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Ever-increasing events of bank failures, bankruptcies and distresses have been occurring home and abroad. In many situations, they are being brought under resolution by the central regulatory body. Despite resolution steps, the worst victims are the depositors everywhere. We are suffering the subtly-occurring exploitation and looting of public money due to escalating defaulted loan. We hardly go into the depth of the monstrous phenomena. Two-way actions are crucial now. First, stringent laws and regulations ( lack of which is the crux of the problem) must be enacted and put into action to liquidate the securities for quick recovery. On the other hand, we must focus upon recasting the deposit insurance system so that network of insurers is adequately expanded to cover 100 percent deposit erosion risk. It is high time we addressed the issue in a radically different manner to protect depositors and the banking industry of our country.
People desire to keep their money in a bank with safety and some return. Can they gamble with their money in banks? If not, why would depositors pass their days in worries and anxieties in case of bank failures. Many problem banks of Bangladesh refuse to honour required withdrawals of depositors. Do they have any right to do this ? The alarming reality is : banks fail to operate smoothly; they are unable to recover defaulted loan dues; they face fund shortages, capital shortfalls, liquidity crises and so on . As depositors, can we tolerate the irresponsible, imprudent and inefficient role of bank authority as well as the central regulatory body ? We understand banks' incapacities but depositors are not donors and can, in no case, sacrifice their resources. In these circumstances, it is the government which must come forward with several short term and long term as well as innovative options or plans to save the depositors and also the banking system now and in future.
Depositors' money is lent. Money is thus with the borrowers. Recovery trends in the banking industry of Bangladesh hint that most of the borrowers are defaulter. Huge volume of non-performing loans (NPL) together with money laundering by mischievous borrowers of five Islamic banks is a recent example of a big case of bank failures. The lives of depositors of these distressed banks are now extremely endangered despite central bank's resolution steps to give protection in phases and a certain limit. Loan rescheduling is still happening without tightening legal measures to ensure recovery as scheduled. Besides the event of failures of the aforementioned five banks, the overall NPL proportion is surging rapidly. Distressed situation is mainly attributable to legal leniencies and loopholes accompanied by past undue political intervention in credit management including recovery.
International cases like Lehman Brothers (2008) or Silicon Valley Bank (2023) show how mismanagement and risk-taking can destroy trust and value. In many such cases, ethical failings were part of the cause. It is unethical for a bank to destroy depositor money through mismanagement. While banks can make mistakes like any organisation, systemic failures due to negligence or greed are not just business risks - they are ethical violations.
Bangladesh Bank is taking steps to merge five Islamic banks into one separate entity along with current deposit protection upto 2 lakh. But if the loss is bigger than what insurance covers, depositors may lose money. However, Deposit Insurance Department of Bangladesh Bank states its objectives as "In Bangladesh Deposit Insurance system (DIS) is designed to protect depositors, enhance public confidence to the bank, increase savings and foster economic growth, enhance market discipline and overall stability of the financial system." Here, the underlying philosophy is, no doubt, highly appreciable. But the concern is how and to what extent Bangladesh Bank would ensure deposit protection to all depositors, small, medium or big.
Central bank's recent policy on deposit protection in case of five distressed banks (currently under merger proposal) is conditional in terms of limit and timeframe. Does any fault lie with the depositors? There is no ground at all to make depositors scapegoats. Partial protection is absolutely exploitative, deceptive, and quite unjust. The government or the regulators are totally indifferent to actual loss of the entire depositing population. Banks cannot escape their fiduciary responsibilities for some valid reasons. First, banks deal in other's money and are safe custodian of deposits given by individuals and institutions. Second, banks can fail to recover money from borrowers but depositors cannot take responsibility of non-recovery. Third, banks are not given any authority to waste depositors' money or to shift risk to depositors. Fourth, depositors cannot pay the cost of failure in banking governance and regulatory role. Finally, people deposit money in good faith. They are not financial experts. They trust that the bank is safe and regulated.
Today or tomorrow, 100 per cent immunity to depositors' funds must be unconditionally ensured. A radical change in approach to governing banking system is the crying need of the time. The government, regulators and individual banks have a moral and civic duty to create a banking system where people can save and withdraw their money without any risk or fear. We must believe that looting capitalists are highly motivated to exploit people's deposits and for this to happen, banks or financial institutions are the easiest conduits. Henceforth, the government and the central bank should play an idiosyncratic, stringent, cooperative and more active role in banking governance, regulation and oversight to save depositors, lenders, and the economy as a whole.
Haradhan Sarker, PhD, is ex-Financial Analyst, Sonali Bank & retired Professor of Management. sarkerh1958@gmail.com