Reforming non-bank financial institutions a long overdue

The economy of Bangladesh is currently under stress. High inflation, depleting foreign reserves and sluggish growth have eroded public confidence. Amid these issues, Bangladesh Bank has recently formed a six-member taskforce to conduct reform works in the banking sector.

The task force will propose reforms in the Bank Companies Act, Bangladesh Bank Order, among others and legislation related to asset management companies, bank acquisitions and mergers, reforms and modernization and take steps to issue the white paper of the banking sector.

The sector stakeholders are seeing this decision of the central bank very positively. However, they feel that it is important to take reform initiatives not only in the banking sector, but also in non-banking financial institutions (NBFIs).

Those concerned with the sector informed that the anarchy created in the banking sector during the time of the outgoing government through irregularities and looting has also affected the non-banking financial institutions. The crisis in NBFIs is manifold than the banking sector. As most of the financial institutions are involved in loan irregularities, there has been a liquidity crisis along with the increase in defaulted loans. Most institutions are unable to return money to depositors on time. Clients are not eager to keep new deposits in these institutions. In this situation, it is necessary to reform NBFI.

Former Director General of Bangladesh Institute of Bank Management (BIBM) and economist Dr. Tawfiq Ahmed Chowdhury told View Bangladesh, since the task force has been formed to reform the banking sector, now there is a need to automatically reform the non-banking financial institutions. The Governor of Bangladesh Bank will surely think about this matter.

The owners of non-banking financial institutions also want reforms in this sector. Sources informed that recently they met with the Governor of Bangladesh Bank. They said that client’s confidence in NBFIs has decreased due to various reasons including increase in defaulted loans. Reformation is must to restore trust.

According Bangladesh Bank’s data, at the end of 2023, defaulted loans of non-bank financial institution’s increased by 38 percent to a record amount of Tk 23 thousand 208 crore 70 lakhs. At the end of March 2024, the loan disbursement status was 74 thousand 529 crore 76 lakh taka. After three months (April-June) the debt status of financial institutions stood at 74 thousand 918 crore 41 lakh taka. Accordingly, the loan disbursement has increased by Tk 388 crore in three months. However, 47,000 depositors left the NBFI in a span of three months.

According to the report of the Central Bank, at the end of March 2024, the number of depositors of the country's financial institutions was 427 thousand 341. And at the end of June, that is, after three months, the number of depositors stood at 3 lakh 79 thousand 737 people. Accordingly, the number of depositors of financial institutions decreased by 47 thousand 604 people in just three months. This is the highest number of depositors in a single quarter.

The central bank informed that in the first quarter of this year (January-March) the number of depositors of financial institutions decreased by 3 thousand 880. Earlier, in the fourth quarter of 2023 (July-September), the number of depositors of financial institutions decreased by 25 thousand 782. In the previous three months (April-June), the number decreased by 18 thousand 493. In addition, in the first quarter of 2023 (January-March), the number decreased by 35 thousand 5 people.

At the end of the second quarter of this year (April-June), the deposits of financial institutions stood at 45 thousand 116 crore 8 lakh taka. And at the end of the first quarter (January-March) the deposits of financial institutions were 44 thousand 304 crores 69 lakh taka. Accordingly, the deposits increased by 8 thousand 113 crores 9 lakh taka in three months.

Many are blaming Bangladesh Bank for this plight of non-banking financial institutions. They argued that Prashant Kumar Halder alias PK Halder had looted thousands of crores of taka from non-banking financial institutions with the help of Bangladesh Bank. He has taken loans worth at least three and a half thousand crore taka from four institutions.

Referring to various irregularities including non-bank financial institutions, Dr. Tawfiq Ahmed Chowdhury said, 'Giving license to non-bank financial institutions is not right. These institutions work like banks. There is no need for NBFI as there are many banks in the country.

According to Bangladesh Bank data, 14 out of 35 financial institutions were in the red zone at the end of September 2023. Two years ago, in 2021, 12 financial institutions were in the red zone. As a result, people's confidence in this sector has decreased dramatically.

Meanwhile, chairmen of non-banking financial institutions met with the governor of Bangladesh Bank on last Wednesday. It is learnt that they have called for reforms in the non-banking sector as well as in the banking sector. However, Bangladesh Bank did not agree to the matter. Governor Dr Ahsan H Mansur informed them that ‘Reformation of 'NBFI will start within three to four months’.

In this regard, Executive Director of Bangladesh Bank Husne Ara Shikha told View Bangladesh, "The task force formed by Bangladesh Bank is only for the banking sector. In order to fix the economy, the banking sector should be fixed first on a priority basis. Bangladesh Bank is currently trying to restore good governance in the banking sector.