The honourable president has urged for the reformation of banks and financial institutions, while also providing directives for effective measures against corruption. The president rightly emphasized that at this moment, banks and financial institutions are in a delicate state. Therefore, the reformation of these sectors becomes extremely urgent.
If banks and financial accounts cannot be brought back on a healthy track through reformation, the situation may spiral out of control. Banking accounts serve as a vital driving force for the economy of a country. Especially in progressive nations like ours, the importance of banking accounts in the economy is even more significant. If for any reason the banking sector falters, the entire economy may suffer. There is even a risk of economic stagnation. Therefore, there is no alternative to managing the banking sector in a healthy manner. The current state of the banking sector feels like we have reached the edge of a cliff. From this situation, we must find a way to navigate to safety at any cost. There is simply no alternative. The primary objective of any potential reformation should be to restore discipline to this sector.
For the management of banking, those appointed to management and supervision roles on the governing board must adhere to the highest standards of integrity and sincerity in carrying out their responsibilities. There is no room for negligence in any aspect. The legal framework and soft regulations in place for banking management must be correctly implemented. The various guidelines issued by the Bangladesh Bank from time to time must be meticulously followed to ensure proper and effective management.
In banking management, there are some international standards such as Basel I, Basel II, Basel III, and certain accounting norms that must be adhered to correctly. In Bangladesh, one issue is that while the existing laws are of high quality and meet international standards, they are not always implemented properly. The laws are meticulously written on paper, but banks often operate according to their own pace. Sometimes, legal changes are made to please certain interests rather than for genuine reasons.
Those who are managing banking accounts while violating the law are not subjected to any punitive measures. In this context, there is a need for amendments to the law. Ensuring the effective implementation of existing laws is crucial. The issue of amendment and modernization of laws in the banking sector is extremely important because the effectiveness of existing laws has diminished in many cases.
Hence, keeping in mind the demands of the era, these laws can be modified, supplemented, and amended. There is a necessity for changes, consolidation, and modifications in the laws governing the Securities and Exchange Commission. It is a common tendency among our country's entrepreneurs to manage their businesses by taking loans. This should be discouraged. Alongside business management or industrial establishment, there should be increased reliance on the stock market. If entrepreneurs can raise their capital from the stock market, then the pressure on banks will decrease.
It is essential to thoroughly scrutinize and select applicants for loans from banks. Measures must be taken regarding those who fail to repay their installments regularly after taking out a loan. There is a need for amendments to the law regarding the rehabilitation of default loans, as well as the loan disclosure policy. A few years ago, the loan disclosure policy was simplified. Previously, if a loan account was classified as non-performing, after five years had elapsed, the appropriate court would file a case, and after preserving one hundred percent provision, the loan account would be written off.
According to the revised policy, now if any loan account becomes classified as non-performing, it can be written off after three years have passed. For this reason, the provision preservation rule of one hundred percent has been revoked. There is no provision for filing a case against the entrepreneur or institution if the loan amount is less than 5 million taka. Recently, the opportunity for restructuring default loan accounts has been provided, including a grace period of one year with a down payment of 2% cash and a ten-year term. Under the previous law, for the first restructuring of a default loan account, a down payment of 10% was required, followed by 20% for the second restructuring, and 30% for the third restructuring. A loan account can be restructured a maximum of three times.
The amendments to banking laws could be repealed to revert to the previous state. After the 2014 elections, following the creation of widespread violence in 2015, a special provision was introduced allowing for the restructuring of default loans totaling 500 crore taka and above. While several industries availed themselves of this opportunity to restructure their loan accounts most industries later failed to repay their installments as per the conditions. Due to the special facilities provided to defaulters, a misconception has arisen among the public.
The amendments made to certain contractual laws could be revoked to revert them to their previous state because the previous laws were in accordance with international standards. Even if necessary, the laws could be made even stricter than before. Those who borrow from banks should understand that if they fail to repay the installment along with interest within the specified time, they will not be able to escape the consequences in any way.
Currently, many people are under the misguided notion that there will be no consequences if they fail to repay loans taken from banks. However, it is impossible to circumvent the law in any way. Even those who wish to repay their installments due to contractual reasons may not be able to do so, and they may be provided with special facilities. However, providing an opportunity for loan restructuring for ten years with a 2% down payment for everyone is not appropriate. As a result of this arrangement, even those who used to repay their loan installments regularly are becoming hesitant to do so. This situation may not bode well for the banking sector at all.
When a case is filed against a loan defaulter in court, the customer feels pressured. Cases are intentionally prolonged. Until the resolution of the case, banks cannot take any action against the loan defaulter. Changing bank laws for the purpose of fulfilling personal or special interests will never be acceptable. Those who are experts in banking and financial matters can form a powerful commission to identify the problems in the banking sector and propose initiatives for legal reforms. The government should implement the recommendations or advice given in the committee's report.
It's time to be cautious about those who are appointed as executives in state-owned banks. Often, it is observed that political considerations, rather than qualifications, play a significant role in the appointment process for the boards of directors of nationalized banks. It's not inherently flawed for a political government to appoint favored individuals to various institutions; however, it must ensure that appointments are made based on merit and competency. Ensuring that a state-owned bank is managed effectively is not possible in any way if an incompetent person is appointed.
Banking business is not like any other ten businesses. A bank is an extremely sensitive institution. Even a minor mistake can lead to a catastrophe in a bank or financial institution. Therefore, any decision regarding a bank or financial institution must be carefully considered. Only qualified individuals should be hired for state-owned banks. There is no alternative to this. It is essential to recruit professional individuals for banks and financial institutions at all times. Hiring someone for a bank or financial institution based solely on political considerations will not be appropriate in any way.
A few days ago, a provision was made to appoint four directors from the same family in state-owned banks. They will serve three terms uninterrupted, meaning they can hold office for a total of 9 years. Previously, two directors from the same family could be appointed, and they could serve two terms uninterrupted, meaning they could hold office for a total of 6 years. This law was amended to allow for the appointment of four directors from the same family simultaneously. They will serve three terms uninterrupted, totaling nine years. Later, a slight amendment to this law allowed for the appointment of three directors from the same family simultaneously. The previous law was good because appointing three or four directors from the same family at once establishes familial dominance over the banking system.
This law cannot be effective in any way. Therefore, it is necessary to revisit this provision in the previous situation. There is a provision for appointing independent directors in banks under ownership. However, it is observed that relatives of the bank's owners are appointed as independent directors. As a result, they cannot fulfill their responsibilities properly. Instead, they remain busy protecting the interests of the bank's owners. To change this situation, arrangements should be made to appoint competent individuals as independent directors so that they can contribute effectively to the management of the bank. In the case of appointing independent directors, Bangladesh Bank can provide some specific guidelines separately.
There is no rationale for having so many banks under national ownership. Nationalized banks should be transferred to private ownership as quickly as possible. Through the stock market, their shares could be floated for privatization. A person under national ownership has stated that they will convert the government's money into shares. This is not feasible at all. It's just a form of cunning. The question is, why would anyone buy shares of a dubious company? They would prefer to invest in good companies.
Central banks need to maintain a strong position in adopting and implementing various policies. If central banks are influenced by political pressure and make decisions, it can never be beneficial for this sector. Currently, banking accounts are managed through dual control. The Bangladesh Bank makes one type of decision, while the Financial Institutions Division of the Ministry of Finance makes another type of decision. The Bangladesh Bank can impose as much control as possible over privately-owned banks. This is not possible in the case of state-owned banks. State-owned banks are more controlled by both banks and financial institutions. This is not yielding good results for banking accounts.
I think that the Ministry of Finance's Banking and Financial Institutions Division could be abolished to empower the central bank further. Simultaneously, the central bank could be allowed to recruit more skilled personnel. In state-owned banks, the management director and members of the management board are appointed by the Banking and Financial Institutions Division of the Ministry of Finance. This provision could be changed. Following the government's advice, the Bangladesh Bank could recruit for these positions. The Bangladesh Bank could create a list of eligible individuals for the positions of management director and members of the management board in state-owned banks. From this list, the Bangladesh Bank will recruit suitable individuals for these institutions. The government could provide guidance in this regard.
Currently, there is a problem with the reserves, as they are gradually depleting. To increase reserves, there needs to be diversification in export goods. Bangladeshi expatriates are sending remittances through informal channels. Various rates for the exchange of US dollars are prevalent in the market, leading to no significant benefit. Efforts should be made to completely shut down the hundi business. Many suggest floating the exchange rate of the US dollar against the market. However, it is not feasible at the moment. Therefore, initiatives must be taken to close down the hundi business. Simultaneously, maximum arrangements should be made for direct foreign investment influx.
Author: Economist and former governor, Bangladesh Bank
Transcribe: M A Khaleque