Poor governance, non performing loans trigger crisis in banking sector

The banking sector in Bangladesh is passing through a critical period due to the lack of good governance and non-performing loans (NPL), experts said. They allege that Bangladesh Bank (BB), the banking sector regulatory authority, is unable to work independently and cannot exercise its power.

Regarding the prevailing situation, Dr Zahid Hussain, lead economist of the World Bank's (WB's) Dhaka office, told The Independent that economic and political factors have made the banking system vulnerable. He said the board of directors often approves loans without proper assessment. “As a result, non-eligible borrowers, who have no intention to make repayments, get loans”.

In most cases, eligible borrowers are denied loans as the board sanctions loan on the basis of political consideration or family connections, he said. “Owing to this, most banks suffer from a liquidity crisis. Sometimes even a depositor’s cheque bounces because of disbursement of bad loans,” he added. Under the circumstances, depositors are losing their trust in banks and this is leading to a liquidity crisis, he noted.

While blaming wilful defaulters, Zahid Hussain criticised BB's monitoring shortcomings that have failed to keep out dubious loan seekers.

He said the crisis has been created by the lack of banking skills and deterrent measures against defaulters. “Wilful defaulters should be punished,” he added.

He also said private banks give loans because of personal contacts and considerations rather than on the basis of strict commercial evaluation. On the other hand, state-owned banks provide loans based on political considerations.

Dr Hussain compared the prevailing situation in the banking sector to a ticking time-bomb that could blow up any moment.

In his view, BB should take long-term and short-term measures to rescue the banking sector from the current crisis. He suggested that the central bank should be given full autonomy to independently regulate the banks.

About the large number of banks in operation, the WB economist said that third-generation banks

perform poorly and should be merged immediately as their owners lack banking experience.

During the first nine months of the current year, loan defaults, according to Bangladesh Bank, increased by Tk. 181.35 billion. Cumulative loan defaults stood at Tk 803.07 billion.

If the written-off amount of Tk 450 billion is added to this, the actual loan default will be Tk 1,253.07 billion.

Shares of banks recorded fall on the stock market because of media reports on loan default.

Earlier, Bangladesh Institute of Bank Management (BBIM) Director General Dr Toufic Ahmad Choudhury said the central bank should carry out external monitoring, while internal governance must be maintained through banks’ internal control mechanisms.

He said if a bank lacks internal governance, the central bank could do little with outside monitoring. "It's a symbiotic relationship, which depends on good governance," he added.

“When governance improves, it strengthens the central bank. All this should be done without any outside interference,” he maintained.

Dr Saleh Uddin Ahmed, former governor of BB, said the banking sector crisis mainly stems from the absence of corporate governance as banks are not run by professional bankers. Wilful defaulters went unpunished over the years and this has encouraged other borrowers to renege on repayment commitments, he added.

He said private banks do not follow the rules and regulations and present manipulated annual reports. The central bank is unable to perform professional monitoring of commercial banks because of government pressure.

Centre for Policy Dialogue (CPD) Executive Director Dr Fahmida Khatun said that burdened with rising bad loans and lack of governance, the banking sector has become a “growing malignancy” for the economy. Despite significant growth, the sector is currently facing a number of serious challenges, she added.

According to Fahmida Khatun, the sector is struggling to recover from the setbacks caused by large financial scams in a number of state-owned and private commercial banks in recent years. “Most indicators reveal a poor health and lack of discipline in several banks,” she noted.

She blamed it on the lack of close monitoring by the central bank and the absence of corporate governance in private banks for the mounting NPLs.

About the prevailing situation of banking sector former managing director and chief executive of Meghna Bank and NCCBL Nurul Amin told The Independent that there is direct influence of board of directors. For this reason the management can’t work independently and professionally.

He said if the private banks follow the rules of the central bank and ensure compliances, none of them will fall into problem.

Apart from following the rules of the central bank, he also suggested the bank managements to practice professionalism to improve the banking sector.

Poor governance, non performing loans trigger crisis in banking sector

The banking sector in Bangladesh is passing through a critical period due to the lack of good governance and non-performing loans (NPL), experts said. They allege that Bangladesh Bank (BB), the banking sector regulatory authority, is unable to work independently and cannot exercise its power. Regarding the prevailing situation, Dr Zahid Hussain, lead economist of the World Banks (WBs) Dhaka office, told The Independent that economic and political factors have made the banking system vulnerable. He said the board of directors often approves loans without proper assessment. As a result, non-eligible borrowers, who have no intention to make repayments, get loans. In most cases, eligible borrowers are denied loans as the board sanctions loan on the basis of political consideration or family connections, he said. Owing to this, most banks suffer from a liquidity crisis. Sometimes even a depositors cheque bounces because of disbursement of bad loans, he added. Under the circumstances, depositors are losing their trust in banks and this is leading to a liquidity crisis, he noted. While blaming wilful defaulters, Zahid Hussain criticised BBs monitoring shortcomings that have failed to keep out dubious loan seekers. He said the crisis has been created by the lack of banking skills and deterrent measures against defaulters. Wilful defaulters should be punished, he added. He also said private banks give loans because of personal contacts and considerations rather than on the basis of strict commercial evaluation. On the other hand, state-owned banks provide loans based on political considerations. Dr Hussain compared the prevailing situation in the banking sector to a ticking time-bomb that could blow up any moment. In his view, BB should take long-term and short-term measures to rescue the banking sector from the current crisis. He suggested that the central bank should be given full autonomy to independently regulate the banks. About the large number of banks in operation, the WB economist said that third-generation banks perform poorly and should be merged immediately as their owners lack banking experience. During the first nine months of the current year, loan defaults, according to Bangladesh Bank, increased by Tk. 181.35 billion. Cumulative loan defaults stood at Tk 803.07 billion. If the written-off amount of Tk 450 billion is added to this, the actual loan default will be Tk 1,253.07 billion. Shares of banks recorded fall on the stock market because of media reports on loan default. Earlier, Bangladesh Institute of Bank Management (BBIM) Director General Dr Toufic Ahmad Choudhury said the central bank should carry out external monitoring, while internal governance must be maintained through banks internal control mechanisms. He said if a bank lacks internal governance, the central bank could do little with outside monitoring. Its a symbiotic relationship, which depends on good governance, he added. When governance improves, it strengthens the central bank. All this should be done without any outside interference, he maintained. Dr Saleh Uddin Ahmed, former governor of BB, said the banking sector crisis mainly stems from the absence of corporate governance as banks are not run by professional bankers. Wilful defaulters went unpunished over the years and this has encouraged other borrowers to renege on repayment commitments, he added. He said private banks do not follow the rules and regulations and present manipulated annual reports. The central bank is unable to perform professional monitoring of commercial banks because of government pressure. Centre for Policy Dialogue (CPD) Executive Director Dr Fahmida Khatun said that burdened with rising bad loans and lack of governance, the banking sector has become a growing malignancy for the economy. Despite significant growth, the sector is currently facing a number of serious challenges, she added. According to Fahmida Khatun, the sector is struggling to recover from the setbacks caused by large financial scams in a number of state-owned and private commercial banks in recent years. Most indicators reveal a poor health and lack of discipline in several banks, she noted. She blamed it on the lack of close monitoring by the central bank and the absence of corporate governance in private banks for the mounting NPLs. About the prevailing situation of banking sector former managing director and chief executive of Meghna Bank and NCCBL Nurul Amin told The Independent that there is direct influence of board of directors. For this reason the management cant work independently and professionally. He said if the private banks follow the rules of the central bank and ensure compliances, none of them will fall into problem. Apart from following the rules of the central bank, he also suggested the bank managements to practice professionalism to improve the banking sector.