Protecting weak banks is like pouring water into a leaky bucket

Dr. M M Akash, an esteemed economist and retired professor from the Economics Department at Dhaka University, has recently emphasized the need for confiscating the assets of large defaulters. He points out that many banks in the country are currently experiencing a liquidity crisis. For those banks that are likely to recover, refinancing could be a viable option, while alternative measures should be considered for those that are unlikely to survive. Dr. Akash shared these insights during an exclusive interview with Views Bangladesh, conducted by economics writer M A Khaleque and Girish Goiric, the assistant editor of 'Views Bangladesh.'

Views Bangladesh: The new interim government has initiated the preparation of a white paper aimed at identifying various irregularities and corruption within the financial sector. A high-powered committee of 12 members has been formed for this purpose. What do you expect the White Paper might cover?

Dr. M M Akash: The white paper drafting committee is likely to assess the accuracy and realism of GDP growth indicators and other economic metrics published in recent years. The committee will review the sustainability of the development achieved and propose ways to ensure sustainable growth in the future. While the primary focus will be on macroeconomic issues, it remains uncertain whether the white paper will delve deeply into uncovering past irregularities and corruption. Key areas of concern include the reasons behind low growth rates, insufficient local and foreign investment, and the persistent issue of defaulted loans. However, it is unclear if the white paper will address these specific issues in detail. The concept of the white paper is to identify those responsible for past economic missteps and irregularities, but its exact scope will only become clear as the drafting progresses.

Views Bangladesh: Bangladesh Bank is considering establishing a commission to investigate various irregularities in the banking sector. How effective do you believe this commission will be?

Dr. M M Akash: The new governor's proposal to form a high-level commission is a positive step toward addressing the banking sector's issues. This commission will need to thoroughly examine the underlying problems, which are multifaceted. Currently, a critical issue is the liquidity crisis affecting several banks. Without adequate liquidity, these banks cannot meet their obligations to depositors or manage daily operations effectively. This could lead to a situation where depositors start withdrawing their funds en masse, potentially causing bank failures. To prevent such outcomes, it's essential to address the liquidity issues promptly. The challenge lies in how the commission will ensure that troubled banks receive the necessary support without merely prolonging their problems or mismanaging resources.

Views Bangladesh: What specific measures do you recommend for recovering defaulted loans?

Dr. MM Akash: The first priority should be to recover outstanding loans and repatriate any laundered money. Once the funds are recovered, they should be used to create a dedicated recovery fund. This fund could then be utilized to provide targeted financial support to banks in need. The Governor of Bangladesh Bank has indicated that no new money will be printed, which is prudent given the inflation risks associated with printing additional currency. Therefore, focusing on recovering defaulted loans and repatriating illicitly obtained funds is crucial.

For large debtors, it is essential to assess the value of their assets in relation to the loans they have taken. The first step is to determine if the amount recoverable from selling these assets can fully cover the outstanding loan. If the mortgaged assets are insufficient to recover the entire loan, it is necessary to explore the sale of other immovable assets. This process will require court approval, and existing laws may need to be amended if necessary.

If cash recovery from the borrower is feasible, it should be prioritized. However, since cash recovery is often unlikely, efforts should be made to sell additional assets, such as houses, flats, and other properties. It is common for borrowers to overvalue their pledged assets, so the sale of these mortgaged assets alone may not cover the full loan amount. Therefore, it is important to consider acquiring and selling other domestic and foreign properties if needed. If current legal frameworks do not allow for this, initiatives should be undertaken to change the law accordingly.

Views Bangladesh: There seems to be confusion regarding defaulted loan statistics. How do you think this issue can be resolved?

Dr. M M Akash: The confusion surrounding non-performing loan (NPL) statistics in the banking sector is significant. According to the latest report from Bangladesh Bank, the amount of defaulted loans is listed as Tk 2 lakh 11 thousand 391 crores. However, this figure is problematic because it does not account for written-off loans, amounts due to rescheduled accounts, or claims against projects under litigation. Many believe that, using international definitions, the total amount of defaulted loans could exceed Tk 4 lakh crore. The current definition of defaulted loans likely understates the true extent of the problem.

Recent legal reforms aimed at reducing bad debt have simplified loan rescheduling and shortened the debt settlement period. However, the definition of defaulted loans needs to be updated to align with international standards to provide a more accurate picture. The previous legal definitions, which were formulated with input from institutions like the IMF or the World Bank, should be enforced more strictly. Additionally, while reducing bad debt through installment collection is one approach, taking legal action to address these issues should also be considered. Over time, laws may need to be made tougher to ensure effective management of bad debt. If necessary, laws can be made stricter over time. There is no bravery in reducing defaulted loans through legal tricks instead of reducing them through recovery of installments.

Views Bangladesh: The data published by international organizations such as the IMF and World Bank regarding Bangladesh's GDP growth rate often shows figures that are consistently 1 to 1.5 percentage points higher than those reported by the Bangladesh government. International organizations have maintained their figures, while the Bangladesh government continues to endorse its own statistics as accurate.

Dr. M M Akash: The Bangladesh government sometimes inflates certain statistics to showcase its successes, while downplaying others. For example, figures related to inflation, unemployment rates, and bank defaults are often minimized to appear more favorable. Conversely, statistics on GDP growth, local and foreign investments, and remittance collections are frequently exaggerated. Such practices are particularly prevalent during autocratic regimes.

The interim government has prioritized the accurate identification and disclosure of the achievements and shortcomings of various economic indicators. It is hoped that in the future, we will receive more accurate data on these indicators. One of the White Paper Committee's tasks, established by the Interim Government, is to uncover any exaggerated or false figures that have been published across different sectors. A comprehensive assessment will be possible after the publication of the white paper.

There are ongoing controversies regarding data on household censuses, unemployment, household income-expenditure surveys, and the realism of figures published on private sector and foreign investments. It is alleged that many registered investments are presented as actual investments, while in reality, most registered investment proposals are never implemented.