Banking sector: Debacle and recovery

The country's banking sector has been badly impacted by non-performing loans (NPLs), or toxic assets. The amount has surged to an alarming 36 per cent, or Tk 6.00 trillion, out of the country's total outstanding loans of around Tk 18.00 trillion. This has created serious concern. The country leads in NPLs, which are a major drag on the banking sector and could collapse the banking and financial system. The spill over effect threatens the national economy. This state of NPLs shows the depth and scale of the kleptocratic rule of the past regime. NPL rate exceeds not only those of the neighbouring countries but also those of other countries worldwide. Even war-ravaged countries are in a better situation than ours.

Good governance has become a buzzword in Bangladesh context as, during the past regime, we had to consume the narratives given by persons in authority regarding the necessity of good governance and causes of its failures in the different seminars and symposiums, but they themselves incarnate the bad instances of governance failures. Our financial sector experienced a serious debacle due to bad governance, and predatory along with anonymous lending practices.

Good governance starts with the bank's board and its composition. The type of people on the board, their backgrounds, education, ethical standards, and orientation matter most. It is dismaying that many board members and sponsors of banks and financial institutions see themselves as the ultimate beneficiaries, while ignoring that their capital is small compared to depositors' funds. They treat the bank as just another business. The management, from the managing director down, become subservient and treat the board as the ultimate arbiter of their careers. As a result, they often serve the board's interests by adopting unethical means at the institution's expense.

The interim government has taken on daunting reform tasks across different sectors, with the banking sector high on its agenda. This sector is in the worst condition and threatens the foundation of the country's financial ecosystem. Autonomy and adequate empowerment of the central bank are the demands of the time, and it needs to be converted into an independent body with all necessary prerogatives. Its autonomy does not necessarily imply that it is beyond the periphery of accountability; rather, it will remain virtually accountable to the authority of the appropriate jurisdiction, ideally to the relevant parliamentary committee. The central bank is also required to take policy decisions to ensure macroeconomic stability without any intervention from any vested quarters.

The challenging circumstances demand good governance, coupled with adequate mechanisms to ensure transparency across all fronts of financial transactions, where the banking sector plays a pivotal role. It is perceptible from the run of events and from the findings of the forensic audits that crony capitalists use the banking sector as the vehicle to amass their own fortunes at the cost of the national interest, and they contaminated the financial ecosystem.

There should be a paradigm shift in raising funds from the banking sector, and the over-reliance on the private sector and the government has dealt a blow to our growing economy.  Banks deal with short-term deposits, so they should not deploy funds for long-term purposes. Moreover, the tremendous pressure of NPLs massively constrained the recycling of funds, and, naturally, the liquidity crunch hit the banks so hard that they faced an existential threat.  Banks and financial institutions should confine their lending operations to small and medium enterprise financing, with particular focus on working capital financing as well as financing in the retail segment or consumer finance. On the other hand, corporate clients should raise funds for acquiring capital goods or project financing from the capital market or by issuing corporate bonds or debentures. It is imperative to broaden the base and depth of the secondary market of the debt instruments. Moreover, there is no need for so many banks and financial institutions in our country, given the size of the economy measured in gross domestic product (GDP). The number of banks, both in the public and the private sector, is required to be downsized through mergers and amalgamations in due process, with the appropriate level of due diligence. It is noteworthy that the Bangladesh Bank has initiated the restructuring of the boards of various banks.

It is time to make bank's boards more professional by ensuring that independent directors make up at least 50 per cent of the total board members.

In common parlance, banks take counterparty risk. Political instability, social unrest, or deteriorated law and order situation, inflationary pressures, interest rate hikes, and abrupt movements in the exchange rate, may disrupt the business or industrial activities negatively deteriorating the balance sheet of the banks. So, a good portion of the defaulted borrowers are not necessarily wilful defaulters, as they unfortunately became victims of circumstances and were scarred by unpredictable risk factors. Again, a good number of banks have lost their capacity to sustain their operations at the desired levels, as most banks, due to predatory lending practices and the absence of good governance, swelled the burden of NPLs and, consequently, poor fund recycling caused a liquidity crunch. Banks and financial institutions are inherently sensitive, where confidence matters more than any other factor.

The newly elected government now faces innumerable challenges due to the kleptocratic rule in past 16 years. To navigate the crisis, the new government must formulate economic and social-sector-specific, time-bound action plans, along with execution schemes based on ongoing appraisal and reappraisal. This will help them achieve the desired level of success, be assessed objectively at fixed intervals, and have corrections made as needed along the way.

The writer is former Managing Director & CEO, Citizens Bank PLC.

raihan.bappi@gmail.com