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BANKING SECTOR: THE GAPING FAULT LINE

‘Nothing is going right in the country’s banking sector’, stated former Bangladesh Bank deputy governor, Khandaker Ibrahim Khaled, at a discussion meeting in Dhaka recently. The observation of the veteran banker, in reality, sums up the current state of the banking industry.

The crisis is multifaceted. But the true manifestation of the trouble comes through the banks’ pile of bad loans or stressed assets worth over Tk. 800 billion as of September 30, 2017. The amount represents 10.67% of the total outstanding loans in the banking industry. The share of the soured assets, in the case of the public sector banks, is now nearly 27% of the money they have lent until the third quarter of the current calendar year.

The statistics are compiled by the central bank. But some people tend to take the data concerning the stressed assets of the commercial banks with a grain a salt. They suspect that a section of private sector banks resort to window dressing in a bid to hide facts about their financial health and soured assets in particular.

The industry is yet to overcome the setbacks caused by a number of loan scams involving both state-owned and public sector banks. The public image of the banks was greatly tarnished by the scams. Everybody expected some major steps, including reform measures, from both the government and the central bank to restore discipline and ensure good governance in the banking industry. Nevertheless, that did not happen. Instead, events that have been taking place since then rather given rise to more frustration.

Despite opposition from the experts and industry insiders, the government allowed a few more banks in the private sector coming under political influence. A section of people having strong connections with the ruling political party got permission to open banks. However, few had any idea about the source of funds of their sponsors. The relevant government agencies also did not bother to know the secrets of the sponsors. Unfortunately, this is nothing new. Such a lapse, deliberate or otherwise, did happen in the past also while granting permission to open new private banks.

The government, as the owner of the state-owned banks, has also been performing poorly and allowing the banks to become sick. Reluctant to put these banks under the central bank’s regulatory control, the government, from time to time, has interfered in the loan as well as administrative decisions of these banks, leading to huge accumulation of non-performing assets in those. The obvious consequence has been their frequent recapitalization at the expense of taxpayers.

The rot also has been transmitted to the private sector banks. A section of sponsors of these banks with tacit blessings from the powers-that-be has developed a tendency to turn a blind eye to regulatory measures, rules, and regulations. The central bank, on occasions, is also found to be indulgent to such defiance, for reasons best known to it. A few recent instances have only strengthened the popular perception about its growing weakness.

Besides, a couple of disturbing developments has gripped the sector. The first one relates to tenure and presence of members of a single family on the bank boards. A bill now awaiting approval of the lawmakers intends to allow four of a single family to be on the bank boards. The same bill, if passed, would also a sponsor to continue as director for long nine years in a row. The second one shows the signs of ‘business groups’ capture’ of banks. One particular group has, allegedly, taken control over three private banks, already.

“Out of 48 private banks, the financial health of at least 13 is dismal. The appointment of ‘observers’ by the central bank in these banks has failed to improve the situation. The situation prevailing in these banks and the recent developments involving the ownership of a few others have given rise to a sort of ‘crisis of confidence’ among the bank clients.”

The style of the takeover has drawn people’s attention both at home and abroad. Even the first takeover being bizarre in nature had hit the headlines of a prestigious international weekly magazine, The Economist. The Finance Minister has, lately, promised to look into the sources of funds of a particular business group that has been, allegedly, behind the takeover of a few private banks.

It is widely believed that the amendments to the 1991 Bank Company Act would further aggravate the weak governance in the banking system. The results of weak governance are clearly visible all around. Out of 48 private banks, the financial health of at least 13 is dismal. The appointment of ‘observers’ by the central bank in these banks has failed to improve the situation. The situation prevailing in these banks and the recent developments involving the ownership of a few others have given rise to a sort of ‘crisis of confidence’ among the bank clients.

The non-performing loan (NPL) ratio of the private commercial banks (nearly 6%) though far less than that of the public sector banks is by no means negligible. Moreover, it is widely believed that a few of them play with the numbers of their financials. The day-to-day reporting to the central bank also by these banks is suspected to be not up to the mark.

The government has tried quite many options, homegrown and beyond since the early 1990s to streamline the situation prevailing in the public sector banks, but none of those has finally worked. However, it is none but the government itself is to blame for the failure. By its actions, on many occasions, the government nullified the possible gains from such reforms. The worst came following the decision to place the political appointees on the boards of the public sector banks in the recent past. Scam after scam had hit a number of public sector banks following such appointments.

The credibility of the banking sector has largely been eroded by the dominance of some big defaulters who have the power to bring things in their favor. These people do often secure loan rescheduling unduly and even ‘restructuring’ when no option is left to save their skin. They have the power to manage funds from one bank to repay debts to another or even buy ownership of one or two banks. They are also seen often rubbing their shoulders with the top notches of the administration.

But as far as the state of affairs with the country’s banking industry is concerned, it is time to act decisively.

In our neighboring country, India, where public sector banks hold 70% of the banking sector assets, the situation is even worse. Things are lately changing for the better as the Reserve Bank of India (RBI) has taken a tough stance. Many big corporate houses there have been forced to repay defaulted bank loans by selling off their prime assets. Bangladesh should do so by ensuring corporate governance, transparency and accountability in the banking sector that has become a sore point for an otherwise economy. However, prior to that what is all the more essential is the improvement of the quality of overall governance in the country. Once that is done, transparency and accountability would automatically travel to other areas of economy and society as well.

The writer is a senior journalist. He can be reached at zahidmar10@gmail.com

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