The state of health of the country's banking sector has not been good for quite some time. If the banks can be compared to the blood circulation system of a body, then it can be said that it is haemorrhaging the country's economy. Some economists opine that corruption in the banking arena is like cancer. Once it appears somewhere, it spreads throughout all parts of the economy. This is exactly what has been happening during the past decade. The problems faced by the state-owned public sector banks have spread to the private ones as well. Only a handful of these are now operating efficiently. Establishing good governance in the banking sector should therefore be a top priority for the country's newly installed government.
Available statistics show that over Tk 220 billion has been embezzled from the country's banking sector during the past ten years. Of these, Anontex, Crescent and Thermex groups alone have allegedly siphoned off Tk 112.30 billion from the state-owned Janata Bank. The Basic Bank lost Tk 45 billion, while Tk 35.47 billion was usurped from the public sector Sonali Bank through the Hallmark scandal. The Bismillah group swindled Tk 11.74 billion from the state-owned banks, while Tk 12.01 billion has been pilfered from the private sector's Farmers Bank.
Many economists hold the view that the banking sector must be repaired and reinvented if the socio-economic growth tempo of the county is to be sustained. It would not be possible to graduate to an upper middle-income country status with such a fragile banking sector, and political goodwill at the top is a must for restoring order in the sector. Alongside establishing good governance for the purpose, transparency and accountability of all has to be ensured, and the culprits haunting the sector must be brought to book. Only then would people's faith in the banks get restored.
At present, 59 banks are operating their businesses in Bangladesh. These include nine public sector banks, 41 private banks and nine foreign-owned ones. According to information supplied by Bangladesh Bank, the amount of defaulted loans in the country was Tk 224.81 billion in 2009. But it rose to an astonishing level of Tk 993.70 billion by September 2018. That implies, there has been a four and a half times increase in loan defaults during the period 2009-18. Besides, the amount of loans written off by the banks up to September last year was a staggering Tk 499.36 billion.
But knowledgeable sources claim that the real figures for loan defaults is much higher, because many banks have not labelled huge sums of loans they could not recover as defaulted ones. Besides, banks are also granting waivers every now and then on various pretexts. To compound matters further, the Bangladesh Bank has recently relaxed the loan write-off policy in order to allow the banks to show their mounting debt defaults look less bad. Banks can now write off debts that have been marked as bad for three years (instead of the previous five years) from their balance sheets. They have also been empowered by the central bank to write-off up to Tk 200 thousand (instead of the previous amount of Tk 50 thousand) loan without filing any case. Making 100 percent provisions for the write-offs would also not be required by the banks. Consequently, recovering the defaulted money after showing lesser loan defaults on paper is bound to be a huge challenge.
Rules are also not being adhered to properly as the banks are repeatedly rescheduling loan repayments once they are defaulted. Bangladesh Bank is giving special permissions when rescheduling cannot be done in accordance with rules. As a result, these amounts are not added to the list of defaulted loans despite their non-recovery by banks. Consequently, the real picture of loan defaults remains hidden from public view. The central bank itself gave approval to rescheduling of loans worth Tk 55 billion in 2012, Tk 180.20 billion in 2013, and Tk 123.50 billion in 2014. Besides, permissions were granted for rescheduling of loans worth Tk 191.40 billion in 2015, Tk 154.20 billion in 2016 and Tk 191.20 billion in 2017. Approval has been accorded for rescheduling loans worth around Tk 200 billion in the year 2018 alone. Despite this massive increase in rescheduling of loans, loan defaults are constantly rising.
Insiders point out that the rules for repayment of loans are not being properly followed by the stakeholders. Usually, loan rescheduling is not supposed to be allowed more than twice. If loans are rescheduled, at least 10 per cent of the money must be recovered forthwith, which should be in the form of cash and not instalments. The rescheduling should also be cancelled in case of violation of relevant terms and conditions. The banks need to be compelled to respect these rules. The emphasis should be on enforcement of existing laws and rules instead of formulation of new ones.
NEWLY APPROVED BANKS: The state of health of the newly approved banks is also not good. Loans worth Tk 42.70 billion have already been defaulted by the nine private sector banks that got approval in 2012 on political considerations. Their loan defaults have increased eight times in only two years. Of these, the loan defaults of the troubled Farmers Bank (now renamed as Padma Bank) alone has been stated to be Tk 30.70 billion. It started extending banking services without caring about banking rules and regulations, which has cast a dark shadow over the whole banking sector. The fears and apprehensions generated among the depositors due to the failure of Farmers Bank to repay them have not yet subsided. Besides, irregularities have also been committed by some other banks. As a consequence, the foundations of these private sector banks still remain fragile.
Against the backdrop of this alarming development, the bank owners' body - Bangladesh Association of Banks appears to wield much influence with the government. The government has reduced the corporate tax rate for banks in accordance with their demand. The Banking Companies Act has been amended by incorporating the provision for four directors from the same family as well as continuation of directorship for three consecutive terms. The central bank also reduced the CRR (cash reserve ratio) for them in exchange for their pledge of bringing down the interest rate to below 10 per cent. But that has not yet yielded the desired outcome in the sector.
Confidence in the banking sector is seriously affected because of the prevailing multifarious irregularities in the sector. Ominously, the growth rate in credit disbursement by banks has become almost double the growth rate of deposits in recent times. Figures obtained in November last year showed that whereas bank deposits grew at a rate of 8.0 per cent, the loans increased at the rate of 13 per cent. As a result, surplus deposits in the sector are now shrinking fast. It is claimed by bankers that additional money would be required now for investments, and that has to come from the deposits. The interest rate would therefore rise. But the challenge is to bring down the interest rate to below 10 per cent.
The ratio of defaulted loans in the private sector banks was once much less compared to the state-owned ones. But later, the notion that 'if money from public banks need not be returned, then why that has to be done in case of private ones' started to bedevil the private banks. This is a kind of punishment for the well-intentioned subscribers. Big procedural changes should therefore be brought about for recovery of the defaulted loans. The loan defaulters should be ostracised from society. That is likely to have a positive impact, as it would shaken the defaulters morally and everyone would become more alert. The cooperation of all stakeholders including the government, the regulatory bodies and the courts is needed for that to happen.
In a newspaper column, the World Bank economist Dr. Zahid Hussain sums up the banking sector maladies as follows: There are many kinds of problems in the banking sector. The rates of interest and defaulted loans are very high. The number of banks is excessive and there are weaknesses in regulation of the sector by Bangladesh Bank. It is not possible to solve so many problems at one go. The biggest problem that hounds the sector is loan default. Other problems are also getting exacerbated because of defaulted loans. Loan default is like cancer. Initiatives should be taken so that it does not spread. Measures should be put in place for removing it. Initiative should be taken so that none becomes loan-defaulter anew.
Scope for malpractices should be curbed by amending the Banking Companies Act, the Money Loan Court Act and the Bankruptcy Act. Not only amendment of laws, what is required is their strict enforcement. Another problem is that, law is not applied equally for all in Bangladesh. This is a big problem. For long-term solution, both the parties who sanction and receive loans should be brought under the purview of strict accountability. Dual control of banks should be done away with. The public sector banks should come under full control of Bangladesh Bank, and the central bank should be allowed to function independently. If these structural problems can be rectified, then other issues can also be resolved.
Dr. Helal Uddin Ahmed is a former Editor of Bangladesh Quarterly and retired Additional Secretary of the Ministry of Public Administration. firstname.lastname@example.org
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