Strengthening regulatory oversight on NBFIs

With gross irregularities and governance deficiency plaguing the operations of a section of non-banking financial institutions (NBFIs), the performance of this important segment of the financial sector has been lacklustre for long. In fact, last year's financial stability report published by the Bangladesh Bank (BB), the country's central bank, bears testimony to this. Going by that central bank report of 2021, performance of the NBFIs was the worst in a decade and the culprit was, obviously, bad loan. While the pandemic was a big factor behind the default crisis, the lack of governance in a section NBFIs only made matter worse.

The situation has hardly improved in a year since. And it is exactly against this background that the BB last week in a notification asked the NBFIs not to write off bad debts. And, instead, the NBFI management concerned would be required to settle legal disputes with the defaulting loanees in question before writing off their debts. In addition, legal proceedings have to be started, as necessary, against the looters of those financial institutions in the guise of loan seekers, the BB notice further went.

Notably, the delinquent borrowers of the NBFIs were but thieves who actually stole money from those institutions in most cases against non-existent companies or projects. The very fact that those loans could be advanced to those scamsters at all points to the gross negligence on the part of the NBFI officials who cleared those loans. Clearly, as it takes two to tango, in many cases, the role of the loan officials involved, or even that of the management of some NBFIs, came into question. As for instance, the scandalous case of PK Halder, who looted cash worth billions of taka from some NBFIs he headed or owned, only proves the point. It goes without saying that it is due to this financial scamster that the those NBFIs plunged into a state of chaos.

Against this backdrop, establishing discipline in the non-banking financial sector is now the imperative. And the central bank's directive in question on this score is no doubt a step in the right direction. For, as reports go, some of the NBFIs had already taken steps to close the book on the delinquent loan accounts. Granted that writing off of non-performing loans in the worst category is an accepted practice among banks as well as NBFIs to improve their loan recovery profile as well as remove their tax burden. Even so, it depends on the respective NBFIs' overall financial strength and there is a guideline from the central bank to this effect. But seeing that the entire NBFI industry has been bleeding over the past decade due to serious deficiency in corporate governance leading to huge scams, it calls for stricter supervision and monitoring.

Though the rise of the non-banking financial sector was looked upon by many as a mark of increasing depth and diversity of the local financial industry, the inherent risk of its becoming a fertile ground for charlatanism and fraudulent practices was always there. And to ensure security of the common investors' money, it required strict regulatory oversight from the very beginning. Ironically though, in comparison to the banks, which are under a strict regulatory regime, the NBFIs have been operating in a rather relaxed (regulatory) environment. Against this backdrop, it is believed that for a better health of the sector as well as to avoid risks, the central bank would henceforth strengthen its regulatory oversight on the NBFI industry.