Time to reform the banking sector is now

In the context of a political shift, the country has entered a new era. Under the leadership of Nobel Peace Prize laureate and internationally renowned economist Dr. Muhammad Yunus, a 17-member interim government has assumed the responsibility of governing the state. The primary duty of this interim government is to hand over power to a newly formed government based on the people's mandate through a fair and acceptable national election. This government can officially take initiatives to heal the recent economic wounds of the country. Particularly, immediate action is needed to address the issues prevailing in the banking sector. Noted economist and former Governor of Bangladesh Bank, Dr. Salehuddin Ahmed, has been appointed as the economic advisor to the interim government. Given his experience as the Governor of Bangladesh Bank, he is well-acquainted with the problems and limitations of the banking sector. Therefore, it will be relatively easier for him to undertake reform initiatives. The interim government has the advantage of not being committed to any particular political party, allowing them to initiate and implement reform measures in the greater interest of the nation. The current state of the banking sector is undesirable for anyone.

The banking sector is often referred to as the 'lifeline' of a country's economy. An economy can never flourish properly if the banking sector is not managed transparently. This is especially true for developing and underdeveloped countries where the banking sector is indispensable. Entrepreneurs and businesses in these countries often face capital shortages, so they rely on banks for setting up industrial plants and running business activities. If the banking sector can provide them with the necessary support, economic activities can grow rapidly. Unfortunately, the banking sector in our country is not functioning properly, and as a result, entrepreneurs and businesses are not receiving the expected assistance. Instead, the banking sector has become a hub for wealth misappropriation and capital flight by a select group of individuals. Over the past few years, the banking sector has been systematically undermined.

A H M Mustafa Kamal was the Finance Minister in the previous government. He is the only Finance Minister in Bangladesh's history who was directly an industrialist and businessman. Most of the policies he formulated and implemented regarding the banking sector were dedicated to protecting the interests of a specific group. The legal framework developed and implemented for the banking sector, with the advice and support of international organizations such as the World Bank and the International Monetary Fund (IMF), was of international standard. However, many of these laws have recently been weakened under the guise of reforms. These so-called reforms have primarily protected the interests of intentional defaulters and 'bad' borrowers. Therefore, these amended laws need to be reversed, and if necessary, even stricter laws should be enacted. No legal reforms that weaken the banking sector should be accepted.

The biggest problem in the banking sector is the failure to collect the installments of the loans on time. As a result, the amount of defaulted loans is rapidly increasing. When A H M Mustafa Kamal assumed office, he claimed that not a single penny would be added to the amount of defaulted loans from that day onward. This statement gave hope to many, but during his tenure, instead of collecting installments of defaulted loans, they were hidden through various legal maneuvers. When the Awami League formed the government in 2009, the amount of defaulted loans in the banking sector was about 22,000 crore taka. It has now risen to 182,295 crore taka. However, this does not represent the true picture of defaulted loans in the banking sector. According to some, if the hidden defaulted loans due to legal loopholes were added, the total amount of defaulted loans in the banking sector would be around 400,000 crore taka.

First, let's address the issue of loan account rescheduling. Loan rescheduling refers to the extension or reduction of the time for recovering installments from a loan account. In our country, the time for repaying installments is generally not reduced. Therefore, rescheduling a loan account usually means extending the repayment period. The issue of loan rescheduling first came to attention in 1991. At that time, after the Bangladesh Nationalist Party (BNP) came to power through an election, the Bangladesh Bank, on May 20th, published a list of 171 large loan defaulters in various newspapers. The amount of defaulted loans owed by the individuals and institutions on this list was at least 1.5 crore taka. The publication of this list caused an uproar. The World Bank had approved a loan proposal for Bangladesh, and the condition for disbursing the loan was the publication of the list of loan defaulters. This was the primary reason the government published this list.

It was said that more lists of such loan defaulters would be published later, but those lists were never released. The individuals named on the list were very displeased and began to pressure the government in various ways. At that time, for the first time, an initiative was taken to reschedule loan accounts. Borrowers were allowed to reschedule their loan accounts by depositing 10% of the total outstanding loan amount as a one-time down payment to the bank. The first time, the down payment was 10%, the second time 20%, and the third time 30% of the total outstanding loan amount was required for rescheduling. However, there was no clear legal guidance on how many times a loan account could be rescheduled, though it was generally assumed that no loan account could be rescheduled more than three times. Since it was stated that three down payments were to be made, some influential entrepreneurs and borrowers exploited this legal ambiguity and rescheduled their loan accounts more than three times by paying a 30% down payment. It was reported that an entrepreneur from Narayanganj rescheduled his company’s loan account 12 times.

In subsequent governments, the abuse of this rescheduling facility continued. Most recently, during A H M Mustafa Kamal’s tenure as Finance Minister, defaulters were allowed to reschedule their loans for 10 years with a one-year grace period by making a down payment of only 2%. 38,000 individuals and institutions took advantage of this facility. When the time comes to collect the installments from these projects after the stipulated 10 years, the banks will realize the extent of the damage. If the defaulted loans in the banking sector are to be recovered, the rescheduling facility, which allows for a 2% down payment, must be immediately abolished, and measures should be taken to collect the loan installments. Moreover, no loan account should be allowed to be rescheduled more than once. Individuals running for national or local elections should be required to be debt-free for at least a year before the designated election date. It has been observed that many loan defaulters make a small down payment before the election to participate. Once elected, it becomes impossible to collect installments from them, and if they lose the election, they never return to the bank, as if the bank were responsible for their defeat. Those who become loan defaulters after taking loans from banks should not be allowed to represent the people in elections.

The loan write-off policy has recently been simplified multiple times. The term "loan write-off" often leads people to believe that the bank has waived its claim on the outstanding loan from the concerned account. However, that is not the case. Loan write-off means transferring the outstanding loan amount from the concerned account to a separate account. The primary purpose is to make the main ledger of the bank's loans appear clean. Efforts to recover the outstanding amount from the written-off loan account continue. Any installment collected from a written-off loan goes directly to the bank's profit account. Previously, a loan account could be written off only after five years had passed since it was classified as a bad debt, provided that a lawsuit was filed in the appropriate court, and 100% provisioning was maintained. However, recent legal reforms allow loan accounts to be written off after just two years of being classified as bad debt. The requirement to maintain 100% provisioning has also been withdrawn. If the outstanding amount is less than 500,000 taka, there is no need to file a lawsuit in the appropriate court. As a result, the amount of loans being written off has increased.

A recently enacted legal reform has been described as self-destructive. The previous rule was that if any one of the industrial projects of an industrial group defaulted on a loan, no loans would be granted to the remaining industries of that group. This created a kind of pressure on entrepreneurs, who would try to keep all the industries in the group free of loan defaults. However, the law was recently changed. Now, even if one of the industries of an industrial group defaults on a loan, the remaining industries will still be eligible for bank loans. If an industrial group has five industries and four of them default on loans, the fifth industry will face no difficulty in obtaining a bank loan.

In 2015, political instability erupted across the country. During that time, various establishments were set on fire and vandalized. Under the pretext of being affected by this unrest, a certain group exerted pressure on Bangladesh Bank to restructure defaulted loans of 500 crore taka or more under easier terms. Loan restructuring is somewhat similar in nature to loan rescheduling. At that time, 11 of the country’s top industrial groups managed to regularize 15,000 crore taka worth of defaulted loans. Later, many of these loan accounts failed to meet the restructuring conditions. The question is, why was such a facility provided? And if such a facility was given, it should have been open to everyone. After all, just as those with defaulted loans of 500 crore taka were affected, those with 300 crore taka in defaulted loans w The Bangladesh Bank, under pressure from entrepreneurs, set the maximum interest rate on bank loans at 9%, and the interest rate on deposits at 5.5% for state-owned banks and 6% for private banks. Subsequently, to control high inflation, the bank rate was repeatedly increased. The bank rate, which is the interest rate that scheduled banks pay when borrowing from the central bank for a short term, was raised from 5% to 8.5%. However, the interest rate on bank loans (charged by scheduled banks to entrepreneurs) was capped at 9%. As a result, bank loans became relatively cheap. A certain group of influential people took advantage of this by taking out loans from banks. The money from these loans eventually made its way into the market, thereby undermining all efforts to control high inflation by reducing the money supply.

The country's banking sector is not being managed properly. One of the key reasons for this is the severe lack of internal governance in each bank. Additionally, there is a kind of dual control in the banking sector. The Bangladesh Bank cannot exert its authority over state-owned banks as it does over privately-owned banks. The Ministry of Finance's Bank and Financial Institutions Division has control over the state-owned banks. The Bangladesh Bank has no role in the appointment or dismissal of managing directors or in the formation of the board of directors of state-owned banks. This authority rests entirely with the Bank and Financial Institutions Division. In the past, the Bank and Financial Institutions Division of the Ministry of Finance was once abolished. A similar initiative could be taken again.

Furthermore, the Bangladesh Bank could be empowered with sole authority over the banking sector. Individuals appointed as governors and members of the board of directors of the Bangladesh Bank should be those who are not directly loyal to any political party. Additionally, it would be preferable not to appoint any bureaucrat as the governor of the Bangladesh Bank. Bureaucrats often struggle to make appropriate decisions independently. A former governor of the Bangladesh Bank, who was once a bureaucrat, promised entrepreneurs at an event that the maximum interest rate on bank loans would be 9% and the interest rate on deposits would be 6%. This was an unprecedented incident.

It is necessary to genuinely transform the Bangladesh Bank into an autonomous institution. The governor of the Bangladesh Bank should be someone who can make decisions in the national interest, free from political influence, and who will not make any economy-damaging decisions under the influence of any government minister or anyone else. There are additional issues in the banking sector that need to be addressed through effective measures.

MA Khalek: Retired General Manager, Bangladesh Development Bank Plc and Writer on Economics.