Time to initiate urgent reforms in the banking sector

After the students' movement, an interim government assumed the responsibility of state management under special circumstances. The interim government is now passing three months in office. Public expectations from this government are very high. People hope that it will steer the country towards sustainable development by addressing the various damages created in society. However, there are growing concerns that public trust in the interim government is gradually fading. Although several commissions have been formed for reforms in various sectors, the general public is not well-informed about their activities and progress. In particular, there is skepticism about what the interim government is planning regarding the troubled banking sector and how much of that we will be able to see reflected in the future.

Recently, the sector that has suffered the most in the country’s economy is the banking sector. This sector has been systematically brought to the brink of disaster. The banking sector is the "lifeline" of a country's economy. To keep an economy functioning and effective, it is essential to ensure that the banking sector operates smoothly. Unfortunately, the reality is that our country's banking sector has never been regarded as a crucial factor for development by policymakers. Instead, it has been viewed as fertile ground for looting and unethical activities. Particularly during the last few years of the previous government, the existing international standards in banking law were amended and reformed in such a way that the sector could be exploited for individual and group interests. More specifically, we must refer to the time of former Finance Minister AHM Mustafa Kamal, during which the amendments made to the existing banking laws have become a cause of long-term damage to this sector.

It is noteworthy that among those who have served as the Finance Minister of the People's Republic of Bangladesh, only AHM Mustafa Kamal was a professional businessman and entrepreneur. As a result, he implemented legal changes influenced by the country’s leading entrepreneurial groups, which undoubtedly pushed the banking sector toward disaster. After taking office, Finance Minister AHM Mustafa Kamal stated that the amount of non-performing loans would not increase by even one taka. This statement initially reassured economists and those involved in banking, as the Finance Minister himself was an established businessman and entrepreneur, indicating he was well aware of the issues in the banking sector. However, it wasn’t long before disappointment set in. It became evident that under his direction, the Bangladesh Bank began amending existing laws in such a way that the amount of non-performing loans could be shown low without actually collecting installments. A prominent economist referred to this initiative by former Finance Minister Mustafa Kamal as an attempt to "clean the house by hiding dirt under the carpet."

The banking sector faces countless issues, but the most complex problem is the inability to recover disbursed loans on time. When former Finance Minister AHM Mustafa Kamal took office, the amount of non-performing loans was around 93,000 crore taka. As of last September, that figure had risen to over 211,000 crore taka; however, this is not the true picture of non-performing loans. It represents only a fraction of the actual amount.

There are various ways in which the extent of non-performing loans has been concealed. One strategy to show a lower amount of non-performing loans without collecting installments is the implementation of loan rescheduling policies. Loan rescheduling refers to extending or reducing the time frame for recovering installments from a loan account. However, in reality, there is often no need to reduce the time limit for loan repayments, as a borrower can choose to pay off the installments before the due date. When the designated time expires without payment, the loan account is classified as non-performing. Once a loan account is categorized as non-performing, the borrower is no longer eligible for new loans from any bank.

A simple way to present loan accounts as regular without paying installments on time is to reschedule the loan account. For example, if the due date for recovering installments from a loan account is December 31, 2024, and the borrower fails to make the payment by that date, they would be classified as non-performing. To avoid this situation, the borrower can apply to the bank for an extension of the repayment deadline. The bank's board of directors can extend the payment deadline through proper legal procedures. If the board grants an extension of one year for payment, the borrower will then have to pay the installments by December 31, 2025, instead of December 31, 2024.

During this one-year period, the loan account cannot be classified as non-performing. Previously, a loan account could be rescheduled for a maximum of three times. The first rescheduling required a 10 per cent down payment of the total non-performing loan, the second time 20 per cent, and the third time 30 per cent to be deposited in cash with the bank. Each rescheduling would have a duration of three years. Towards the end of his term, Finance Minister AHM Mustafa Kamal irrationally allowed loan accounts to be rescheduled for a total of ten years with just a 2 per cent down payment and a one-year grace period. As a result, 38,000 individuals and institutions managed to reschedule their loan accounts. By last December, the total amount of rescheduled loans in the banking sector had reached 288,540 crore taka, up from 91,000 crore taka just a year earlier. This rescheduling has allowed a significant amount of non-performing loans to be officially presented as not being classified as non-performing.

Through loan write-offs, a substantial amount of loans are being kept outside the realm of non-performing loans. Previously, a loan account could be written off after being classified as non-performing for five years, provided that a lawsuit was filed in an appropriate court and 100 per cent provision was maintained. Now, a loan account can be written off after just two years of being classified as non-performing, with the requirement for maintaining 100 per cent provision having been removed. For loans under 500,000 taka, the condition for filing a lawsuit has also been eliminated. According to the latest statistics, the total amount of written-off loans in the banking sector has reached 71,699 crore taka. These written-off loans are not displayed as non-performing loans.

As of June, there were 67,519 projects under litigation. The amount claimed by banks from these projects was 2 lakh 9 thousand 691 crore Taka. Due to court injunctions, an additional 76 thousand crore Taka is also blocked. Therefore, the total amount claimed by banks from the litigated projects amounts to 2 lakh 86 thousand crore Taka. This represents 17 per cent of the total loans disbursed by banks, which is 16 lakh 83 thousand 396 crore Taka. Overall, the amount of defaulted loans stands at nearly 6 lakh crore Taka, accounting for 35.64 per cent of the total distributed loans.

Bangladesh's banking system was effectively operating under internationally accepted laws. In the late 1980s, the World Bank initiated reforms in the country's banking system. The legal changes made at that time reflected internationally adopted and followed laws. However, in the last 15 to 20 years, existing banking laws have been altered in a manner that primarily serves the interests of certain groups. The definitions of the laws have been modified to benefit influential loan defaulters who are supported by the government.

Just before the previous government left office, the Bangladesh Bank implemented a legal reform that was wholly unacceptable. Previously, if one or more enterprises in an industrial group defaulted on loans, the remaining industries in that group could not borrow from any bank. The new law changed this, allowing remaining factories in an industrial group to secure loans even if one or more of its enterprises defaulted. The potential consequences of this legal change are evident. Another law was also enacted that provided certain specific industrial groups with special and astonishing advantages regarding cheque clearance. This law stated that if a related institution submitted a cheque from a scheduled bank’s current account and there were insufficient funds in that account, the cheque would still have to be cleared. In this case, the Bangladesh Bank would pay the due amount to the concerned bank.

After the interim government took office, these special privileges were revoked. The legal changes have weakened the banking sector and burdened it with defaulted loans. The current banking system in Bangladesh favors loan defaulters and unscrupulous customers. Those who regularly repay their loan installments receive no special financial benefits from banks, while those who delay repayments for years receive various financial incentives, including interest waivers. The banking sector has become a haven for the plundering of certain privileged individuals. A specific group has used state machinery to take control of the country's top six privately-owned banks, extracting thousands of crore Taka as loans under various pretexts and laundering them abroad. At this moment, there is no need to form a special commission to understand the problems in the banking sector, as we are already aware of the issues. It is time to take strict measures.

The recent legal changes in the banking sector can be revoked, and the laws can be restored to their previous state. Simultaneously, strict legal actions should be taken against those borrowers who, despite having the capacity, are not repaying their installments. Their movable and immovable assets could be confiscated. They may also face bans on foreign travel and boycotts from state events. The children of loan defaulters should be denied the opportunity to receive an education in good schools within the country, let alone abroad. Deliberate loan defaulters should be declared as committing a "criminal offense," and exemplary punishment should be meted out to those involved. First and foremost, we need to decide how sincere we are about recovering defaulted loans.

MA Khaleque: Retired General Manager, Bangladesh Development Bank PLC, and writer on economic affairs.