[🇧🇩] Banking System in Bangladesh

[Saif]

Urgent bank reforms are crucial

Recover bad loans, punish those who exploited the sector

www.thedailystar.net

Urgent bank reforms are crucial
Recover bad loans, punish those who exploited the sector

VISUAL: STAR

Since the fall of the Awami League regime, there have been several chaotic incidents in the banking sector—from the resignation of Bangladesh Bank (BB) governor and other top officials to the conflicts between rival groups at the Motijheel branch of Bangladesh Islami Bank yesterday—sending out an alarming signal. These incidents are but an indication about how quickly a sector, long lying on the edge of the precipice, can unravel when push comes to shove.

A recent report by Prothom Alo sheds light on what led to the woeful state of this sector. It talks about the BB's questionable steps taken during the erstwhile government to keep several failing banks afloat by providing liquidity support without collateral; alleged unethical connections of the BB governor and deputy governors with top loan defaulters; and the change of ownership forced on several banks including the Islami Bank, creating an environment of mistrust. Moreover, the BB's choice of lending foreign currency loans from the reserve to various influential businesses through the export development fund, without proper evaluation, also resulted in many classified loans. Just think: 20 local businesses currently owe BB about $70 million taken out of the foreign currency reserve!

The default loan amount reported by BB—Tk 1.822 trillion—is also under scrutiny. Experts estimate that the actual figure would be close to four trillion, considering rescheduled and bad/written-off loans and those currently under legal dispute. Meanwhile, depositors of the failing banks, many of which were forced to change ownership, cannot withdraw their savings. Yet, the owners of the banks are taking out loans under different names.

While some of these irregularities were mentioned in the BB's own reports, several central bank officials allege that many such activities have remained out of BB's and Bangladesh Financial Intelligence Unit's regulatory radar. This raises serious questions about the responsibility and ethics of top officials of not just the central bank but also the governing bodies of several private and public commercial banks. There is no doubt that political appointments in the banking sector, incorrect or manipulative accounting practices, nepotism, and lack of transparency in the lending process brought the sector to its current state.

It is, therefore, imperative that the interim government urgently launches an investigation to find out the actual amount of default loans, and identify and bring to book the big defaulters along with officials who aided these questionable borrowings. Also, the government must prioritise depositors' interests and prevent any further withdrawal of money by the unholy nexus of unscrupulous owners, borrowers, and defaulters that are bleeding the sector dry.​

 

[Saif]

Why have loan defaults risen sharply?

However, NPLs rose 38.5 percent year-on-year to Tk 1,82,295 crore by the end of March, accounting for 11.11 percent of the total loans disbursed in the banking system, according to central bank data.

www.thedailystar.net

Why have loan defaults risen sharply?

Default loans in the banking sector have hit a historic high at a time when the Bangladesh Bank has just provided a roadmap to reduce the volume of bad debts.

In line with conditions set by the International Monetary Fund (IMF) for securing a $4.7 billion loan, the central bank in February unveiled a roadmap consisting of 17 action plans for reducing non-performing loans (NPLs).

However, NPLs rose 38.5 percent year-on-year to Tk 1,82,295 crore by the end of March, accounting for 11.11 percent of the total loans disbursed in the banking system, according to central bank data.

If written-off and rescheduled loans and loans with court injunctions are added, the actual volume of bad debts will be as much as Tk 5 lakh crore, industry people said.

This raises the question as to why NPLs have increased abnormally at a time when the government has promised to the IMF it would reduce it to a tolerable level by 2026.

There is no quick and easy answer in this regard as the problem persisted even after the central bank introduced a relaxed loan rescheduling and one-time exit policy for defaulters in 2019.

Under the policy, defaulters were allowed to regularise their loans for 10 years by only paying a 2 percent down payment instead of the existing 10 to 15 percent. And while this was a big benefit for defaulters, it acted as a slap in the face for good borrowers.

With bad loans in the banking sector amounting to Tk 94,330 crore when the policy was introduced, the then Finance Minister AHM Mustafa Kamal had said NPLs were a matter of grave concern but still manageable.

"From today, NPL will not increase," he added while announcing the policy.

Other than the relaxed rescheduling policy, the BB unveiled several policy measures over the years in favour of borrowers and other vested quarters who influenced the policymaking.

For example, the cheaper loans thanks to the 9 percent lending rate cap, the loan moratorium facility amid the Covid-19 pandemic, and the loan classification facility were major policy supports. However, rather than reining in NPLs, these measures seem to have only motivated defaulters.

The central bank in April 2020 introduced the 9 percent lending rate cap that remained until June 2023. Borrowers who took loans during that period have to pay more than 16 percent now in interests. This perhaps has motivated many to refrain from paying their instalments.

Besides, borrowers enjoyed a loan moratorium benefit amid the Covid-19 pandemic from 2020 to 2022. At the time, businesspeople did not have to repay bank loans. But when this facility was withdrawn, borrowers faced a sudden pressure to pay back and many eventually became defaulters.

For a long time, borrowers enjoyed easy repayment terms due to the loan classification facility. However, recently, the BB tightened the loan classification rules to be in line with the IMF prescription.

In April this year, the central bank tightened the definition of overdue term loans to conform to international best practices.

As per the new rules, banks have to treat a loan as overdue if a borrower does not make any instalment payment within three months after the due date while it was six months previously.

Additionally, irregularities, scams and weak corporate governance in the banking sector alongside the lack of proper monitoring by the BB are also responsible for the record levels of bad loans.​

 

[Saif]

Unearth all banking sector irregularities

Bring those involved in financial crimes to book

www.thedailystar.net

Unearth all banking sector irregularities
Bring those involved in financial crimes to book

VISUAL: STAR

Since the fall of the Awami League government, increasingly alarming information about the banking sector has begun to surface. Most recently, it was reported in this daily that Tk 45,000 crore is tied up in dubious loans. In a questionable practice, eight banks have provided loans to directors of other banks, posing considerable risks to the entire sector. According to their financial reports, loans totalling Tk 25,000 crore were exchanged among these eight banks for their directors by the end of 2023. In addition, four of these lenders provided around Tk 20,000 crore to the relatives of the bank directors. This means the total reciprocal loans sanctioned for these directors and their relatives amounted to Tk 45,000 crore, with most of these loans changing hands over the last five years.

It has been known for some time that the banking sector experienced massive irregularities under the AL government. However, the true extent of these irregularities—despite various issues being regularly reported—seems to be beyond anyone's wildest imagination. For example, these eight banks were known for their questionable practices and were allegedly linked to the recently ousted AL government. During Hasina's 15-year rule, powerful business groups with banking assets, including S Alam, Beximco, Nassa, and Sikder Group, thrived on murky politics and routinely bent banking rules, exposing the entire financial sector to serious risks. The names of these business groups have once again surfaced in relation to the irregularities that have occurred at these eight banks.

What is further concerning is that the combined contribution of the eight bank directors to the lenders' paid-up capital is only Tk 2,400 crore, or about five percent of the Tk 45,000 crore in loans they have taken from each other. Since most of these groups would have been unable to secure loans if their business practices and financial health had been properly assessed, and given that central bank rules prohibit a bank from lending to its own directors, they engaged in reciprocal lending. Moreover, many of these loans were approved based on the direct orders of the directors, with bank officials playing a minimal role, according to some mid-level bank officials. In other words, the bank directors essentially made up the rules as they pleased, putting depositors' and national interests at risk in the process.

However, it is unlikely that they could have carried out such risky manoeuvres without "managing" the regulator in one way or another. This represents another disastrous outcome of the politicisation of our regulatory authorities. Therefore, it is essential that the interim government continues to uncover such irregularities and identify those responsible for these corrupt lending practices. The truth about the health of our banking sector needs to be revealed, and those responsible for financial irregularities must be held accountable. Additionally, steps must be taken to protect depositors' interests and recover these loans from politically connected businesses and individuals.​

 

[Saif]

Banking sector reform: where and how?

We have been talking about banking sector reforms since long as our banking sector is plagued with insider lending, bad loans, low capitalisation and risk coverage, weak governance, sub-optimal automation, a lack of expert manpower and non-availability of better products to serve the emerging...

www.thedailystar.net

Banking sector reform: where and how?

We have been talking about banking sector reforms since long as our banking sector is plagued with insider lending, bad loans, low capitalisation and risk coverage, weak governance, sub-optimal automation, a lack of expert manpower and non-availability of better products to serve the emerging clients and cater their shifting demands.

Since the fall of the last regime, there have been several chaotic incidents in the banking sector—from the resignation of Bangladesh Bank (BB) governor and other top officials to the conflicts between rival groups at various banks, including Islami Bank—which send out an alarming signal.

These incidents are nothing but an indication about how quickly a sector, long lying on the edge of the precipice, can unravel when push comes to shove.

The leading vernacular daily the Prothom Alo and many other media as well as civil society forum, including expert groups from the development partners, at frequent intervals shed light on what led to the dismal state of this sector.

They talked about the BB's questionable steps taken during the erstwhile government to keep several almost failing banks afloat by providing liquidity support without collateral; alleged unethical connections of the BB governor and deputy governors with top loan defaulters; and the change of ownership forced on several banks even at the late hours including the Islami Bank, creating an environment of mistrust.

Moreover, the BB's choice of lending foreign currency loans from the reserve to various influential businesses through the Export Development Fund (EDF), without proper evaluation, also resulted in many classified loans.

I can't believe 20 local businesses currently owe BB about $70 million taken out of the foreign currency reserve.

The default loan amount of Tk 1.822 trillion itself is also under scrutiny. Experts estimate that the actual figure would be close to Tk 4 trillion if not more, considering rescheduled and bad/written-off loans and those currently under legal dispute as well as with doubtful security and collateral backing.

Meanwhile, depositors of the known to be weak banks, many of which were forced to change ownership, having tough time to withdraw their savings. Yet, the owners of the banks are taking out loans under different names.

While some of these irregularities were mentioned in the BB's own reports, several central bank officials alleged that many such activities have remained out of BB's and Bangladesh Financial Intelligence Unit's regulatory radar. This raises serious questions about the responsibility and ethics of top officials of not just the central bank but also the governing bodies of several private and public commercial banks.

There is no doubt that political appointments in the banking sector, incorrect or manipulative accounting practices, nepotism, weak due diligence and the lack of transparency in the lending process brought the sector to its current state.

New Governor has been appointed with good visibility re: the destination. Few deputy governors are also being reportedly recruited. Finance adviser himself is a former governor. Once they settle down well in their new roles, it is therefore, imperative that the interim government urgently launches an investigation to find out the actual amount of default loans, identify and bring to book the big defaulters along with officials who aided these questionable borrowings.

Like many other similar countries, the government must prioritise depositors' interests and prevent any further withdrawal of money by the unholy nexus or individuals close to the big offices, borrowers, and defaulters that are bleeding the sector dry.

Use of the political clout through sub-servient or susceptible to pressure officials must stop.

Though we must allow the government to clean the dust on the carpet first, an attempt to run a deep-dive and well-thought banking sector reform in keeping with ever evolving market scenario and globalisation warrants should also start soon. Otherwise, we can't make our banking sector inclusive and on the similar pace with other competing countries.

The writer is the chairman of Financial Excellence Ltd​

 

[Saif]

We need a bank commission that can drive radical reforms

But its objectives must be clearly defined and regularly scrutinised

www.thedailystar.net

We need a bank commission that can drive radical reforms
But its objectives must be clearly defined and regularly scrutinised

VISUAL: STAR

We welcome the interim government's decision to form a banking commission to implement sustainable reforms in the sector. The formation of such a body has been a longstanding demand from economists, as the sector has suffered massive problems and regulatory failures for years, particularly under the Awami League regime. In 2009, when the party took office, non-performing loans (NPLs) in banks totalled Tk 22,480 crore. By March 2024, NPLs skyrocketed to around Tk 1,82,000 crore. The number would be even higher if not for the accounting frauds committed under the past regime to conceal the true picture.

Over the years, experts have underscored various institutional challenges plaguing the sector, including questionable appointment practices for bank directors, loans being granted and rescheduled ad infinitum, weak internal controls, writing off of loans for dubious reasons, etc. Regulatory weaknesses—such as the lack of independence of the central bank, political influence of habitual loan defaulters, arbitrary issuance of bank licenses, and the quasi-monopolistic power granted to a few banking oligarchs—have allowed these irregularities to occur unabated.

As a result of high NPLs, the fiscal flexibility of banks has also been seriously constrained. This has had numerous spillover effects both on the health of the banks and the overall economy. Given these realities, the country urgently needs a commission to unearth the true extent of the damage done to the sector. Without such an effort to bring transparency to the sector, it will be difficult to determine the necessary remedial solutions for it.

However, in establishing such a commission, its objectives should be clearly defined, as experts have suggested. These may include ensuring full transparency in the commission's operations, identifying the root causes that have led to the current banking problems and future challenges, determining which groups and institutions are responsible for these issues, and providing specific, actionable recommendations for reforms in the short to medium term. Moreover, the interim government should also establish a clear roadmap outlining when and how the commission's suggestions will be implemented.

To ensure that the commission is able to play its desired role, its members should not only be highly competent, experienced, and honest, but they should also engage with different stakeholders to gather their input. Regarding transparency, it is encouraging that the interim government plans to prepare and publish a report on the overall situation of the financial sector and a roadmap for reforms within the first 100 days of its tenure. However, once the commission is established, it should also provide regular updates on its progress to restore confidence in the banking sector. Additionally, to ensure its long-term health, it must be guaranteed that the commission can carry out its work without any external interference in the future.​