The Financial Express

Disciplining financial institutions

Disciplining financial institutions

The financial markets are classified mainly according to the final maturity of their instruments. Money market usually includes financial assets that have short or medium-term duration. These assets are highly marketable and carry a lower degree of risk. Capital market, on the other hand, includes instruments having longer term maturity and often with lesser liquidity like stocks and bonds. The money market players include banks and non-bank financial institutions. The banks acquire demand and time deposits while most non-bank financial institutions collect term deposits from individual customers, companies and governments, and conversely offer loans and investment capitals to the business sector.

According to the website of Bangladesh Bank, the number of banks and non-bank financial institutions (NBFIs) in the financial market of the country currently stand at 65 and 34 respectively. The latter mostly keep term deposits at rates higher than the banks and then offer those as loans at even higher rates. The banks in Bangladesh are broadly categorised as scheduled and non-scheduled ones. Of the 60 scheduled banks, 6 are state-owned commercial banks (SOCBs), 3 are specialised banks (SDBs), 42 are private commercial banks (PCBs), and 9 belong to the foreign commercial bank (FCBs) category. The non-scheduled banks number 5.

While the scheduled banks operate under the Bangladesh Bank Order 1972 and Bank Company Act 1991, the NBFIs are regulated by the Financial Institute Act 1993. Both are however controlled and supervised by Bangladesh Bank. NBFIs are also permitted to function as merchant bankers. In that case, they have to take separate licence from the Securities and Exchange Commission (SEC). Merchant banking activities include working as a manager of issue, underwriter, bridge-financier and portfolio manager.

Three principal problems that afflict the financial market in Bangladesh are deficient legal framework, poor governance and a weak central bank. Despite recent gains in depth, the financial market in Bangladesh remains shallow and the sector's contribution to GDP has remained almost static over many years. Although policy reforms were undertaken in the past, including deregulation of interest rates, strengthening the standards of loan classification cum provisioning, and reduction of central bank's control over most financial transactions, the financial market continues to be underdeveloped and inefficient. Poor financial intermediation presents a significant disincentive to faster economic growth in Bangladesh.

In the above backdrop, scams involving NBFIs in recent days including the ones at People's Leasing and Financial Services Ltd. (PLFSL), International Leasing and Financial Services Ltd. (ILFSL), FAS Finance and Investment Ltd. and Bangladesh Industrial Finance Company Ltd. caught many innocent depositors off-guard, as they cannot now get back their money. As has been widely reported, one P K Haldar could bring all the four financial institutions under his control by opening numerous companies in his own as well as others' names. He used these companies for buying huge numbers of shares of those four entities. Then he siphoned off money from those institutions in the guise of loans, and all of them are in deep trouble now as a consequence. In fact, at least 10 non-bank financial institutions are facing crisis at the present juncture due to mismanagement, irregularities and corruption.

The recent scams in the NBFIs have created a degree of mistrust among potential depositors and have also created pressure on existing depositors to withdraw money. Regrettably, Bangladesh Bank (BB) has not fared well in its supervision of NBFIs in recent times. P K Haldar was still in the country when the BB was investigating his scam at ILFSL - through which he had siphoned off Taka 20 billion from the country. But Haldar fled overseas when the Anti Corruption Commission started its own investigation into the scam. The onus of this failure therefore falls in a large measure on the shoulders of BB. 

Bangladesh Bank has two departments for overseeing the functioning of non-bank financial institutions, viz. financial institutions and markets, and the financial institutions inspection department. Of these, the latter is relatively new. Taking into consideration the recent alarming trend, time has now come to reorganize and strengthen these departments. From the manner in which Haldar could capture one financial institution after another through trickeries, it is quite clear that many insiders from among the regulators had connived or cooperated with him.

Even the names and involvement of some high officials could be gathered by the media that was claimed to be 'open secret' in the banking arena. Time has therefore come to dismantle this vicious circle of connivers and abettors, who have continued to play a supervisory role in overseeing the financial market of the country for a long time. Besides, the Institute of Chartered Accountants, Bangladesh (ICAB) should also play a strict role in ensuring that its members uphold the accounting standards and principles rigorously, as they are the ones to prepare financial reports that often give rise to so many controversies.   

A modern and dynamic regulatory framework is now needed for a balanced and productive growth of NBFIs. They are regulated by the Financial Institute Act 1993 and Financial Institute Regulation 1994, and guided by the 'Guidelines on Products and Services of Financial Institutions in Bangladesh' 2013. But some weaknesses have been identified in these instruments. For example, the regulations should classify the deposit and non-deposit holders separately; and those who are linked to the stock market for obtaining funds through public offerings of securities should remain under the regulatory jurisdiction of the SEC.

Bangladesh Bank has framed policies and rules for classification and provisioning of the investment resources of NBFIs. These were formulated for ascertaining the quality of investment funds, establishing discipline in lending, recovering and securing people's deposits, along with provisions for the loss of unrecoverable invested funds as well as bad investments. But all these need constant improvements and updating in the light of changing realities and newer challenges. The recent BB directive to board members and three top officials of banks to submit annual reports on own and family-businesses should be widened to cover NBFIs as well. 

Dr Helal Uddin Ahmed is a retired Additional Secretary and former Editor of BangladeshQuarterly.

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