Twenty-twelve was one of the most challenging years ever for the banking industry. Corruption and irregularities have not only eroded governance in the sector but also eaten up the profit margin.

Slow economic growth and high lending rates have added further troubles to the industry.

Liquidity factors and capital buffers have both gained strength, which is encouraging; but bad loan and overall risk have increased too.

“I've never seen a challenging time as this for banks in my 36 years in the profession,” says Yousuf Khan, deputy managing director of Mercantile Bank. “Bad loans are piling up, so is provision."

Bad loans have increased by Tk 7,282 crore to Tk 36,282 crore in the third quarter till September 2012 as a significant amount of loan related to the recent scams was rendered classified. That excludes the overTk 3,600 crore that Hall-Mark and five other companies swindled out of the Sonali Bank; and the figure would rise to about Tk 40,000 crore when this amount is added to the

classified category.

Waves of scams in Sonali and other state-owned banks involving thousands of crores of taka have shaken up the industry as well as the regulators. Much of this money went out of the banks' coffers in the name of loan against forged documents.

In Sonali Bank's case, the top management has demonstrated its sheer negligence in safeguarding depositors' money. Worse, some of its officials joined

hands with the scamsters, making the swindle all too easy.

“It seems the management structure in Sonali Bank has collapsed,” Tajul Islam, who headed a parliamentary committee probing the Hall-Mark scam, told The Daily Star recently.

These scams had had a collateral effect on the industry as a whole. Sonali Bank still owes 26 banks overTk 1,500 crore. On the list of these banks are pub-

lic, private and multinational banks that gave acceptance to purchase bills of Hall-Mark and other companies.

“We had a very uneasy year [2012]. Our business was affected by the scams badly," said a chief executive officer of a private bank to which Sonali Bank owes nearly Tk 50 crore in connection with the Hall-Mark scam.

The age-old inland bill purchase or IBP has also come under question after

these scams.

It led to the tightening of the IBP system: The once all-powerful branch managers from now on cannot approve these bills without the go-ahead of the head office. While this is no way a bad thing in terms of management and good governance, seen from business perspective, it will eat up valuable time. Documentations for the IBP must be made through SWIFT code.

“We're establishing a

new system to monitor foreign trades and IBPs from the beginning of the New Year,” said Naznin Sultana, deputy governor of the central bank.

According to the managing director of a private bank, this might hurt manufacturers and exporters.

He argues banks in Bangladesh work on the acceptance of other banks, and this has been a normal practice and an established business model for years. Particularly, bill

discounting in readymade garment sector is a common feature and the system helps the apparel sector maintain a cash flow to meet expenditure, including wages.

“Though regulations are good for establishing discipline in the financial sector to stop fraudulent activities, it'll have a negative impact on businesses,” notes a top official of a private bank.

Tightening loan rules on classification and

provisioning will also be effective from this year, which, bankers say would further increase bad loans.

Nevertheless, new regulations would have a positive impact on the market in the long run.

But, in the short run, bankers see no significant boost in investment amid the growing apprehension of political unrest.

Poor infrastructure and shortage of gas and electricity still remain their big worries.