Can lending to weak banks restore customer confidence?

The monetary policy announced by Bangladesh Bank has adopted a contractionary stance. For quite some time, Bangladesh Bank has been following a contractionary monetary policy. The main purpose of following this policy is to bring down the existing high inflation in the economy to a manageable level. High inflation has been prevailing in the country's economy for over two years. Despite various efforts, the aim to reduce inflation to a manageable level has not been successful. As a result, Bangladesh Bank has repeatedly increased the policy interest rate. Previously, the policy interest rate was around 5 percent, but it has now increased to 10 percent. However, inflation has not been brought down to a manageable level.

According to the latest data from the Bangladesh Bureau of Statistics, the overall inflation rate in November reached 11.38 per cent. This is the highest inflation rate in the past four months. Inflation is rising in both urban and rural areas. Among this, food inflation stood at 13.80 per cent, which is the second-highest food inflation rate in the last 13 and a half years. In July, food inflation had reached 14.10 per cent. The objective of the monetary policy announced by Bangladesh Bank is to control high inflation by reducing the supply of money in the economy. However, the reality is that despite various efforts, there is no sign of high inflation being brought under control.

Recently, we noticed that Bangladesh Bank has provided liquidity support of 22,500 crore BDT to six weak banks in the country to address their liquidity crisis. In the past, Bangladesh Bank has provided capital support to weak banks at different times. This is not a new development. However, the current capital support has some differences compared to previous ones. Previously, banks with surplus liquidity would provide capital support to weaker banks at a specific interest rate (13 per cent interest rate). But now, given the condition of the banking sector in Bangladesh, it is not possible for strong banks to provide capital support to weak banks with surplus liquidity. Therefore, as an alternative, Bangladesh Bank is printing money to address the liquidity crisis of the weak banks.

Bangladesh Bank has stated that if necessary, it will continue to print money to assist weak banks. This measure is being taken primarily to assure depositors that there is no liquidity crisis in the banking system and that they can withdraw their deposits whenever needed. If panic spreads among depositors, they may try to withdraw all their deposits at once, which could cause a severe crisis in the banking system. Some banks may even become bankrupt. Therefore, Bangladesh Bank is printing money to provide liquidity support to weak banks and reassure depositors. Given the current state of the banks, there is no viable alternative to this approach. Protecting depositors' interests is a critical issue, as any inability to access their money may reduce public trust in the banking system. If that happens, the banking system cannot function properly, as the foundation of banking is unquestionable public trust. Bangladesh Bank, as the regulatory authority, cannot allow any bank to fail.

The question is, how long will Bangladesh Bank continue to assist weak banks by printing money if these banks are unable to manage their operations and return depositors' funds? The interim government has been in power for four months now. In this time, have the weak banks made any efforts to recover? Have they taken effective steps to improve their positions? These aspects need to be examined. Or have they created any possibility that, with temporary assistance from Bangladesh Bank, they will be able to stand on their own in the future? It is important to analyze how proactive these banks have been in overcoming the issues such as corruption, irregularities, or other factors that led to their current difficulties, and what successes they have achieved in this regard. Information about the troubled banks should be made public. Specifically, since the interim government assumed office, has the amount of non-performing loans (NPLs) decreased or increased in the last four months? How much NPL recovery have they achieved during this period, and what measures have they taken to recover these loans? This information should be shared with the public.

It is essential to investigate whether any bank officers, directly or indirectly, contributed to the creation of non-performing loans (NPLs). If so, the actions taken against them should be made public. In other words, the efforts made by banks to ensure internal governance must be disclosed. If satisfactory answers to these questions are obtained, it will help determine whether the banks can survive with the assistance of Bangladesh Bank. A specific timeframe should be set for each bank to resolve issues such as NPL recovery, with clear performance targets and improvement indices defined.

It is essential to investigate whether any bank officers, directly or indirectly, contributed to the creation of non-performing loans (NPLs). If so, the actions taken against them should be made public. In other words, the efforts made by banks to ensure internal governance must be disclosed. If satisfactory answers to these questions are obtained, it will help determine whether the banks can survive with the assistance of Bangladesh Bank. A specific timeframe should be set for each bank to resolve issues such as NPL recovery, with clear performance targets and improvement indices defined.

Bangladesh Bank should closely supervise the progress of these banks against the set benchmarks. For banks that fail to meet the expected success, alternative plans must be considered. Providing capital support to struggling banks without properly assessing their future potential would be ineffective. In a free-market economy, temporary assistance may be provided to a struggling institution, but it is unsustainable to keep an institution dependent on continuous aid. Every institution must develop the capability to survive in an open competitive environment. If a bank is unable to operate effectively and its future prospects do not seem promising, it may be necessary to sell off its assets to repay the depositors.

According to the size and strength of Bangladesh's economy, the number of banks is far greater than necessary. If a bank cannot operate on its own strength or capacity, it should be allowed to close. Weak banks could also be merged or acquired by stronger ones. Since we follow a market economy, every business must survive based on its own competence. There is no room for artificially sustaining any institution. Public sector enterprises are being subsidized, resulting in a waste of state funds. Each institution must find ways to survive according to its own capacity. We must also take decisions regarding state-owned institutions running at a loss. If weak banks in the banking sector cannot demonstrate the strength to survive, they should be removed from the market. Particularly, there is no justification for providing financial support to private banks to forcefully keep them afloat. This would lead to more losses than gains for the state.

Dr. Mustafa K Mujeri: Economist and Executive Director, Institute for Inclusive Finance and Development.
Transcription: M A Khaleque