Oversight alone won't strengthen weak banks

Upon taking office, Bangladesh Bank Governor Ahsan H Mansur commented that ten banks in the country are in a state of bankruptcy. He made this remark during a press briefing with journalists. He has also assured that efforts will be made to rescue these banks. However, he has questioned the necessity of weak banks that are not recognized internationally and mentioned plans to merge these weak banks.

To reform the banking sector, three task forces will be established; one of these has already been formed. There are also concerns about conflicts of interest among some members of the task force—one is the chairperson of Brac Bank's board of directors, and another is involved in the audit activities of Bangladesh Bank.

Seventeen individuals have been taken from Bangladesh Bank for fieldwork, but can they work impartially to uncover the flaws, irregularities, and corruption of Bangladesh Bank? Some bank boards have been dissolved, and new ones have been formed by Bangladesh Bank. This has only resulted in changes of personnel; it does not seem that the condition of the banks has improved.

If the people had confidence in the owners of commercial banks, there would be no need for these banks to be listed with Bangladesh Bank. It is the trust in Bangladesh Bank that leads people to deposit their money in commercial banks. Governor Ahsan H Mansur has undermined that trust. Despite various measures and assurances taken afterward, public confidence has not returned, and banks are gasping under liquidity crises.

By damaging the credibility of weak banks, Bangladesh Bank has now started imposing strict oversight, requiring them to inform about 20 issues daily. As a result, banks are so busy preparing statements for Bangladesh Bank that they cannot even plan for recovery. Thirty years ago, when scheduled banks questioned the necessity of submitting numerous details, we were labeled as 'authoritarian' and 'fascist' officials of a 'dictatorial' institution. We did not give importance to their words then.

With the lack of confidence resulting from Bangladesh Bank's 'wrong' policies, it is not possible to strengthen weak banks merely through oversight.

While some banks faced liquidity crises during the Awami League era, the current crisis has reached an extreme level. The responsibility for this lies with the current governor of Bangladesh Bank and his reckless declarations. These unnamed weak banks are no longer receiving deposits; instead, people are crowding to withdraw their funds. As the withdrawal increases, the liquidity crisis of these banks is becoming more exposed, with many unable to honor cheques.

How can Bangladesh Bank expect anyone to deposit money in a bank that cannot pay back depositors? The previous governor, Rouf Talukder, reassured the public that Bangladesh Bank would support any bank in liquidity crises. However, the new governor could have provided such reassurance while secretly monitoring the situation more rigorously.

Bangladesh Bank must remember that the reckless comments of a central bank governor can trigger a tsunami in the money market.
The excessive number of banks in the country is also a factor contributing to the current distress. Our economy is not large enough to sustain the competition among more than fifty banks. For our small economy, having 62 banks is unnecessary. The economic environment required to collect deposits and create borrowers for 62 banks has yet to be established.

Although the number of banks has increased, the corresponding rise in customers has not kept pace, leading to uneven competition in deposit collection and loan distribution. In some cases, multiple bank branches operate within the same building. Employees of weak banks are going door-to-door for funds, similar to life insurance agents, but they are not receiving any money. If the central bank does not trust them, why would the public?

Despite Bangladesh Bank providing guarantees, stronger banks are unwilling to lend to weaker ones. Struggling banks are attempting to survive by offering deposits at rates exceeding 12%, but visible, sustainable improvement remains elusive.

In several banks, the acceptable ratio of deposits to loans has been violated due to poor management. Bangladesh Bank has specific guidelines regarding this, and the implementation of these guidelines is regularly monitored. Did the monitoring by Bangladesh Bank not spot these dire conditions in a timely manner? If it was detected, why were corrective measures not taken immediately with proper forecasts?

The dire state of these banks is not just marked by declarations of bankruptcy; there is also ongoing tug-of-war regarding their fates. Not only during the interim government but also under the Awami League government, there has been limitless propaganda against these banks. Rumors of banks going bankrupt and being labeled as "default" started circulating during the COVID-19 pandemic. Just as the media inflates inflation by reporting on the prices of market goods, it also erodes public trust in banks by repeatedly discussing "bankrupt" banks and "default" loans.

The narrative that the S Alam group has looted money from all banks and laundered it abroad creates natural panic among depositors. Initially, the current governor frequently made statements regarding S Alam, which led to public fear regarding the existence of banks owned by the group. While the irregularities of the S Alam group may be significant, they did not occur overnight. Bangladesh Bank and the relevant scheduled banks are expected to be aware of what the group has done with the reported 1 trillion taka in loans.

Taking loans is not a crime; if there are irregularities in lending, both the lender and borrower are culpable. Media narratives have created a perception that being a loan defaulter is a heinous crime. Experiencing temporary loan default is not unusual; even in personal circumstances, we sometimes cannot repay debts on time due to various reasons. Although there are numerous allegations against S Alam, and I have detailed some of their misdeeds in my columns, I have yet to hear them labeled as loan defaulters. Even if their name appears on defaulter lists, it is not widely discussed.

The uproar in the media regarding the rate of default loans is excessive and exaggerated. Thirty years ago, the rate of default loans in state-owned banks was over 33%, whereas now it is likely around 11%. However, the accounting for default loans is different now. I have written several columns against the undue interference of the S Alam group in banks, and I was aware that I could not become deputy governor due to their favoritism towards my junior officers at Bangladesh Bank. Nevertheless, the downfall of this group should not be wished for by anyone.

Currently, it is reported that the S Alam group has deposits of 26,000 crore taka across six banks, and they may have deposits in other banks as well. The exact value of this group's assets has likely not been calculated yet, but it is unlikely to be less than 1 lakh crore taka. Corporate entities are accustomed to taking loans in anonymity, and when caught during inspections, in the past measures have been taken to secretly regularize and penalize them.

The way Bangladesh Bank is making noise about the current situation has never been seen before. It should decide what is more appropriate: keeping matters secret or causing an uproar. It is important to remember that politically motivated statements that lead to the unemployment of 180,000 workers and employees working for the S Alam group would not reflect well on the country.

The statement that several banks have been established solely to meet the financial demands of their owners is not mine but that of the current finance advisor. These banks have violated rules and regulations in order to fulfill their owners' loan requirements. Bangladesh Bank has also approved this; otherwise, such irregularities could not have occurred.

To investigate how such widespread misconduct happened despite the oversight mechanisms of Bangladesh Bank, a commission should be formed. Although laws have been enacted during various governments to prevent owners from taking excessive loans from their own banks, irregular loan-taking has not ceased. In fact, stringent regulations have compelled bank owners and managers to resort to corruption.

In 2023, during the Awami League's tenure, Bangladesh Bank issued a circular titled "Prompt Corrective Action Framework." According to this framework, if banks fail to overcome their weaknesses, Bangladesh Bank may take steps to merge them starting in 2025. The current governor has also emphasized the need to implement this policy to rescue failing banks.

In our country, weak banks are unlikely to merge voluntarily; the owners fear losing their power in such a scenario. Therefore, while bank owners may agree to let their institutions go bankrupt, they are reluctant to merge. Concern for banks and disseminating misleading information in the media are not the same thing. If the central bank has genuine concerns, it is better to address them calmly.

Former finance minister Saifur Rahman provided capital support during the crisis for state-owned banks. Similarly, the US once financed its banks to protect them from bankruptcy. Informing the public about the government's or central bank's doubts, thereby ensuring the collapse of failing banks, does not seem prudent.

Ziauddin Ahmed: Former Executive Director of Bangladesh Bank