In the perspective of free market economics, closure of all weak banks is necessary

In 2023, the Bangladesh Bank issued a circular titled 'Prompt Corrective Action Framework' to address the crisis of weak banks. The circular stated that if banks fail to improve their situation through the implementation of the framework, the Bangladesh Bank may take steps to consolidate them from 2025 onwards. Merger, or 'consolidation,' refers to the coming together of two or more companies into one. There have been extensive discussions and debates regarding the Bangladesh Bank's initiative to merge weak commercial banks with stronger ones. However, this arrangement is not truly a merger but rather a rescue operation for struggling banks.

Apart from the announced roadmap for consolidation by the Bangladesh Bank, ensuring governance in banks and addressing the issue of defaulted loans were also included. However, this decision by the Bangladesh Bank has created anxiety through social media. There are doubts about whether the deposited money will be returned or not. Seminars and workshops on banking also include negative discussions led by knowledgeable individuals.

Even renowned economists in the country believe that the Bangladesh Bank is flooding the market with notes. Therefore, they are demanding an end to the printing of notes. They are certainly convinced that not all printed notes are money. Yet, they continue to express the same sentiment in seminars and talk shows. However, despite withdrawing 41 thousand crore taka from the mint in the past fiscal year, the Bangladesh Bank has only withdrawn 7 thousand crore taka in the first 10 months of the current fiscal year. It's difficult to understand why some knowledgeable individuals are confusing people when criticizing the government and the Bangladesh Bank. Getting upset over banking matters and presenting misleading information are not the same thing. We are all concerned about banking accounts because non-performing loans are increasing. The issue of taking out additional loans under the names of directors, or even anonymously, is regularly highlighted in the media. In the 1990s, during our time, there was a division in the Bangladesh Bank called the 'Problem Bank' division. The function of this division was to strengthen weak banks through various orders, directives, and advice. At that time, weak banks were prohibited from providing new loans. Why such a policy was adopted, I still don't understand.

I was looking for an answer on how a bank's weakness could be overcome without accepting new deposits and giving out new loans. At that time, by participating in a seminar abroad, I came to know that in developed countries, banks often go bankrupt. However, they have no problem returning the deposit money through insurance. No bank goes bankrupt in Bangladesh - hearing this from me, most of the participants in the seminar were surprised.

Every year, the Bangladesh Bank assesses the strength and weakness of banks and takes appropriate measures accordingly. From 2000 to 2022, I was also involved in this work. However, the assessed financial condition of one bank was not disclosed to other banks. Nor was it made available to the public. Once, somehow, one bank obtained the assessed positions of all banks and, finding their own position strong, they publicized the comparative status of all banks in the media to highlight their strength. This action angered the Bangladesh Bank so much that the MD of that bank had to submit a written apology to keep his job. The poor condition of the banks did not happen overnight. It’s not like they were doing very well before either.

In the eighties and nineties, the amount of defaulted loans was over 35 percent. At one time, the influence of the CBA (Collective Bargaining Agent) in government banks was limitless. Leaders and activists of various organizations did not do office work; they roamed around, approved loans, and sometimes harassed senior officials to display their power. Bakir Hossain, a CBA leader of Sonali Bank, had such immense influence and power that he, along with his group, once came to the Bangladesh Bank and threatened Governor Dr. Fakhruddin Ahmed with obscene language in his chamber. Despite informing the then Finance Minister M. Saifur Rahman about Bakir's behavior, no action was taken against him. Because Bakir Hossain was part of the entourage that would see off and receive the Finance Minister at the airport. President Abdus Sattar had taken strict measures against such individuals, which is why the banks are still standing today. Otherwise, all the banks would have gone bankrupt long ago.

The story of Bakir Hossain spending millions of taka while running as a candidate in the governing body election of Viqarunnisa Noon School was reported in the media at that time. Now, the influence of the CBA has somewhat diminished, but the prevalence of corrupt and bribery-prone officials has increased. The mismanagement and corruption in the banks are now limitless. Foreign banks and representative offices of foreign banks operating in Bangladesh re-confirm the letters of credit (LCs) of our domestic banks. In this process, it is rumored that billions of taka are transacted in the distribution of LCs by commercial banks, and all bribes are paid in dollars abroad. Dishonest bank officials have created a class of brokers to facilitate loans for ordinary businessmen. You can find numerous brokers in Motijheel who have ready-made project profiles. Without engaging a broker, it's almost impossible to get a loan, even after exhausting all efforts. Even if a loan is eventually obtained, the excessive delays render it useless. Because of this lack of utility, the loans often become defaulted loan.

It is crucial to assess the responsibility of the concerned commercial banks, the Bangladesh Bank, and the Financial Institutions Division of the Ministry of Finance for the rise in non-performing loans or the weakening of banks. At one time, candidates aspiring to become Deputy Governors would seek support from influential businessmen, and once appointed, they would remain subservient to them. During the tenure of Governor Dr. Mohammad Farashuddin, a directive was issued stating that no officer of the Bangladesh Bank could teach at the training academies of scheduled banks. This was because, in some cases, the honorarium for teaching could amount to hundreds of thousands of taka. As the president of the Bangladesh Bank Officers Welfare Council, I frequently informed Governor Mohammad Farashuddin about various irregularities and malpractices. In order to prevent the progression of weak banks' financial situations, Bangladesh Bank recruited supervisors and coordinators. They attend board meetings to monitor the board's activities. However, it is not possible to address all the bank's overall irregularities solely through the supervision of the presented memorandums at the board.

The presence of a observer at the Bangladesh Bank creates a psychological pressure against irregularities. This pressure may not exist if the observer, upon retirement, accepts a job offer from the same bank. A significant reason for the increase in fraudulent loans is the excessive number of banks. The economy of Bangladesh is not so big that 61 banks are needed to provide banking services. Banks are usually tight fisted with corporate traders. Commercial banks are not supposed to lend in industrialization, they lend to businesses. Foreign banks typically do not provide loans in the industrial sector; their activities are limited to LC (Letter of Credit) and commission banking. They are not involved in agriculture, nor do they show much interest in lending to small and medium-sized enterprises, they are not into industrial investment. Therefore, their involvement in defaulted loans is relatively low. The development of the stock market is crucial for raising funds in the industrial sector. Commercial banks have been entrusted with the responsibility of meeting the demand for capital from entrepreneurs, leading to an increase in defaulted loans.

Making an industry profitable isn't easy. Pakistan's industrialist Adamjee managed to thrive by taking advantage of tax exemptions. Perhaps industrialists still resort to similar tactics.

The lack of institutional governance is often responsible for irregularities and corruption related to loans. Both state-owned and private banks have been entrenched in various irregularities and malpractices from the very beginning. The government has repeatedly injected capital to rescue state-owned banks. Another reason for the increase in default loans is undue interference in loan disbursement by influential individuals. In private banks, the administration and loan disbursement are often controlled by directives from the top management, sometimes based on personal preferences. A deputy governor of Bangladesh Bank turned MD of a private bank, he used to greet the owner of the bank by touching his feet for no reason. However, there is no other way but to do it. The exit of all weak banks is necessary for the scrutiny of the free market economy. There's no benefit in prolonging their existence. However, without addressing the problems during their exit, new issues may arise. With the closure, public trust in even the strong banks will diminish.

Due to the lack of public trust in weak banks, merely implementing policies and strategies is not enough to strengthen them. Governments also do not keep their funds in weak banks. Attempts were made to restore confidence by changing the names of some weak banks, but it was not successful. Therefore, merging weak banks with stronger ones remains the only way to alleviate the crisis of trust.

In various countries, countless institutions voluntarily merge for their own interests almost daily. However, in our country, weak banks will not merge voluntarily. There is a fear among the management that merging will result in a loss of power. So even if the bank owners are willing to bankrupt their banks, they won't agree to merge voluntarily. It must be enforced and this action is necessary for Bangladesh Bank, even if it is unpleasant.

Author: Columnist, former executive director of Bangladesh Bank and former MD of Mint