Incorrigible public sector banks
Shamsul Huq Zahid | Published:
November 29, 2015 20:41:49
October 24, 2017 21:43:45
The government of Bangladesh and the World Bank (WB) are now reportedly holding talks on the availability of $200 million from the latter to help improve operational efficiency of nine state-owned banks (SoBs).
A report, published in the Financial Express Saturday last, said the WB fund, if available, would be used to help the SoBs cut their credit risks and reduce the current level of non-performing loans (NPLs).
Given the experience with the use of similar fund made available by the same lender earlier, one has reason to be apprehensive about the end results of the proposed fund. The fear about the outcome is not at all unfounded if one goes back to the track record of the state-owned banks that with all their deficiencies once ruled the sector in the absence of their private sector counterparts.
The government between 2010 and 2014 implemented the 'Enterprise Growth and Bank Modernisation Project' under which four state-owned commercial banks were corporatized and their operations automated at a substantial cost. The WB made available a fund of $250 million for the project.
The basic objective of the project was to improve the performance of these banks and help cut the size of their respective NPL. The project delivered some dividends, at least temporarily. The average NPL of these banks came down to 12 per cent in 2014 from 25 per cent in 2004.
But the deficiencies in the case of public sector banks appear to be perennial. No matter what is done to improve their situation, the long-term outcome does always remain disappointing.
The situation with the four state-owned commercial banks has deteriorated so much of late that the central bank has been forced to appoint 'observers' to these banks to monitor their day-to-day operation.
Because of the presence of high level of NPL, the capital base of these banks has been largely eroded. The government has kept budgetary provision to beef up their capital base. In the past also, the government had to pump taxpayers' money into these banks.
Barring four public commercial banks, five other specialized and development financing banks that are likely to come under the new WB-financed project include the Bangladesh Development Bank Limited, Bangladesh Krishi Unnyan Bank, Rajshahi Krishi Unnyan Bank, Ansar and VDP Bank and Karmasangsthan Bank. The classified loan situation as far as these banks are concerned is worse.
The central bank is unable to exercise its authority over the nine banks in question since those are owned by the government. This is viewed as a serious drawback as far as improving the quality of governance and loan operations of these banks. The government does decide who would run these banks. In most cases it does make wrong choice. The administration has been found unwilling to give up its control over the state-owned banks and transfer the authority to the central bank. Even multilateral donors have not been able to dislodge the government from its stance particularly on the state-owned commercial banks.
However, this kind of approach on the part of the government has taken a substantial toll on the economy, in the form of budgetary injection and foreign-funded projects for performance improvement.
The government spending on a number of state-owned banks has failed to make any tangible change in their performance level. Many tend to consider the spending a mere wastage of public money.
There is no denying that the funds provided by the WB are cheaper because of their nominal rate of interest and long repayment period. But the fact remains that at the end of the day the government has to service its debt to all external lenders, including the multilateral ones.
Nobody would have objected to the government spending on public sector banks had there been any fruitful outcome. It is widely believed that until and unless the necessary internal control is established in these banks and the government gives up habit of interfering in their affairs, administrative or otherwise, the performance of these banks would not improve.
A privately-owned bank would have faced disaster if it had gone through the scams like those of Sonali Bank and the BASIC Bank. There would have been a run on the bank concerned immediately, leading to its collapse. But because of the state's backing, it does not usually happen in the case of public sector banks. The depositors do feel assured that the government as the owner would never allow its banks to go out of business, at least, for its prestige's sake.
However, the government does keep these banks afloat using the taxpayers' money, not with funds coming from those who run the government. So, it is essential for the people in general and parliament in particular to ask questions about the operations of the state-owned banks. The shareholders grill the management of listed private sector banks in the annual general meetings about any managerial failure. But as far as the state-owned banks are concerned, there is no way of doing that. So, it is none but the media and the national parliament should discuss the state-owned banks' performance and compel the government to take necessary corrective measures, if necessary.