'Bank Supervision Board' can be formed in ensuring internal governance

The 12th National Parliamentary Elections is imminent. According to the schedule announced by the Election Commission, the national election will be held on January 7. The elections have to be held in January as there is a constitutional obligation to hold it by the mentioned period. The question is, what will be the state of the country's economy during this transitional period of national elections or whether any major reforms will be undertaken in the economic sector. It is almost certain that no institutions will undertake major reform activities before the national elections. They will wait for the next government. At the moment, maintaining the economy at normal speed will be a big task.

I think Bangladesh Bank and others will do the same. They won’t go for big changes. But, this is the high time to prepare for a major reform programme as the activities regarding the reform can start just after the national elections. A clear outline can now be made on what aspects of the economy we will prioritize and when we will start the reform process. Bangladesh Bank can discuss with economists, bankers and other sector experts of the country during this interim period. Short-term and long-term reform programmes based on the opinions of experts in their respective fields can be beneficial for the country and the nation. If we want to go for major reforms, we need to decide now on what kind of reform programme to undertake.

Here I give an example. The biggest and most complex problem in the banking sector at present is the defaulting loan culture. Therefore, if any effective reform program is undertaken for the banking sector, the issue of non-performing loans will definitely come up. The issue of how to tackle the issue of loan default can be discussed very seriously. Because many of the problems in the banking sector are rooted in the presence of a mountain of defaulted loans. There are many types of debtors. Among these, the most troublesome debtor is trade financing. It may have been seen that an LC (letter of credit) was opened in favour of an organization; But be it due to an international crisis or due to the negligence of entrepreneurs, the money is not coming to the country at the right time. This money is then converted into a force loan.

Force loan is divided into several installments. Many times these loans are not repaid. Then that loan account becomes defaulted. This issue needs to be worked on in depth. It has to be decided that we will not give any loan that could turn into a force loan. Risks should be properly assessed before lending and how the risk will be managed should also be taken into consideration. That is, there must be a risk based assessment. Banks should also be careful about this. And Bangladesh Bank also has to monitor the issue. These matters--Which class of loans has defaulted more in recent years? Can the reasons for default be dealt with now? What measures can be taken to prevent these causes?-can now be discussed and researched and should be decided now.

If the bankers are asked, why did you give the loan despite the risk of default? Then the bankers will say on condition of anonymity that the loan proposal has been approved in their board meeting. The board has not properly followed the guidelines related to risk management. As a result such loans are given or they are forced to pay. The question then becomes how to structure the board so that it does not push for unethical lending in favor of any individual or institution. Individually owned banks have a system of appointing independent directors; But individuals are appointed as independent directors, whose qualifications many have doubts about.

Again such persons are appointed as independent directors, who are relatives or loyal persons of entrepreneurs. They act on behalf of the entrepreneur-directors on the board. Bangladesh Bank should make such a legal system, so that those who will be appointed as independent directors in different banks can work for the development of the bank by applying their talent and qualifications properly. Independent directors will lead the bank. Even the chairman of the board can be selected from among them. If this is done, the presence of non-performing loans in the banking sector will be greatly reduced. I think, on the eve of national elections, now is the time to do preparatory work in this regard. If this is done, whoever forms the new government in the future, these reforms can be started quickly.

It is not only Bangladesh Bank's responsibility to start preparing for this reform programmes. The Ministry of Finance should be involved with this. National Parliament should also be involved. As is often the case, a draft of a new law is placed to Parliament for passage after much experimentation; But it turned out that a member of parliament may have made such a proposal at the instigation of some vested interests, which ended the hard work. We noticed this in the recent reform of the Bank Companies Act. There must be a political commitment in this regard. The process by which a law has been drafted so far should not be completed by a stroke of the pen. Our country's banking system is largely run under dual regulation.

While Bangladesh Bank can impose controls on private banks, it cannot on state-owned banks. For example, Bangladesh Bank may remove the Chairman or Managing Director of a privately owned bank for any serious offense or breach of discipline; But Bangladesh Bank cannot exercise this power in case of state-owned banks. However, when I was the governor of Bangladesh Bank, we did not give up. Where there are problems, we send proposals to the Finance Ministry. The Finance Ministry did not ignore our proposal. An example can be given in this case. The managing director of a state-owned bank was committing major irregularities. In the light of that irregularity, we requested the Ministry of Finance to take action against him; But we did not get much response from the Ministry of Finance. Time was running out. The situation was getting more complicated with time. We again wrote to the Finance Ministry. In that letter it is mentioned that we had written earlier against this managing director; But nothing worked. In the light of our letter this time, if no disciplinary action is taken against the accused managing director, then we will take action as per Section 46 of the Bank Companies Act.

 Article 46 states that Bangladesh Bank can remove anyone in public interest. Bangladesh Bank generally does not apply this section of the law to state-owned banks. After the second letter from Bangladesh Bank, the accused managing director had to leave. The accused managing director did not answer. He practically fled the country. He has not been caught yet. In these cases, it is better if the policies of private banks and state banks are similar. As the responsibility of controlling the banking sector is entrusted to the Bangladesh Bank and the Banking Division of the Ministry of Finance, problems arise in some cases.

The Central Bank of Sri Lanka has a board called the 'Monetary Policy Board'. There were government representatives; But Sri Lanka's central bank said there was no need for government representatives to make the monetary policy board fully independent. They excluded the government representative. It is a very bold decision though. Bangladesh Bank may also have to play such a bold role in some cases. There has been some progress in these matters in our country. The Monetary Policy Board has been constituted. Three economists from outside Bangladesh Bank have been included there. I think this is a good initiative. There is good reason to believe that without the approval of the three outside economists who have been included in the Monetary Policy Board, no major changes will be made to the proposed monetary policy. The progress made in monetary policy should be extended to other areas as well. Such a board may be constituted to look after the internal governance of various institutions in particular. A bank supervision board may be constituted in particular. The Governor of Bangladesh Bank will be the Chairman of this Board.

Apart from this, a Deputy Governor and an Executive Director will be members of this committee. And there may be some other experts from outside. We can think of such mass-oriented reforms for the coming days. The amount of non-performing loans in the banking sector can be reduced if truly qualified independent directors are included on the board. Similarly fit and proper persons should be appointed as directors on the board of directors of state-owned banks. There is nothing wrong with a political government appointing people of its choice to run various institutions; But it would not be appropriate to appoint an unqualified person to the board of directors of a sensitive institution like a bank or financial institution. Bangladesh Bank may prepare a list of who can be appointed as directors in various banks.

Author: Economist and former Governor, Bangladesh Bank.

Transcribe: M A Khaleque