Bipasha Barua* and Suborna Barua**
[The final manuscript is currently under publication consideration in a journal. An older version of the paper is available at: http://ssrn.com/abstract=3646961]
--------------------------------------------------------------------------------------------------------------
The COVID-19 pandemic poses significant threat to the sustainability of financial institutions, particularly banks. 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.
Figure 1: Number of banks with minimum CAR at different NPL shock
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.
Our 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 decline in all three dimensions will be disproportionately bigger as for larger NPL shocks. At the sectoral level, the NPL shocks will generate a sector-wide decline in all three dimensions. However, findings suggest that larger banks are relatively more vulnerable.
Findings further indicate that the loss in RMG exports has a multiplier effect of three on NPL ratios. A 10% NPL shock could force all banks lose their minimum capital adequacy requirement (Figure 1) and a 13% or more shock will force sectoral CAR down to zero or negative, which is possible by just over 3-5% loss of the RMG export values. Given that the value of cancelled RMG export orders already stand three times higher the sectors’ outstanding loan and that overall economic recovery remains uncertain, NPL shock in reality could well be over 10%. If it happens and persists, it may trigger bank-runs and systemic banking sector crisis.
Overall, findings call for an immediate, phase-wise, and innovation-driven policy measures with a long-term approach to prevent an imminent banking sector crisis in Bangladesh. The findings could be considered as a warning sign for other emerging and developing countries where banks have high lending exposure to COVID-19-sensitive sectors and traditionally suffer from poor asset quality, high rates of NPLs, and weaker policy and regulatory frameworks.
*Assistant Professor, Department of Banking and Insurance, University of Dhaka
**Assistant Professor, Department of International Business, University of Dhaka
No comments:
Post a Comment