Legal reforms are essential to offset banking sector catastrophes

The private research institution, the Center for Policy Dialogue (CPD), has highlighted the dire situation of the banking sector in its latest research report. According to the report, over the past 15 years, widespread embezzlement has taken place in the country's banking sector, pushing it into a state of severe risk. Of the 60 banks operating in the country, at least 29 are struggling to function properly for various reasons. Among them, at least 10 banks are on the verge of bankruptcy. What was once a symbol of public trust, the banking sector, has now become a breeding ground for corruption.

Between 2008 and 2023, 24 major corruption incidents have occurred within the country's banking sector, with a specific group having embezzled a staggering 92,261 crore taka. This amount stolen through corruption in the banking sector is nearly 12 per cent of the national budget for the fiscal year 2023-24.

According to CPD data, the largest banking scandal in the last 15 years occurred in 2022. That year, the S Alam Group embezzled 30,000 crore taka in loans from Islami Bank Bangladesh and laundered the money abroad. Before this, the S Alam Group used state intelligence agencies to force the Managing Director of Islami Bank Bangladesh to resign in the dead of night, taking control of the bank. Between 2009 and 2013, Abdul Hai Bachchu, the then Chairman of Basic Bank, embezzled 4,500 crore taka through various irregularities. Over 60 lawsuits were filed in court regarding this loan scandal. Although Bachchu was named as the accused in 50 of those cases, he was never arrested.

Around the same time, Hallmark Group embezzled nearly 4,500 crore taka from the state-owned Sonali Bank Limited. Between 2010 and 2018, Crescent Group and Anon Tex Group looted nearly 10,000 crore taka from Janata Bank Limited. Allegations were raised at various levels that the then Chairman of Janata Bank’s Board of Directors was involved in these criminal activities, but no action was taken against him. In fact, those responsible for pushing the banking sector to the brink of collapse through such corruption and irregularities were provided protection by the government.

The country's banking sector has become a golden opportunity for easy money through corruption. Political considerations allowed the establishment of one private bank after another. These were granted to individuals whose honesty and ethical standards were questionable throughout their careers, but they were given permission to open banks purely due to their political allegiance. Worldwide, there are typically two types of banking systems: Unit Banking and Branch Banking. The United States follows a Unit Banking system, where banks are established with only a few branches. In contrast, Branch Banking is where a small number of banks operate with a large number of branches to conduct their business activities. The British banking system follows the Branch Banking model. The main weakness of the Unit Banking system is that even a slight shock can lead to the complete bankruptcy of a bank.

In the last century, around 18,000 banks in the United States have gone bankrupt, according to various sources. Bangladesh has traditionally followed the Branch Banking system, but during the last government’s tenure, permission was given to establish new banks in a way that contradicted the Branch Banking policy. When nine new banks were approved during that period, Bangladesh Bank raised objections, but these were ignored, and the approval was granted based purely on political considerations. Former Finance Minister Abul Maal Abdul Muhith had stated that there was no need for new banks at that time, yet nine banks were still permitted to be established under political considerations.

Currently, there are 60 operational banks in Bangladesh, including state-owned, privately owned, and foreign banks. Out of these, 43 are privately owned, and 17 are state-owned or foreign banks. For a small country like Bangladesh, such a large number of banks is highly undesirable. In neighboring India, the number of banks is 33, Pakistan has 20 banks, and Malaysia has 43. The number of banks exceeding demand has led to unhealthy competition within the sector. Most banks cannot offer new products to customers, instead approaching them with similar products. Over the last 20 years, the Awami League government has approved the establishment of 26 banks, with each approval granted for political reasons, lacking any sense of professionalism. Similarly, after 2009, individuals with little to no understanding of economics and banking were appointed to the boards of state-owned banks. Their primary role was to lobby for loan approvals to serve personal interests. If any official did not cooperate with their illegal activities, they would be labeled as anti-government and subjected to harassment. Many honest and capable officers have silently shed tears under this ruthless mental torture.

During the tenure of the previous government, there was a concerted effort to destroy the banking sector. Particularly under Finance Minister AHM Mustafa Kamal, the damage caused by the amendments to various banking laws will likely become fully apparent in the coming years. Among all the individuals who have served as finance ministers in Bangladesh, Mustafa Kamal was the only one who was directly a businessman. Since he was himself a businessman, he changed banking laws to protect the unethical interests of businesspeople. Here are a few examples of how he legally undermined the country's banking sector.

AHM Mustafa Kamal had previously served as the Minister of Planning before being appointed as Finance Minister. After taking on the finance portfolio, he stated that the amount of non-performing loans (NPLs) would not increase by even a single taka from that day onward. His statement had reassured those in the banking sector. However, he began to implement measures that altered the existing international standards for banking laws in such a way that non-performing loans could be reduced without collecting installments on them.

First, he extended the deadline for identifying non-performing loans under the pretext of the COVID-19 pandemic. This allowed loans that had been overdue for longer periods to avoid being classified as non-performing. He also changed the definition of loan write-offs. Previously, a loan could only be written off after being classified as a bad debt and after five years, provided a court case was filed, and a 100 per cent provision was maintained for that loan. Under the amended law, loans could be written off after just two years of being classified as non-performing, without the requirement to file a case in court for loans under five lakh taka. Similarly, the condition for maintaining 100 per cent provisions was also removed.

Due to these changes, the process of loan write-offs became much easier. As a result, the total amount of outstanding loans in the banking sector has now risen to 71,699 crore taka. There seems to be some confusion surrounding the term "loan write-off." When people hear the term, they may assume that the bank has waived or forgone the loan amount. However, this is not the case. While the likelihood of collecting installments from a written-off loan account diminishes, the bank never actually gives up its claim on the loan. Banks continue their efforts to collect installments from written-off loans, and if any installments are recovered, they are directly added to the bank's profit. A few years ago, the amount owed to banks from written-off loans was around 45,000 crore taka, but this has now increased to 75,699 crore taka.

During AHM Mustafa Kamal's tenure as Finance Minister, a controversial decision was made to allow non-performing loans (NPLs) to be rescheduled with just 2 per cent cash down payment, along with a one-year grace period and an extended repayment period of up to 10 years. This was a stark departure from the previous norms. Previously, in order to reschedule a loan, the borrower was required to pay 10 per cent of the total defaulted loan amount for the first rescheduling, 20 per cent for the second rescheduling, and 30 per cent for the third. Rescheduling could only be done for a maximum of three years at a time. But under Kamal's rule, the rescheduling process was significantly eased, allowing a 2 per cent down payment with a 10-year repayment period and a one-year grace period.

This change had a significant impact on the banking sector. In the last year, rescheduled loans increased by 91,000 crore taka, bringing the total amount of rescheduled loans to 2,88,540 crore taka. As of June, the total amount claimed by banks in 67,519 cases filed in various courts to recover non-performing loans was 2,09,691 crore taka. In total, the amount of non-performing loans has reached nearly 6 lakh crore taka. This figure represents 35.64 per cent of the total loans disbursed by banks, which amounts to 16,83,396 crore taka.

One issue that remains concerning is that Bangladesh Bank does not disclose the figures for written-off, pending, or rescheduled loans when it publishes non-performing loan statistics. According to the latest data from Bangladesh Bank, the amount of non-performing loans stands at just over 2,11,000 crore taka. When AHM Mustafa Kamal took office as Finance Minister, the reported amount of non-performing loans was 93,000 crore taka—indicating a significant rise in defaulted loans under his leadership.

During the previous government, the family-run institutions in the country's private-sector banks were given a clear path to expand. Previously, in any privately owned bank, only two directors from the same family could be appointed at the same time, and they could serve for two terms (each term lasting three years). However, this law was changed, allowing up to four directors from the same family to be appointed at the same time, with the possibility of serving for three consecutive terms. This legal change was made a condition when the government secured a 470 million USD loan from the International Monetary Fund (IMF). Later, the law was amended again, reducing the number of directors from the same family to three instead of four.

A few examples of legal changes made to provide special privileges to party-loyal bank owners can be cited. Earlier, the rule was that any state-owned institution could deposit 25 per cent of its surplus funds in privately owned banks, while the remaining 75 per cent had to be deposited in state-owned banks. This was done primarily to ensure the security of public funds. However, during the previous government, alongside the approval of a large number of privately owned banks, a change was made to allow state institutions to deposit 50 per cent of their surplus funds in privately owned banks, amending the previous rule.

The most damaging policy change was made in determining bank loan interest rates. Under pressure from pro-government businessmen, Bangladesh Bank implemented the highly controversial 9-6 interest rate policy. In a free-market economy, Bangladesh Bank should not intervene in setting interest rates; they should be determined by market demand and supply. Bangladesh Bank is only allowed to intervene in interest rates in case of an abnormal economic situation. However, under this policy, Bangladesh Bank set a maximum interest rate of 9 per cent for bank loans, and the maximum deposit interest rate for state-owned banks was set at 5.5 per cent, while for private banks, it was set at 6 per cent.

The purpose of setting the deposit interest rate 0.5 per cent lower for state-owned banks was to encourage depositors to place their funds in private banks, hoping for higher returns. This 9/6 interest rate policy not only damaged the banking sector but also had disastrous consequences for the overall economy.

Banking operations depend heavily on the trust and confidence of the general public. That trust is now on the verge of being completely shattered. A committee could be formed to recommend measures for reducing the number of banks in the country, and at the same time, priority should be given to professionalism in the management of banks. It is essential to ensure that political activities do not take place under any council name in state-owned banks. Those who have engaged in political activities under names like Bangabandhu Parishad or Zia Parishad within banks should be identified and dismissed, along with any other appropriate punishment. If anyone wishes to engage in politics, they should resign from government institutions and do so outside the banking sector.

MA Khaleque: Retired banker and writer on economic issues.