The medium-sized banks whose credit is growing by 20 to 30 percent and whose non-performing loan (NPL) ratios are about 10 percent should be more closely watched, said a report of International Monetary Fund (IMF).

"Bangladesh Bank needs to move more closely in line with best practice standards for banks' accounting, loan classification, and provisioning requirements," said the IMF report released on Wednesday.

The IMF in April this year prepared the paper on 'Bangladesh: Selected Issues' which include a series of reports on Bangladesh's readymade garment, bank, revenue, remittance, inflation, state-owned enterprises and aid flow to Bangladesh.

The IMF paper said at this time, the risks posed by recent credit growth appear to be limited, but they need to be closely monitored.

Former deputy governor of Bangladesh Bank (BB) Khondker Ibrahim Khaled said if the credit growth matches deposit growth, there would be no need for 'extra monitoring'.

Banks can disburse up to 80

percent credit against their deposits, Khaled told The Daily Star.

The IMF also said newer small banks are experiencing the most rapid growth in their loan portfolio, but they are the smallest banks and together this group accounts for 5 percent of banking system deposits.

"The second quintile of banks in terms of credit growth is also relatively small with a total share of 10 percent of system assets but whose performance ratios appear sound," it said.

However, it said much stricter monitoring is needed of the middle quintile, representing ten banks whose average loan growth is 25 percent annually and who already have non-performing loans slightly over 10 percent of their loan portfolio. This group of banks represents about 17 percent of total system deposits.

The IMF report said rapid credit growth poses particular risks when banking intermediation is inefficient. "Credit to the private sector has increased at an average annual rate of 18 percent over the past three years, even while lending to the private sector by the largest three state banks has been restricted to no more than 5 percent

annually."

It said some private banks saw strong growth in their loan portfolios, averaging over 40 percent annually.

The report said private commercial banks and stock exchange have seen the most rapid growth in the last five years. "Assets of domestic private commercial banks increased from 19 of GDP to 29 percent of GDP between 2001 and 2006. The stock exchange more than doubled in size relative to GDP."

According to the report, relatively high lending rates are a sign of weak financial intermediation. "Bangladesh's bank lending rates are on average around 15 percent with some rates much higher, while rates on lending to agriculture and state-owned enterprises by the state-owned banks are much lower."

It said these rates are relatively high compared to other Asian countries where they are between 8 and 12 percent on average although inflation rates are at similar levels. "The higher lending rates could reflect perception of higher risk in Bangladesh," it said.

The IMF report also said persistently higher interest rate spreads

are another sign of inefficiencies in the banking sector. "Interest rate spreads have remained high at between 6 and 8 percent since 1983. Improved economic conditions, and measures to strengthen bank performance have not been translated into lower interest rates," the IMF said.

It said private banks' deposit rates have risen most sharply, while both deposit and lending rates for nationalised commercial banks have dropped significantly.

Deposit rates of private banks average 9 percent compared to 5-6 percent for foreign banks, the report said adding that in contrast to the situation three years earlier, deposit rates of private banks now significantly exceed rates offered by state banks.

The report said Bangladesh's financial system is relatively shallow. Total financial sector assets amount to about 69 percent, with banking sector assets accounting for the bulk of assets or 58 percent of GDP.

Finally, the report said Bangladesh needs a sound financial sector and efficient financial intermediation to support sustained growth.