Inadequacies in the process of enacting banking laws

The banking sector of the country has been plagued with various problems for a long time. The existing banking and financial companies were not able to address these problems through legal means. As a result, local economists and stakeholders in the banking industry had been providing recommendations for the amendment and modernization of banking company laws for a considerable period.

Bangladesh has recently received approval for a loan of 470 million US dollars from the International Monetary Fund (IMF). Several conditions have been set for the disbursement of this loan. Among these conditions, a notable one is the promotion of responsible lending through substantial improvements in the banking sector and ensuring internal governance to mitigate the propensity for generating non-performing loans.

The initiative taken to amend the Banking Companies Act has primarily been in response to the conditions set by the IMF for the loan. I believe that the existing law for the banking sector has not been adequately or sufficiently reformed. There was a greater potential to modify the law more effectively and make it more pragmatic to ensure its relevance and efficacy.

The number of banks in the country has significantly increased compared to the past. Consequently, complexity and issues in the banking sector have also escalated compared to any previous period. In this context, it can be said that there was a profound opportunity to thoroughly examine the Banking Companies Act and amend it effectively. It is not believed that the amended Banking Companies Act will be able to comprehensively address the problems at hand in this regard.

Another problem here is that even though Bangladesh Bank (the central bank) tries to implement various laws, it is not always possible for them to do so. Especially in the case of state-owned banks, the control of Bangladesh Bank is considerably limited. The way Bangladesh Bank can enforce laws on privately owned banks might not be applicable in the case of state-owned banks.

In particular, Bangladesh Bank cannot play any role in the appointment and removal of managing directors of state-owned banks. However, they might have authority over the appointment and removal of management executives in privately owned banks.

The prevailing dual governance structure in the banking sector is not yielding positive results in any way. Despite having terms of reference, there are various gaps and inconsistencies within it. Consequently, ensuring the proper enforcement of laws by Bangladesh Bank is not always achievable. Even in the case of privately owned banks, there are some issues regarding the appointment of executives. Adequate governance in banking accounts is not being effectively executed. Those who serve as independent directors in privately owned banks play a crucial role.

However, individuals appointed as independent directors often have close personal or familial connections with the primary stakeholders or are friends. As a result, they do not independently execute their roles, rather they advocate for the interests of the ownership side. This deviates from the intended purpose. If appropriately selected individuals were appointed as independent directors based on merit, they could contribute to the interests of the depositors. Independent directors, if they express dissent on any matter, are subject to scrutiny by Bangladesh Bank. Previously, two individuals from the same family could serve as directors simultaneously in private owned banks. They could serve two consecutive terms (each term of three years). A few years ago, the Act was amended to provide for appointment of 4 directors simultaneously from the same family. They could serve continuously for 3 terms i.e. nine years.

As per the conditions set by the IMF, amendments have been made to the banking law. Under this revised law, the provision to appoint three directors from the same family simultaneously has been established. When I was the Governor of the Bangladesh Bank, the law allowed the appointment of two directors from the same family. They served for an uninterrupted term of six years. That law was in accordance with international standards.

But now legal reforms have allowed family dominance over banks. Now the tenure of directors has also been extended. It was by no means desirable. Nowadays many of the family members become bank directors with legal opportunities. Sons, sons' wives, daughter-in-laws can all become bank directors now. Here some control needs to be established. Directors should be appointed only by persons who have experience in banking operations.

After the eighties, the journey of private owned banks began in our country. Many private owned banks have been established in the country. Some of these banks have run into trouble at various times. They have been kept active through various reforms. It cannot be asserted that all privately owned banks are currently doing well. Some banks suffer capital shortfall. The dual authority that exists in the banking sector is not good at all because, if there is no single authority over any sector, that sector cannot be managed properly. So we have to think about this matter.

The most critical problem in the banking sector is that the presence of mountain proof of defaulted loans. The amount of defaulted loans cannot be reduced in any way. Various legal changes are being shown to reduce defaulted loans, but this is not the actual situation of defaulted loans. The actual amount of defaulted loans is much higher than the statistics published by Bangladesh Bank.

When I was the governor of Bangladesh Bank, if a loan account was to be rescheduled, 10 percent of the total outstanding loan had to be deposited to the bank as a down payment for the first time. Twenty percent for second rescheduling and 30 percent for third rescheduling were deposited as down payment. Any loan account could be refinanced for a maximum period of three years.

A few days ago, this provision of the law was amended and an opportunity has been given to reschedule the loan account for 10 years with a grace period of one year by submitting two percent down payment. Instead of doing this, it was necessary to make the debt rescheduling law more difficult.

Earlier, if a loan account was to be foreclosed, it means that the corresponding loan account is bad, if five years have passed after being classified, it could have been foreclosed by filing a case in the appropriate court and saving 100% of the provision. But now a loan account can be written off only after three years have passed after it has been classified as bad. Therefore there is no obligation to save 100% provision.

There is no condition of filing a case in the competent court in case of outstanding loans of less than Tk 5 lakh. As a result, it is now easier than ever to write off a loan account. Thus, attempts to reduce non-performing loans through legislative changes can never benefit the banking sector. Instead of artificially reducing the amount of defaulted loans through legal changes, instead of taking strict legal measures, arrangements should be made to collect installments of defaulted loans.

Particularly, a message should be given to willful defaulters that there is no alternative to taking a loan from the bank and repaying it. Now the amount of defaulted loans being displayed is much higher than the actual amount of defaulted loans. There is no merit in artificially reducing defaulted loans without collecting installments.

Due to various opportunities offered to defaulters, those who pay regular loan installments are discouraged. They may lose interest in repaying the loan installments. They see that there is no problem in taking a loan from the bank and not paying it back. The loan defaulters are diverting the money taken from the loan to other sectors. It creates social inequality.

Those who are regularly repaying the loan installments are unable to compete with the defaulters. For example, if a borrower goes to rent a house for his project, the defaulter may offer a higher rent than what he offers. This will make regular loan repayments lag behind in the competition. Some of the defaulters also complain that they are smuggling the loan money abroad. The truth of this allegation can be verified. Legal measures need to be taken to instill in a borrower a firm belief that the bank loan cannot be repaid without regular and timely repayment. In our country, such a situation has arisen that a defaulter can surely feel that there will be no problem if he does not repay the money he has borrowed from the bank.

There are various contradictions in the Bank Companies Act enacted in 1991. Due to these contradictions, proper implementation of the law was not possible many times. An expert committee should have been formed to update the Bank Company Act and make it a more effective law through comprehensive reforms considering the existing socio-economic situation of the country. After the drafting of the Bank Companies Act, it was required to be submitted to the public for review. Then the bill could be tabled in the national parliament. But it was not done. The proposed law has been presented for discussion in the Standing Committee of the National Parliament.

But it would have been more effective than a parliamentary standing committee if a committee of the nation's elite bankers and economists had been formed to draft and review the law. State-owned banks were converted into limited companies a few years ago. However, all the shares of these banks have been purchased by the government. Now it’s time to release the shares of state-owned banks in the market. State-owned banks lack internal governance. Due to which they are not able to contribute as expected.

The credit of various international organizations is very important for the country's banking sector. Due to various considerations, they have now reduced the credit rating of Bangladesh. But many of the country's policy makers, including the governor of Bangladesh Bank, do not want to accept this. If the quality improves, they say we are doing well. And if the quality is bad, they say, these quality are not important. Banks are not like other ordinary institutions. Banks should be run in an unbiased manner. Banks should be managed from a professional perspective. And in the case of appointment of directors in state-owned banks, competent and qualified people should be appointed without party considerations because sensitive institutions like banks should be managed based on reality.

Directors should ensure that they do not interfere in the internal working of the bank. Bank is a symbol of trust and credibility. Therefore, the confidence of the depositors should be gained in such a way that they can safely store their surplus money in the bank. In no way should anything be done that can destroy the trust of the general public on the bank. At the same time, it should be ensured that there are no rumors about banking.