacy, and interest
income.
The worldwide lockdowns and economic shocks in turn cause a severe disruption in the
international trade of goods 7 and services, due to reduced import demand internationally,
limited movement of international transport and logistics carriers, and stricter entry
requirements of goods and human entry in many countries demand and supply, sump in price
levels, massive layoffs and job cuts, exchange rates becoming unfavorable for exporters, and
increases in risk and uncertainty for current or potential private-sector investments . The
crisis will be worse for borrowers relying on exports to the international market, as the world
economy struggles to survive from the pandemic. These effects will be severe also for small
businesses whose only lifeline is doing day-to-day business and generating enough operating
cash inflows to survive . Also, small businesses have little capital support and cushion to
protect it from economic adversities.
During and after the pandemic, banks that have a substantial lending exposure particularly to
export-oriented industries and small businesses may see a steep rise in default rates. Further,
the overall situation may turn many borrowers into willful defaulters and may increase the
credit risk of the banks. It is possible that the market value of collaterals provided against
secured loans may decline in value, further enhancing the credit and default risk for banks .
Due to economic slow-down domestically and globally, demand for loans will slump and it
has already been happening in many economies.
Therefore, the COVID-19 pandemic is likely to make things deeply worse for the countries.
As a case of such emerging economies, this paper examines the possible impacts of the
pandemic on Bangladesh’s banking sector. To develop scenario-based estimates of the likely
impacts on banks, the paper uses a stress testing model designed and prescribed for the
banking by Bangladesh Bank – the central bank of Bangladesh. All banks are required to
follow the model in their regular 11 business practices. The model is described in detail in the
stress testing guidelines in Bangladesh Bank , published by the Department of Offsite
Supervision of the central bank. The paper uses the model to estimate like impacts on three
dimensions - capital adequacy, operating performance, and firm value. In this paper, capital
adequacy is measured by the level of capital adequacy ratio, operating performance is
measured by the level of interest incomes and firm value is approximated by the value of total
risk-weighted asset .
Due to the COVID-19, the biggest and most imminent shock the banking sector is likely to
face is credit shock, particularly, through increased default rates and NPLs across all sectors
and industries. The COVID-19 driven credit shock could be a lifetime test of survival for
many banks since the Bangladesh banking sector is already crippled with high rates and loan
pricing recently has been capped down to less than two digits by the central bank of the
country. As a result, while there might be other sources of shocks arising for banks, credit
risk shock through increased is likely to be the biggest one.
As of now, no scholarly work provides any particular estimate of the likely levels or increases
in Bangladesh, which makes the task of this paper difficult. There is no denial that NPLs will
aggressively increase in Bangladesh due to COVID-19. Among all, two sectors could
produce major NPL shocks for Bangladesh’s banking sector – ready-made garment (RMG) &
textiles and small & medium enterprises .
Textile, RMG, and SMEs combined share the more than two-thirds of loans disbursed by the
banking sector in Bangladesh, according to the recent data published by Bangladesh Bank
defaulted; and banks may never be able to recover any part of the loans. It is worth-noting
that the Bangladesh Garment Manufacturer and Exporters Association reports that orders
worth about USD 3.15 billion in 1,134 factories have been cancelled or delayed as of April
2020 due to the pandemic.
Exchange rate 1 USD=84 BDT based on Bangladesh Bank data. 18 3.3 Data The paper
considers 30 commercial banks (out of total 60 banks in the sector) of Bangladesh that are
publicly listed in Dhaka Stock Exchange Limited. Appendix Table A1 shows the list of the
30 banks.
Fall in interest income under different NPL scenario across size categories Source: Author’s
estimates 37 5. Conclusion The COVID-19 pandemic poses a significant threat to
sustainability of banks globally. It would be worse in developing and emerging economies,
where financial systems are weak. As a case of emerging economies that are considered to
have strong economic potential, this paper considers Bangladesh and examines the possible
impacts of the pandemic on the country’s banking sector. Bangladesh banking sector already
has a high level of NPLs and is crippled with many systemic problems. Using a state-
designed stress testing model of the country, the paper estimates the impacts on three
particular dimensions – firm value, capital adequacy, and interest incomes of banks - under
different NPL shock. The shock range is defined based on the banking sector’s exposure to
the two sectors – RMG & textiles and SMEs – that are the biggest victim of the pandemic.
Findings suggest that all banks are likely to see fall in risk-weighted asset values, capital
adequacy ratio, and interest income more or less. The findings however should be considered
in the context of few limitations. First, the paper includes only the publicly listed banks due
to data availability issues, expanding which will require private data access. Second, the
paper uses a stress-testing model designed by Bangladesh Bank - the central bank of
Bangladesh, which is relatively simpler. As such, the consideration of additional complexities
would require the development of a completely new and advanced model.