Resuscitating dying banks

The banking sector of the country has been made to bleed on an unprecedented scale during the past one and a half decades of the previous government overthrown on August 5 last. Unsurprisingly, Dr Ahsan H. Mansur, the current governor of the central bank, the Bangladesh Bank (BB), with his credentials as a brilliant banker and economist, had to eat his words that he would not further inject any fresh funds into the crisis-ridden banks to resuscitate them. In fact, last week on Thursday (November 28), the central bank governor informed that  he had provided Tk 225 billion in liquidity support to six struggling private banks by printing money. The banks thus receiving the funds include the First Security Islami Bank, National Bank, Social Islami Bank, EXIM Bank, Union Bank and Global Islami Bank.  Obviously, the central bank had little choice but to go back on its earlier stance on the matter. Prior to this latest decision by the BB governor, under a guarantee scheme provided by the central bank, an arrangement was made to provide liquidity support to the weak banks by way of short-term loans extended by stronger banks.

But the   policy did not work as expected.  For, in absence of the central bank's liquidity support, commercial banks had to borrow from the interbank money market to meet their regular liquidity requirements. As a result, in tandem with the surge in the demand for liquidity in the inter-bank money market, the interest rate also shot up. At a stage, the interest on 90-day term loans rose to the highest ever at 13.5 per cent. Similarly, the interest rate in the overnight call money market also rose to slightly over 10 per cent. Clearly, the ailing banks were unable to make up for the losses due to non-recovery of the bad, that is, non-performing loans (NPLs). Add to that the money stolen from banks and laundered. Also, consider the money lying with the corrupt party people, government officials, businesses and others who amassed their wealth illegally during the past regime. They are keeping their money out of the banking system for fear of being seized by the interim government. Apart from that, the common customers who had earlier withdrawn money from their accounts due to loss of faith in the banks are yet to resume their transactions with banks as usual. Under the circumstances, if the ailing banks in question go bankrupt, the worst affected would be the common depositors. Hence is the decision of the BB to keep those banks afloat by injecting fresh funds into them by printing money.

However, unlike what happened during the tenure of his predecessor, Abdur Rouf Talukder, under the previous government, this time printing of money to bail out sick banks has not been done secretly. Actually, the person in charge of the central bank at that time helped the oligarchs owning the seriously ailing private banks so they could make off with the money, launder it and stash away in offshore accounts.

However, the present BB governor has been transparent about the measures he has taken to keep those banks afloat so that their customers could withdraw their money deposited with those banks. To offset the possibility of the newly printed money's potential to drive up inflation, there is also a plan to issue fresh monetary instruments like bonds to mop up the excess money from the market. No doubt, the decision to print fresh money, to some economists and bankers, is a political one. In that case, the main objective, evidently, is to restore the common depositors' trust, which took a severe battering during the previous regime. However, efforts should be there to avoid the risk of running those banks in case the depositors begin to withdraw their money all at once leading to the worst-case scenario of their collapse. Ironically, such dilemma had already been there because those sick banks were already on the verge of collapse due to depositors' distrust as those had repeatedly been failing to honour the customers' cheques or ATM cards being denied access to their accounts. In case of any undesirable situation arising from excessive withdrawal of money from the banks in question by the depositors, the banks could offer lucrative banking products that would encourage their depositors to continue transactions with the banks.

Once the banks are able to gain depositors' trust, the reward will come in the form of increased deposit in the banks. Increased bank deposits also mean easing the pressure of inflation, which is the present policy of the central bank. Notably, to tame inflation, the bank regulator (BB) has been pursuing a contractionary monetary policy whereby bank interest is kept high both to incentivise the depositors and discourage the borrowers.    But the measure is also keeping down consumers' demand as well as discouraging private investment in the economy. That means, at the moment, the banking regulator has to walk a tight rope.

In this connection, some economists have questioned the idea of issuing bonds or similar financial instruments to suppress inflation, for the success of the measure is subject to the public's buying  those instruments in large quantities. In a poorly developed financial market with a fragile banking sector, weak capital market and a population not adequately educated in the financial sense of the term, popularity of financial instruments will remain in question. In that case, the emphasis should be on acquisitioning and selling the assets of the borrowers behind NPLs.

At the same time, to ensure accountability, strong monitoring of the banking sector should continue.

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