[🇧🇩] Banking System in Bangladesh

[Saif]

Central bank’s autonomy crucial for the economy

Its lack of independence has had disastrous effects

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Central bank's autonomy crucial for the economy
Its lack of independence has had disastrous effects

VISUAL: STAR

It's heartening to see the government acknowledge the importance of having an independent central bank. Reportedly, the authorities are set to amend the Bangladesh Bank Order, 1972 to supposedly align it with global best practices and give it more autonomy. The development comes at a time when the economy is going through one of the worst downturns in recent memory, with inflation continuing to break records. As experts have pointed out, failed government policies have been a major factor for the runaway inflation and other economic problems we are currently experiencing. And the role of government-controlled Bangladesh Bank in this debacle is particularly notable.

It is reasonable to assume that many of our problems could have been avoided or better addressed if we had an independent and courageous central bank. The government-imposed interest-rate caps on both the lending and deposit rates—at 9 and 6 percent—is a perfect example of this. Perhaps a more independent central bank would have realised—and indeed listened to experts—that this was a flawed policy that would only end up fuelling inflation. The decision to artificially inflate the value of the taka was another disaster that, too, could have been avoided.

Even before the recent economic crisis began, the unchecked "looting" of our banking sector—under political patronage—had damaged our economy beyond comprehension. Those cracks are widening today as the government, including the central bank, fails to curb default loans with the policies for defaulters continuing to be relaxed. The government's decision to provide continuous loan rescheduling facilities and interest rate waivers to loan defaulters has not been beneficial whatsoever. Therefore, we hope the Bangladesh Bank is given autonomy to pursue stricter policies with regard to wilful defaulters, without political interventions.

In its technical assistance report regarding the Bangladesh Bank, the IMF said that the bank "order needs to be substantially amended so that price stability is the overriding objective of the new monetary policy regime, and governance arrangements are aligned accordingly." We cannot agree more. What's concerning, however, is that a provision of the order called for establishing a council comprising finance and commerce ministers, the bank governor, and others. This will ultimately constrain the bank's actions in times of pressure.

Therefore, while the amendment initiative may sound good, its success in terms of making prudent economic decisions will be determined by the degree of autonomy ultimately granted to the central bank. Previously, despite talks of providing it with autonomy, we have seen the government do the exact opposite. Hence, we hope the amendment is not simply an eyewash amid pressure for reforms. It must be able to address longstanding concerns about the bank's function and mandate. An expert-driven Bangladesh Bank that protects the nation's best interests is the need of the hour.​

 

[Saif]

A former governor’s unpleasant truths about the banking sector

Economists are always noted for telling unpleasant truths because they go by numbers, research, theory, and judgement. Rarely do politicians—who can manufacture arguments to suit their purpose—endorse economists who are objective. Former Bangladesh Bank Governor Dr Mohammad Farashuddin has unvei

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A former governor's unpleasant truths about the banking sector

FILE VISUAL: REHNUMA PROSHOON

Economists are always noted for telling unpleasant truths because they go by numbers, research, theory, and judgement. Rarely do politicians—who can manufacture arguments to suit their purpose—endorse economists who are objective. Former Bangladesh Bank Governor Dr Mohammad Farashuddin has unveiled some truths about the country's banking sector where regulations have remarkably been relaxed in recent years. Seldom have we seen such blistering comments coming from a governor in Bangladesh's history. Farashuddin's statement, though commendable at a critical moment, creates enormous doubt over whether the government will really pay any attention to it.

The doubt is genuine because the looters are quite well-known to all of us, and they are flocking around the people in power. Not only have they indulged in misdeeds, but they are extravagantly empowered with high positions as well. To the bad luck of the nation, these people have been masquerading as the "true saviours" of the financial industry, if not that of the whole nation. These wolves in sheep's clothing, if not checked, will bring an economy of otherwise high potential down.

It would be a mistake for politicians to label Farashuddin as a supporter of the opposition. He was very well liked by Bangabandhu, who appointed him as his personal secretary. The Awami League government appointed him as governor of the central bank after coming to power in 1996. And most importantly, his performance at the helm of the central bank was academically sound and professionally pro-business.

Few retired bureaucrat-turned governors could do what he did. Dr Farashuddin remained committed to economic knowledge and the country's interest, not the interest of the wilful defaulters whose businesses always pretend to be in the red despite the economy's respectable growth. Sadly, growth is showing signs of a premature slowdown, justifying the clamours of economists who advocate bringing a semblance of law and ethics into business.

The great 18th-century economist Adam Smith once wrote, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice." Smith was so sure about his articulation that he asserted that all the rest would be brought about by the natural course of things once justice is safeguarded. The history of all developed countries has evidently proven that organised financial corruption and economic prosperity can never be siblings. They are mutually exclusive and many politicians in power seem to have brushed the trade-off aside for a game of personal wealth-making and very short-term interest.

Farashuddin's worry in this regard is quite explicit although he seems to be afraid of being mistreated if he speaks against the financial hooligans pampered by power. He literarily resorted to the poignant lines of Rabindranath Tagore—Morite chahina ami sundoro bhubone (I don't want to die in this beautiful world). So subtle was his sense of melancholy and humour.

The truth hidden under his humour points out that if high-scale bank looters are pardoned so easily, the banking sector's future must be cancerous, suggesting the emergence of further plunderers under the political coddling of the regime. His warning rightly echoes that of Dr Wahiduddin Mahmud, former economic adviser to the caretaker government, who allegorically labels the default culture as the rotten heart of the nation.

Some critics have recently labelled Dr Farashuddin's outburst at the seminar of the Economic Reporters' Forum (ERF) as his personal frustration for not being placed in a policymaking position by the regime. This is a defective interpretation of Farashuddin's standpoint. First, we need to judge whether he is statistically right about what he has said. Second, we need to check whether his recommendations don't serve him personally or his business. We get a "yes" in response to both these questions. His concern is that the family-based directorship proposal was passed at parliament without any resolution or debate. In fact, this law has turned many private banks into a mudir dokan—the single family-run petty shops sprawling in villages, fostering a perverse move of private banks from corporate structures to family dynasties.

The sneaky way of passing this family directorship law is the antithesis to the spirit of parliamentary democracy where we hope to see debates over economic policymaking. But there are many members of parliament who never utter a single word about anything during their tenure, while most of them are familiar with the art of accumulating personal wealth at magical speed. Thus, simply addressing the banking sector won't solve the current economic predicament. Parliament and the legal system must function better to make the economy as robust as it was before the pandemic.

Farashuddin is correct in pronouncing that some groups of people are taking bigger slices of the pizza—which we earned through independence. And hence, he is against the trend that brings more retired bureaucrats to politics. It will dampen the quality of bureaucratic services as we have already degraded the quality of our universities by infusing political enthusiasm. He is right in reiterating the unholy triangle of tax dodgers, bank defaulters, and money launderers. They are the same group of people who are dragging the economy to the cliff's edge, and waiting for the time to fly overseas with their trafficked fortunes.

This must be stopped for the sake of the nation where income inequality has been on an unbroken crescendo of unsustainability, defying any sensible records of peer nations. Putting a farmer in jail for defaulting on loans by Tk 1,000, while letting a bank looter sit beside government officials, signal a cancerous future for the financial industry, and Farashuddin's artistic portrayal of the injustice and asymmetry in this regard warrants serious attention from the government.

Dr Birupaksha Paul is professor of economics at the State University of New York at Cortland in the US.​

 

[Saif]

The concept of a public institution eludes our central bank

BB has recently restricted the journalists’ access for no reason in sight.

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The concept of a public institution eludes our central bank

Illustration: Biplob Chakroborty

In the mid-1980s, military dictator HM Ershad banned BBC's journalistic operations in Bangladesh. In March 2022, the Taliban banned BBC's local language services in Afghanistan. It can thus be theorised that authoritarian rulers simply hate any journalistic investigations because the press is detrimental to their longevity. But for journalists' normal, professional access into a financial institution in Bangladesh to be barred is an untimely absurdity. It raises a question as to whether something is really wrong within Bangladesh Bank (BB) right now, given that the regulator is floundering in the theatrics of mergers and trying to convert rotten apples to fresh oranges by covering up multiple loopholes.

BB has recently restricted the journalists' access for no reason in sight. Of course, BB's policy restlessness in recent months surrounding default loans, the dollar's exchange rates, reserves, remittance, inflation, and mergers have drawn in more criticism than praise from the media. Meanwhile, journalists have been reporting BB's half-baked ideas and erratic steps. They are only doing their job, as they have been for so long. It is their noble duty to report any public or private sector wrongdoings so as to alert the nation. So what's the problem?

The BB governor has attempted to explain the decision as trying to protect some "top secrets" of the central bank. If the so-called top secrets aren't religiously private, he is supposed to share these with the public via the media. People have every right to know such information since the central bank is the regulator of banks which live and thrive on people's money. And the BB is not like police headquarters; it doesn't handle murder cases which may warrant confidentiality. The culprits BB might be dealing with are wilful defaulters who are at the root of plundering the financial sector and thus placing the economy on the cliff's edge. But even these cases shouldn't be kept secret. The BB governor is a custodian of the state's interests, not those of loan defaulters. Being a hundred percent transparent is the first point of his oath.

The culture of central banks addressing journalists has been there since the early 1990s. Economist Alan Blinder, the then vice-chair of the Federal Reserve System, championed the culture of making central banks more accessible for and accountable to the public. His campaign, "Fed listens," has been a paragon of how a central bank must ensure free flow of information. The journalists help establish communication between policymakers and the public. The current Fed chair Jeromee Powell regularly meets with journalists after every policy decision; so does the governor of the Bank of England, Andrew Bailey. The current president of the European Central Bank (ECB), Christine Lagarde, previously the chair and managing director of the International Monetary Fund (IMF), invites the press for question-and-answer sessions quite regularly. The ECB also welcomes public tours to improve the common understanding of how central banks work and what purposes they serve.

The IMF outlines four principles of communication by central banks. It asserts that communication should be clear, candid, and transparent. Second, communication should reach all segments of the population. Third, communication should take place regularly. Fourth, all economic agents should have equal access to the same information. Ben Bernanke, who chaired the Fed and won the economics Nobel Prize, made it clear that central bank governors are public servants, and it is their responsibility to provide the public with as much explanation of their decisions as possible. Former Reserve Bank of India governor Raghuram Rajan faced journalists quite confidently because he understood economics well and didn't fear being dethroned by any tycoon groups. None of those mentioned above resorted to using their spokesmen to justify their stances because the respective governments appointed them knowing that these leaders know how the economy functions and thus can speak for themselves. At any central bank, every information is public information, and hiding anything is equivalent to doing a disservice to the government.

The economy is facing high inflation and reserve depletion. The banking sector in particular is in its most appalling state, requiring constant checkups like a patient in the ICU. In such a situation, journalists are akin to those devices surrounding the patient which work tirelessly to report BB's financial symptoms to the public.

BB needs extensive interactions with journalists more than ever before, because journalists can read the public pulse and communicate with stakeholders efficiently. No other service can replicate the functions which the media carries out for the public. Journalists mustn't be seen as counterparties, nor are they enemies of state interests. BB should rather engage with journalists as well-wishers and counsellors in regards to policy steps. Had BB adopted this practice in early 2022 when the prevailing crises began to surface, the governor would have been regarded as a good policymaker by now. But BB's attitude towards journalists has recently been more bureaucratic than accommodative, and that is doing more harm than good.

Restricting journalists in the secretariat should in no way be a good example that is blindly replicated in an institution like BB or the Bangladesh Securities and Exchange Commission. These bodies deal with citizens' savings and investments and citizens have the right to inquire about what the custodians of their assets are doing with them at any point in time. Thus, preventing journalists from discharging their duties is unconstitutional and demeans the noble objectives of the Bangladesh Bank Order, 1972 which was framed under Bangabandhu's guidance after independence. BB must revise its approach to journalism by following global best practices and thus improving its knowledge base.

Dr Birupaksha Paul is a professor of economics at the State University of New York at Cortland in the US.​

 

[Saif]

Roadmap for banking reforms: Old wine in a new bottle?

In February 2019, the central bank lowered the timeframe to three years from five years. And what has that achieved?

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Roadmap for banking reforms: Old wine in a new bottle?

A few days before the one-sided election of January 7, Prime Minister Sheikh Hasina asked voters to forgive her (and her party, I assume) for any mistakes that were made since the Awami League came to power, with a promise to rectify them if her party returned to office. And nothing, perhaps, requires as urgent a rectification as the AL's policy in regards to the country's banking sector.

When the AL assumed office in 2009, the total defaulted loans amounted to Tk 22,481 crore, whereas at the end of September last year, non-performing loans (NPLs) stood at Tk 155,397 crore. During the last July-September period, NPLs in the banking sector decreased slightly. But that was only because Janata Bank rescheduled the defaulted loans of Beximco and S Alam, two of the country's biggest business groups which have received quite a few favours from the government. Such rescheduling tricks—which create the illusion of NPLs going down by hiding the figure from banks' balance sheets even though the liabilities still remain—have been at the core of the AL's banking sector policy. They have allowed the government—and vested interest groups—to continually hide the real amount of NPLs in the sector.

According to Moinul Islam, a former professor of economics at Chittagong University, "If the entire amount of the loans involved in the court cases and the written-off loans are taken into consideration, the total bad loans in the banking sector will be Tk 450,000 crore." Similarly, according to economist Ahsan H Mansur, the actual amount of bad loans accounts for around 24-25 percent of the total loans disbursed, whereas via accounting tricks, this is being shown to be below 10 percent.

This buildup of NPLs, according to the Asian Development Bank (ADB), poses a serious risk to the health of banks' balance sheets and financial soundness, reducing interest income, lowering profitability, and depleting their capital bases. They also require higher risk weights and minimum loss coverage in banks' capital requirements, putting a strain on liquidity and increasing funding costs. Hence, it should come as no surprise that the central bank has had to provide increasing amounts of liquidity to credit-hungry banks.

According to Bangladesh Bank statistics, the central bank provided liquidity support amounting to Tk 633.47 billion to banks in June 2023. In the following month, the handouts more than doubled, to Tk 1.28 trillion. And since then, it has been rising every month, ultimately reaching Tk 3.63 trillion in January 2024.

According to a central bank official, if Bangladesh Bank does not "continue cash feeding to the banks as per their requirements," they "will be in severe liquidity crisis." Among other consequences, the interest rate would go up to a level that may be difficult for the economy to absorb. Already, a tight liquidity situation facing both the government and banks has pushed up yields of treasury bills and bonds, as well as the lending rate, in the banking sector. And overall, there is a lack of trust in the financial sector which is adversely impacting the country's economy.

With the banking sector in so much trouble and the authorities walking a tightrope to balance the economy and finance, the Bangladesh Bank on February 4 unveiled its roadmap for reining in defaulted loans and bringing good governance to the sector. The most obvious concern about it, of course, is how genuinely it will be implemented. Given our track record, proper implementation remains highly unlikely. Moreover, some of the action plans and policy reforms already exist or were added in the Bank Company (Amendment) Act, 2023. Yet, none of those prevented things from getting worse.

For example, the roadmap says that the banking regulator will provide necessary instructions to prevent lenders from exceeding the single-borrower limit. However, the same provision existed in the Bank Company Act for more than a decade. And yet, exceeding the single-borrower limit has become the norm in our banking industry, with around 89 borrowers of four state-run banks exceeding it as of June last year, as per a central bank report. What is worse is that, in its attempt to reduce the higher volume of bad loans in the banking sector, the roadmap further relaxed the loan write-off policy by letting banks write off from their balance sheet defaulted loans that have been in the "bad and loss category" for two years, down from three years previously. Again, this will only "artificially" reduce bad loans as the liabilities will remain—meaning that this so-called reform is just old wine in a new bottle.

In February 2019, the central bank lowered the timeframe to three years from five years. And what has that achieved? Default loans since then have gone up from Tk 943 billion to as high as Tk 1,560 billion.

During the discussions prior to the unveiling of the roadmap, the Bangladesh Bank governor was apparently told to bring down default loans by taking any measures necessary, including ignoring political pressure. After its unveiling, former BB Governor Salehuddin Ahmed said the central bank must have enough strength to tackle political interference and pressure from influential groups to implement the roadmap.

However, what is interesting is that back in January, central bank Governor Abdur Rouf Talukder said that the BB's activities have never been influenced by outside forces—a blatant farce of a statement that no one in their right mind would believe.

So, if the governor does not have the courage to even admit the fact that the central bank has bowed to political pressure time and again, has broken its own rules, and made special concessions for vested interests, how can he be counted on to have the courage to stand up to them now? And unless Bangladesh Bank can carry out the necessary reforms by standing up to political pressure—which will most definitely be there—this new roadmap will be nothing but another failed reformation plan.

It is time for the prime minister to prove that her promises to the people were legitimate, and ensure that the regulators have her backing in carrying out the reforms—in spite of any and all political pressure.

Eresh Omar Jamal is a journalist at The Daily Star.​

 

[Saif]

How default culture plagues Bangladesh’s banking sector

A pre-Socratic Greek philosopher named Parmenides first articulated the famous idea: “Nothing comes from nothing.” Later, it appeared in Aristotle’s Physics. The Roman philosopher,

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How default culture plagues Bangladesh's banking sector

The role of the central bank to regulate the banking industry has come under criticism since the 1980s. VISUAL: STAR

A pre-Socratic Greek philosopher named Parmenides first articulated the famous idea: "Nothing comes from nothing." Later, it appeared in Aristotle's Physics. The Roman philosopher, Lucretius, echoed the same, and so did William Shakespear in his famous play "King Lear." The quote was also used in a song from the famous classic movie, "The Sound of Music." The same is true for Bangladesh's banking sector and the emerging default culture which has reached an extreme level because of three things: i) inept institutional leadership; ii) various wrong policies in banking and loan management; and iii) the indulgence of financial plundering by politically mighty business tycoons.

Simply put, Bangladesh's default bonanza did not emerge from either economic debility or financial crises. Nor was it the consequence of political instability. Not a single global factor is attributable to this steadily rising trend in bad loans. It is simply the outcome of government indulgence to habitual defaulters who somehow managed to get crooked politicians to back them no matter which party comes to power. And this is threatening the country's prospect of becoming a developed nation by impinging on private investments, reducing employment opportunities, promoting money laundering, and eventually dampening GDP growth.

BANKS, FIS, AND FINANCIAL INCLUSION

The banking industry after independence included six nationalised commercial banks, three specialised banks, and nine foreign banks. They operated under the guidance of the Bangladesh Bank (BB), the central bank of the country. The BB Order 1972 was the de facto constitution which BB followed in regulating the industry. Due to policy changes in the 1980s and financial deregulation in the 1990s, the industry kept on expanding because private banks were allowed to enter the field under the Banking Company Act 1991.

Currently, the list of scheduled banks includes six state-owned commercial banks, three specialised banks to serve agriculture and industry, 33 conventional private commercial banks, 10 Islami Shariah-based commercial banks, and nine foreign banks. Non-Bank Financial Institutions (FIs) are those types of financial organisations which are regulated under the Financial Institution Act 1993 and controlled by BB. Now, 35 FIs are operating in the market. The architecture of banking and finance is huge, even though the measure of financial inclusion among adult Bangladeshis is not correspondingly satisfactory. According to the Global Findex Database 2021, financial account ownership in Bangladesh has grown substantially since the Awami League took office in 2009. Among Bangladeshi adults particularly, it grew by 22 percentage points, from 31 percent in 2011 to 53 percent in 2021.

However, as Brac observes, the momentum is decelerating—account ownership rose by just three percentage points from 50 percent to 53 percent between 2017 and 2021, suggesting that nearly half of the adult population remains outside of the financial sector's purview. And the current state of banking being mired in malfunctions does not bode well to accelerate the pace of financial inclusion anytime soon.

THE BELEAGUERED BANKING SECTOR

A BB fortnightly report in November 2023 revealed that the total bank deposits that include both demand and time deposits amounted to Tk 16.4 lakh crore in November 2023. Domestic credit amounted to Tk 19.6 lakh crore while credit to the private sector was Tk 15.5 lakh crore, and the rest is credit to the public sector. The banking sector is deeply troubled with a huge share of nonperforming loans (NPLs)—which did not occur as a result of economic distress, but because of judicial tardiness and political favouritism toward wilful defaulters.

The BB Financial Stability Report 2022, released in August 2023, revealed that Bangladesh's banking sector's risky loans amounted to Tk 377,922 crore by December 2022. This amount is the summation of total NPLs, outstanding rescheduled and restructured loans, as well as written-off loans. At the end of 2022, the banking sector's NPL stood at Tk 120,649 crore, outstanding rescheduled loans at Tk 212,780 crore and outstanding written-off loans at Tk 44,493 crore. The report also acknowledged that the overall asset quality has dropped and the NPL ratio has edged up. The percentage share of classified loans peaked at 10.11 percent of total outstanding loans in June 2023, while it was 7.66 percent in December 2020.

DEFAULT LOANS AND SOFT DEFINITIONS

The number game in the banking sector is complicated because of the mismatch between the timeliness of data and its mischievous quality. BB often finds some banks hiding their real data to show a lower amount of NPL and less amount of capital provisioning which enables them to show higher profits. The circus goes on. Roughly, while Tk 16 trillion remains as outstanding loans to the private sector in the economy, almost one-fourth of that amount comprises risky loans. Thus, Tk 4 trillion turns out to be the amount of risky loans, of which, around 40 percent—around Tk 1.6 trillion—appears to be declared as defaulted loans. A Prothom Alo report on October 3 of last year found the total amount of defaulted loans to be Tk 1.56 trillion, while the actual amount would have been more than double had the soft definition of default loans not been used.

The default figure remains highly undervalued on purpose. The report refers to the World Bank website that publishes data and analysis on default loans by collecting information from various central banks. Bangladesh occupied the second highest position in South Asia following Sri Lanka, whose default loans amounted to 13.33 percent of total loans. Bangladesh's default loan stood at 10.11 percent, while it was only 4.8 percent in 2013 according to the report. The corresponding figure for Pakistan was 7.4 percent and India only 3.9 percent.

While Sri Lanka should be seen as an exception because of its unprecedented financial disaster in 2023, Bangladesh turns out to be South Asia's champion in generating default loans, even though the country witnessed a respectable GDP growth rate above six percent since 2013, illustrating that the rise in defaulted loans in Bangladesh has not been economy-driven for sure. It is entirely due to an indulgent culture orchestrated by wilful financial delinquents who are fuelled by political patrons. The lobbyists and advocates of default loans eventually benefit from this institutional method of embezzling funds and rent seeking.

Hence, the first public impression about the banking sector is that it is obliged to embrace the looting of funds by big business tycoons who maintain solid lobbying power with powerful politicians. They can manage delaying numerous cases on default loans in courts, convince the finance ministry to pressurise the central bank to act in their favour and, finally, compel the central bank to reschedule or restructure their loans so they can either contest in the election or take further loans to cater for money laundering, or both. In case the banks sue the defaulters, the litigations take ages to be resolved and, meanwhile, the defaulters manage to get the authorities to come up with new ways to whitewash their misdeeds.

Bangladesh occupied the second highest position in South Asia following Sri Lanka, whose default loans amounted to 13.33 percent of total loans. VISUAL: STAR

GLOBAL OR DOMESTIC REASONS FOR DEFAULT LOANS?

The banking sector suffers from leadership issues. The role of the central bank to regulate the banking industry has come under criticism since the 1980s. But it has been much worse during the third term of the Awami League government (2019-2023) when both threats and opportunities reigned the market. The Covid-19 pandemic paralysed the world economy. Global GDP growth was on average three percent from 2013 to 2019. It plunged to negative 3.1 percent in 2020 during the pandemic.

However, the rebound of the world economy was spectacularly rewarding with global growth as high as six percent in 2021—an unprecedented rate in the postwar era. Growth reached 3.1 percent again in 2022, suggesting that it had returned to normal. The Russian attack on Ukraine in early 2022 caused a spike in inflation globally, but GDP growth did not fall from its average of three percent or so. Moreover, the labour market was tight and unemployment rates did not go up in most developed countries. The US had an unemployment rate of 3.6 percent in 2022—never seen in its past 50 years.

As WB data suggests, Bangladesh's growth always remained in the positive territory since the 1990s, and the country never saw a recession. Its growth even in the Covid year of 2020 turned out to be 3.45 percent—still in the positive territory—while it was 7.88 percent in 2019, 6.94 percent in 2021, and 7.1 percent in 2022. The figure is expected to be around 6.5 percent in 2023, as the government predicts. Thus, the average growth rate during the third term of Awami League becomes 6.4 percent, while it was 6.7 percent in the second term (2014-2018), suggesting that the economic performance during Awami League's third term does not justify a drastic rise in the volume as well as the ratio of NPLs.

Under the Awami League government, defaulted loans amounted to Tk 225 billion in 2009, Tk 502 billion in 2014, Tk 943 billion in 2019, Tk 887 billion in 2020, and surprisingly as high as Tk 1,560 billion in 2023—almost double the amount of what it was during the Covid year. This upward trend does not justify any rationale related to the real economic situation.

The percentage share of classified loans peaked at 10.11 percent of total outstanding loans in June 2023. VISUAL: SALMAN SAKIB SHAHRYAR
POOR LEADERSHIP AND POLITICAL INDULGENCE

The central bank and the ministry of finance (MOF) are jointly responsible for the default loan culture. While the central bank is primarily responsible for regulating the banking sector, the Bangladesh story is different. Here, the MOF keeps the central bank in its grip. Since the mid-2010s, central bank governors have usually been retired secretaries of the MOF. And the central bank leadership has virtually obliged with what the MOF has wished politically. This mechanism is pushing the state of the banking sector from bad to worse.

The amount of default loans that we see today is just the tip of the iceberg. The provision of rescheduling, which is dominantly the brainchild of a previous finance minister and has been unquestionably carried out by the obedient governors since 2016, perverted the definition of default loans. The restructuring provision allowed the big loan takers to extend their repayment dates for an unconscionable amount of time for loans of Tk 500 crore or above. The rescheduling provisions allowed defaulters to make their loans regular and normal by adjusting only 5-10 percent of their default loans. This a perversion that corrupted the normal practice of prudential banking governance. And that is how the default rate has been forcibly shown as low as 10 percent, which would be above 20 percent otherwise—had these two redefinitions not been adopted.

To read the rest of the news, please click on the link above.​

 

[Saif]

Internet outage, curfew: Default loans to soar, banks’ profit to dip

Bankers are dreading a big drop in their profits as their defaulted loans are likely to increase further due to the curfew and the five-day internet blackout.

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Internet outage, curfew: Default loans to soar, banks' profit to dip

ILLUSTRATION: REHNUMA PROSHOON

Bankers are dreading a big drop in their profits as their defaulted loans are likely to increase further due to the curfew and the five-day internet blackout.

The defaulted loans are likely to increase further as business people are suffering due to the ongoing unrest, said Naser Ezaz Bijoy, chief executive officer (CEO) of Standard Chartered Bangladesh.

At the end of March, total defaulted loans stood at a record Tk 182,295 crore, which is 11.10 percent of total disbursed credit, as per the latest published data of the central bank.

However, the actual volume of bad loans is at least three times the central bank figure, according to industry insiders.

Inflation may also increase in the coming days, Bijoy said.

Average inflation overshot the government's target of 7.5 percent in fiscal 2023-24; it stood at 9.73 percent.

"Not only was infrastructure damaged due to the unrest, but it also damaged the country's image -- the country will face a confidence crisis with investors," Bijoy said, adding that the priority now should be to bring the situation back to normal.

The bad loans will increase further as some business people have lost their capacity to repay the bank loans, said Anis A Khan, the former chairman of the Association of Bankers, Bangladesh Ltd (ABB), a platform of banks' chief executive officers and managing directors.

Already, some export orders of the garment sector have been cancelled amid the weeklong unrest, he said.

Banks' profitability will be impact adversely when they will have to keep higher provisioning for the higher bad loans, said Khan, also the former MD of Mutual Trust Bank.

There will be multiple effects on the banking sector and the overall economy because of the ongoing unrest, he said, adding that foreign investors will lose their trust in the country.

"It will be very difficult to rebuild the trust of foreign investors."

The country's economic capacity will be reduced because of infrastructural damage.

"There will be a need for incentive packages for business people but the government is facing a cash crisis of its own. So the overall economic situation is not so good," Khan added.

Borrowers failed to repay the bank loans and other payments amid the internet blackout and curfew, which will adversely affect the banking sector alongside the bank's profitability, said Mohammad Ali, managing director of Pubali Bank.

Last week, Bangladesh Bank instructed banks and non-bank financial institutions (NBFIS) to refrain from imposing fees or interest on delayed repayment of loan and saving scheme instalments and credit card bills between July 18 and July 25 if they clear their dues by the end of this month.

Banking services were stopped from 9 pm on July 18 for the countrywide internet blackout. From July 24, banking services were resumed on a limited scale, with many banks unable to conduct foreign transactions because of the slow internet.

"There is a lot of uncertainty regarding the economic situation in the coming days because of the recent unrest," said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

There will be a double blow to the economy compared with the Covid-19 pandemic period.

"One will be for the internet shutdown and the other will be for the nationwide curfew. This may adversely impact the country's exports and imports," he added.​

 

[Saif]

Monetary policy faces fresh challenges

The latest monetary policy, declared two weeks ago, seeks to keep the growth of domestic credit flow at a moderate level during the first half of the current fiscal year (FY25). It wants to keep the growth of private credit unchanged while allowing the public sector credit grow to a certain extent

thefinancialexpress.com.bd

Depositors losing trust in banks
SYED FATTAHUL ALIM
Published :
Jul 28, 2024 21:52
Updated :
Jul 28, 2024 21:52

Of the many vulnerabilities that the country's banking sector is exposed to, its acute liquidity crisis is one. Tightening of money supply as part of the central bank's contractionary monetary policy, crisis in the forex market, slow pace of loan recovery, rising amount of bad loans, purchase of government bonds and securities by people and so on are the commonly discussed reasons for liquidity crunch in the banks. But over and above all these issues, there is yet another element that has factored in to deepen the bank's liquidity crisis. It is that the members of the public seem to have lost their interest in keeping their money in banks. As a result, banks are being forced to borrow money from the central bank to carry out their day-to-day business. The widespread violence and destruction that shook the nation in the wake of the students' movement for quota provision in government service has again been instrumental in making the public distrustful of the banking service. For it is during time of social unrest and crisis that people need money most to meet emergencies. But the complete internet shutdown for five consecutive days from July 19 to July 23, brought banking transaction to a complete halt. As the internet blackout came without any prior notice, so did the shutdown in the banking service.

To the members of the public, it was totally irresponsible on the part of the banks. Even the ATM booths went dysfunctional. But the banks had nothing to do either as the internet service was not under their control. The enforcement of curfew by the government to restore public order made matter worse. Nothing like this happened within the living memory of many who are below 50. Small wonder that there was a desperate rush at the banks and ATM booths on July 24, when the internet service hesitantly returned. It could be learnt that to meet the demands of some 30 cash hungry commercial banks, the Bangladesh Bank (BB), lent over Tk255 billion in cash to them. The commercial banks conducted their normal banking service with this borrowed money. Why did the banks have to turn to the BB for cash? The simple answer is that they did not have enough cash in their vaults to meet the demands of their depositors. People keep their money in banks for convenience and safety. But when the banks fail to serve them in times of need, let alone during serious emergencies, the public might then ask, what is the use of keeping their money in banks?

So, massive borrowing from the central bank to carry out normal banking is not a healthy sign for the banking sector. Neither is it safe for the central bank to continue doing so. For the central bank at a stage will be forced to print money against the advice of the International Monetary Fund (IMF) to help the commercial banks operate. The central bank has reportedly been doing so already to the detriment of its own policy of keeping money supply under control. But high-octane newly printed money will only defeat that purpose. It is indeed a recipe for disaster as continuation of this practice could pave the way for hyperinflation, a situation that the banking regulator must avoid under any circumstances. According to reports, on June 20 last, the bank notes issued by the central bank in the country was worth over Tk3.275 trillion. This was the highest number of bank notes ever issued in the country. Worse yet, the overwhelming portion, about 95 per cent, of the bank notes are circulating outside the banking system.

Obviously, the latest disruption in the banking service has further damaged public trust in the banks. The umpteen cases of looting of banks in connivance with top bank executives including the directors of private banks and failure, in most cases, of the banking regulator and the government to hold those looters and bank directors to account, has only contributed to further erosion of the public's trust in the banking system. The banking regulator has not been able to exercise its authority to put an end to the culture of inside-robbery in the banking sector, not to mention the pervasive culture of delinquency by the holders of non-performing loan accounts. How long are the common people going to stand this free-for-all in the banking sector? Some people are becoming billionaires not by doing any business, but by just looting public money kept in the banks! The common depositors cannot be blamed if they decide to withdraw their money from banks. It is, as it were, a return to the pre-banking era.

This does not simply pose a mortal risk to the banks alone. It also poses a danger to society itself. If the common depositors turn their back on the banking system, where are they going to save their money? By keeping it in their own homes? But that is yet another recipe for disaster because it will be an open invitation to robbers and thieves. The matter is going far beyond the jurisdiction of the banking regulator.

To make the matter worse, many expatriate workers reportedly were campaigning during internet disruptions against sending their remittance through the banking channel. If true, that's real bad news not only for the banking sector, but also for the country's foreign exchange reserves. After the very low record of remittance receipt in March this year, which was below two billion (actually, US$1.99billion plus), the highest ever record of remittance receipt in the last 47 months was in June at US$2.54 billion plus. But till July 24, the receipt recorded was a mere US$1.5 billion. Will the situation improve with resumption of the internet service?

Let's keep our fingers crossed that things may improve soon.​

 

[Saif]

Banks asked to join BB intranet

The Bangladesh Bank (BB) is trying to develop its own full-fledged banking-network system to prevent service disruptions during internet outages, officials and bankers said. As part of the plan, the central bank has initially developed an intranet and is asking commercial banks, financial institut

thefinancialexpress.com.bd

Banks asked to join BB intranet
Smooth services during internet disruption
FE REPORT
Published :
Aug 02, 2024 00:12
Updated :
Aug 02, 2024 00:12

The Bangladesh Bank (BB) is trying to develop its own full-fledged banking-network system to prevent service disruptions during internet outages, officials and bankers said.
As part of the plan, the central bank has initially developed an intranet and is asking commercial banks, financial institutions and mobile financial services to join it.

This would allow them to run the services even if internet communications are completely cut off.

BB Governor Abdur Rouf Talukder made the call at a meeting with top executives of several commercial banks on Thursday, according to meeting sources.

The meeting was held to assess the damage to the banking sector caused by recent violence following student protests over job quotas.

Bankers reported physical damage and mentioned the five-day nationwide internet outage that severely disrupted banking operations across the country.

Seeking anonymity, a BB official who attended the meeting said the central bank has developed a separate IT infrastructure called an intranet. Some banks have already connected to this system and were able to serve customers during the internet shutdown.

At the meeting, the central bank asked all banks, MFS providers and financial institutions to connect to the intranet to ensure uninterrupted service, the official said.

The Internet is a global collection of computer networks. It is an open network, accessible to anyone with a device and an internet connection.

In contrast, the intranet is a closed online network, only accessible to company employees. Employees use some form of login to access the company intranet.

Contacted, Selim RF Hussain, chairman of the Association of Bankers Bangladesh Limited (ABB) and managing director and chief executive officer of BRAC Bank, said the country's banking system depends heavily on the internet for online services.

The recent nationwide internet shutdown severely affected banking operations, he said. The importance of a separate infrastructure for the banking industry came up at the meeting.

He said the central bank also shared its plan for a separate communications infrastructure that will be different from the public internet.​

 

[Saif]

Bangladesh Bank discusses 24/7 banking without internet

Bangladesh Bank has initiated discussions on how to keep banking services operational around the clock without relying on the internet. The discussions took place during a meeting between the managing directors (MDs) of about a dozen banks and Bangladesh Bank Governor Abdur Rouf Talukder. During

thefinancialexpress.com.bd

Bangladesh Bank discusses 24/7 banking without internet
FE ONLINE DESK
Published :
Aug 01, 2024 22:13
Updated :
Aug 01, 2024 22:13

Bangladesh Bank has initiated discussions on how to keep banking services operational around the clock without relying on the internet.
The discussions took place during a meeting between the managing directors (MDs) of about a dozen banks and Bangladesh Bank Governor Abdur Rouf Talukder.

During the meeting, the governor inquired about the losses and casualties in the banking sector amid the recent unrest.

It was then reported on behalf of the MDs that four employees from Dutch-Bangla Bank and Standard Chartered Bank were killed, and some ATM booths and branches were damaged.

The MDs also said that while bank branches were closed, ATMs remained operational. However, the internet shutdown disrupted online banking services.

The central bank then proposed an alternative system to keep banking services running without internet, and talks on this followed.

MDs from Sonali Bank, Dutch-Bangla Bank, The City Bank, Eastern Bank, Mutual Trust Bank, BRAC Bank, Bank Asia, Prime Bank, and Trust Bank attended the meeting.​

 

[Saif]

Crisis in banks deeper than anyone could imagine

Experts and businesspeople yesterday urged the newly formed interim government to adopt urgent measures to ensure good governance in the banking sector, saying that the crisis in financial institutions is much deeper than anyone could imagine.

www.thedailystar.net

Crisis in banks deeper than anyone could imagine
Experts call for urgent measures to ensure good governance

Experts and businesspeople yesterday urged the newly formed interim government to adopt urgent measures to ensure good governance in the banking sector, saying that the crisis in financial institutions is much deeper than anyone could imagine.

They also demanded punishment for those involved in financial crimes in banks and financial institutions.

"The banking sector has become fragile over the past 15 years during the rule of Sheikh Hasina-led government. The situation is even worse than one can imagine," said Selim RF Hussain, chairman of the Association of Bankers, Bangladesh.

That fragile state is illustrated by the amount of non-performing loans in the sector, which hit Tk 182,000 crore in March this year, up from around Tk 22,000 crore in 2009.

"You see the names of some banks in the newspaper [for corruption]. But many are yet to be unveiled," Hussain added.

Hussain made the remarks at a dialogue organised by the Centre for Policy Dialogue (CPD) at the Lakeshore Hotel in Dhaka to discuss and address the challenges facing the interim government.

It included representatives from civil society, economists, bankers, entrepreneurs and students.

After restoring law and order, the priority should be focusing on the banking sector, Hussain said.

"The interim government should revive the central bank and I think this has already started with the appointment of a new governor."

The banker also congratulated protesting students, saying: "We now have freedom of speech. We did not have it in the last 14-15 years."

Hussain, also managing director and chief executive officer of BRAC Bank, then criticised bureaucratic tangles in the system.

Shams Mahmud, director of the Bangladesh Garment Manufacturers and Exporters Association, demanded stern action against corrupt directors of banks.

Accounts belonging to directors of scam-hit banks should be frozen and th
He also said it is important to prepare white papers to address data anomalies, especially in light of Bangladesh's impending graduation from least developed country status in 2026.

"There are major mismatches in the data based on which economic indicators were calculated. So, a white paper should be formulated on the actual economic scenario. Then we can have a vote. If a majority agrees, LDC graduation can be delayed by 10 to 15 years," he added.

Mahmud also labelled former National Board of Revenue Chairman Abu Hena Md Rahmatul Muneem as the leader of corruption, saying he had destroyed the tax system.

The government removed Muneem from his post yesterday.

Inadequate revenue collection, slow pace of implementation under the Annual Development Programme, and significant government borrowing from the banking sector have squeezed the country's economy, according to Fahmida Khatun, executive director of the CPD.

"Hikes in commodity prices, rising default loans and a liquidity crisis in the banking sector, slow export earnings, slow flow of remittance, stagnation in private sector investment and other problems have to be resolved quickly," she said.

To boost the economy, initiatives must be taken to solve the problems plaguing the power and energy sector. The deterioration of foreign exchange reserves, the declining trend of imports, and the massive devaluation of the taka must also be addressed, Fahmida added.

Another issue is that a large portion of the youth remain unemployed due to a lack of employment opportunities stemming from bribery and corruption, unreasonable job expectations, financial constraints or because they are waiting to land government jobs.

AKM Fahim Mashroor, chief executive officer of Bdjobs.com, said the government had violated civil rights by spying through digital devices over the past 15 years.

"In an independent country, why am I not able to use technology freely?" he questioned.

He emphasised the disclosure of all types of software used to violate human rights and civil rights, adding: "A white paper is required to explain how civil and human rights have been curtailed."

He further mentioned that the entire banking sector had been tailored to support corporate entities, depriving small and medium enterprises.

Legal and constitutional reforms to prevent the return of injustice, corruption, and authoritarianism were sought by Badiul Alam Majumdar, secretary at SHUJAN: Citizens for Good Governance.

He said three crimes occurred during the past government's tenure: crimes against humanity, criminal offences, and financial crimes. He added that the government should be given the chance to defend its actions in a fair trial.

Majumdar also lamented the use of law enforcement as a tool of the ruling party, he said.

One of the coordinators of the Anti-Discrimination Movement, Nusrat Tabbassum, said the interim government should reform law enforcement agencies which were destroyed by the past government.

She further said the interim government should work to restore the country's reputation, which was lost when the government imposed a five-day internet blackout in mid-July to quell protests that left more than 500 people dead as of August 7.

Mushtaque Raza Chowdhury, convenor at Bangladesh Health Watch, said the interim government should form a health commission to make a roadmap and look into existing healthcare services.

Through this commission, it can leave a legacy for future governments, he said.

Prof Mustafizur Rahman, a distinguished fellow at the CPD, demanded justice for recent injustices and loss of lives.

"We need a platform or framework with students and general people. They will work as guarantors of the expected reforms, which help an inclusive society," he said.

"The country has fallen into a vicious cycle. We have deviated from economic progress due to high inflation, low investment and anarchy in the banking sector."

In the last 53 years, Bangladesh has overcome many first-generation challenges. But we still have not overcome second-generation challenges, he added.​

 

[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.​