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The media over the past few weeks have drawn attention to the startling rise in the number and volume of non-performing loans within the banking sector, both public and private.
It has been pointed out that at the end of September, 2016 the figure of bad debt stood at Tk 657.31 billion and a year later this figure increased to more than Tk 803.07 billion. In the last three months the amount has increased by nearly Tk 60.00 billion. Until June, 2017, the amount of defaulted loan stood at Tk 741.48 billion. These details are based on information released by the Bangladesh Bank.
The seriousness of the situation will be better understood when one realises that the total figure is more than 30 per cent of Bangladesh's 2017-18 budget and equivalent to about 13 per cent of its Gross Domestic Product (GDP) at constant price.
Bangladesh Bank data show that six state-owned banks have the highest amount of default loans. By the beginning of October, 2017, the total bad debt of Sonali, Janata, Agrani, Rupali, Basic and BDBL stood at Tk 385.17 billion. These banks had disbursed loans of Tk 1,316.89 billion and are now facing capital shortages with the rise in bad loans. 23.79 per cent of loans disbursed by specialised Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank have also turned into default loans.
In September, 2017 local private banks had default loans of Tk 339.73 billion or 5.97 per cent of the total disbursed amount while bad loans of foreign banks operating in Bangladesh amounted to Tk 22.98 billion or 7.89 per cent of the disbursed amount of Tk 291.16 billion.
Things came to a head when Farmers Bank failed twice to honour a cheque worth Tk 3544 million (35.44 crore) presented by Bangladesh Telecommunications Company Ltd. This surfaced soon after Bangladesh Bank had forwarded a report in October, 2017 to the Parliamentary Standing Committee on Finance that suggested that this bank did not have the capacity to pay back funds to depositors and also to other banks. Farmers Bank had apparently failed to maintain the statutory liquidity ratio and cash reserve ratio as required under the Banking Company Act. This bank is also apparently facing serious difficulty in paying back the amount of Tk 1.24 billion borrowed from the call-money market.
The situation in the troubled Farmers Bank persuaded its chairman Mr. M.K. Alamgir and also the chairman of the bank's audit committee to resign on November 27. One hopes that the financial problems of the bank will now be addressed with greater care by the Bangladesh Bank.
Indicators suggest that the high level of non-performing loans (NPL) is indeed a cause for serious anxiety. In terms of percentage, Bangladesh Bank statistics state that in September 2016 it was 10.34 per cent of loan disbursed. In December last year it came down to 9.23 per cent. It increased again and crossed the 10 per cent mark to 10.53 per cent in March, 2017. It reduced slightly to 10.13 per cent in June, 2017 before rising again to 10.67 per cent in September, 2017.
Analysts and economists say that bad debts in the banking sector has continued to rise due to two critical factors associated with misgovernnce. Most of these default loans are approved through misuse of socio-metric overlay (in public administration terms), political considerations, family connections, and director of one bank taking loan from another bank with the help of a director of another bank and vice versa.
Examples of such misuse and inappropriate governance of financial and banking institutions are found in the unfortunate cases of Hallmark, Basic Bank and the activities of the Bismillah Group. Salehuddin Ahmed, former Governor of Bangladesh Bank, has correctly observed that "both the borrowers and the officials colluded in a non-transparent manner and siphoned off huge amounts of public money". It is disappointing, according to the former Governor, that those responsible and guilty of these misdeeds "have not been subjected to administrative and legal actions".
It is true that the past two decades have seen efforts to increase the quantity and also improve the quality of banking services in Bangladesh. A broad spectrum of digitalisation, including electronic, has enabled the country to expand the banking sector and also the range of banking products not only in the urban but also the rural areas.
However, according to economist Sadiq Ahmed, Vice Chairman of the Policy Research Institute, 'deep fault lines are emerging' along with such growth and diversification and they need to be addressed. He has identified two contributory factors, growing incidence of NPL and growing asset concentration among single borrowers. He has observed that these aspects need to be understood against the requirements and norms underlined in the Basel rounds. This would apply particularly with regard to NPLs in private banks. That adds a critical dimension to the problem.
Dr Sadiq has drawn attention to a significant point related to the 'prudential instruments for portfolio mnagement'. In this context, attention has been drawn to the need for selecting Bank Board members based on the "fit and proper test" and the growing weakness of this in the private banking sector. Consequently, on different occasions decisions are taken not on "solid business evidence but on connections'. That adds to the risk and probability of NPLs.
As such, at this critical juncture, the last thing one needs is the enactment of the Banking Companies (Amendment) Act, 2017. This would allow for four Directors from a single family in a Bank's Board instead of the current two and also extend the tenure of Directors. Such a move can only increase risk of NPL and affect adversely the economic health of financial institutions. This needs to be avoided.
Examples of big business houses creating serious malfunction through massive loans used for speculative commodity trading or in stock market shares or real estate transactions are a galore. Such large exposure creates a greater risk of NPL.
It is such a potential scenario that requires a greater interactive engagement on the part of the Bangladesh Bank. This institution needs to be given full autonomy and independence with regard to its regulatory responsibilities. This should include the ability of the Bangladesh Bank not only to set banking sector-wide exposure limits but also to closely monitor implementation of loan facilitation when the amounts cross certain limits and take the necessary corrective measures.
We must not forget that financial regulations are codified with certain important objectives. That include protecting depositors, investors, the general public and the economic dynamics associated with trading in goods and services. This will be possible only through transparency in the decision-making format. That will then ensure accountability and to a great extent help containing NPLs.
Better corporate governance should be ensured in the banking sector. That will help solve the problem of non-performing loans which, in turn, brighten the scope of foreign direct investment in the country.
The writer, a former Ambassador and Chief Information Commissioner of the Information Commission, is an analyst specialised in foreign affairs, right to information and good governance.