Streamlining the banking sector
One of the major duties of commercial banks is to promote financial inclusion for accelerating the economic progress of the country
Dr. Anu Mahmud
The government is going to allow three more private banks to be added to the already existing 40 commercial banks operating in the country. It has been learnt from observation that private banks are increasingly becoming involved in corruption. With the banking sector already plunged into deep crisis due to the involvement of many private banks in corruption and irregularities, analysts believe that reform of the banking sector is more important at this moment rather than adding more in the row. It is risky.
Banks play pivotal roles in financial inclusion of the people, which is essential for accelerating economic development of the country. But the current situation in the banking sector poses a big challenge to achieving this target. In fact, billion of taka being siphoned off through the channels of the banking system due to the involvement of many private banks in irregularities. And the economy has been suffering from the burden of banking malpractices.
As reported in media, many members of the governing body of private banks, especially those who represent the owners, are found involved in disbursing loans to dubious entities that in many cases fail to repay the loan and become defaulters. As a result, the amount of default loans has become huge and default loan culture has become synonymous with a malignant cancer in the banking sector.
Mobile banking is an essential element of todays technology-based banking system which has been playing significant roles to reach banking facility to the grassroots level in society. But, this service has been misused and has become risky as well.
It is clear that improving the level of efficiency of banks is more important than increasing their number. Notably, nine banks that got operating licenses the latest are found involved in corruption. And this is a convincing argument in favour of the fact that issuing license for setting up more private banks is likely to deteriorate the situation further.
The government recently has taken praiseworthy steps to sack high officials of some banks in an effort to curb corruption in the banking sector. It is essential to streamline the banking system with strong hands to get the optimum benefits.
We have requisite laws and law courts as we see to recover bad loans but they are not functioning because they are not allowed to function. Powerful people around the government are not allowing it to function. So defaulted loans are growing and capital flights are soaring. The government is keeping its eye almost shut.
The non-recovered loans now stands at Tk 1,11,347 crore and the point is why the government is failing to stop faulty loan sanctioning and money laundering from banks. Why it is failing to show success in the recovery of defaulted loans. The public has the right to know about it.
Finance Minister has told the Parliament that more than two lakh individuals or companies are defaulters in the country but he had no courage even to name the top 100 although he mentioned about them. We must say mere voicing concern will not serve any purpose unless the government takes strong resolve to recover the bad loans. Its political weakness is deterring it from bringing pressure on powerful people and business houses to repay the loans.
We must say defaulters are by no means loyal friends or supporters of the regime except the fact that they are using political cover to grab money from banks. The government must prove its credibility to the people without sheltering people grabbing banks and financial institutions.
Thirteen banks have exceeded their annual (Small and Medium Enterprises) SME loan disbursement targets in just six months; which seems to be suspicious in the eyes of the central bank. They disbursed 105 per cent to 242 percent of their annual targets in January-June period of this year. It is good that the banks have disbursed a hefty amount of loans to small and medium enterprises but the central bank should keep watch on these banks to see if they showed other credits as SME loans. Moreover many remain skeptical whether such credit is being used as cover to grabbing loans by influential people closer to power corridor.
The extent of objectivity of all such reports in terms of both conceptual and contextual aspects of all the relevant issues is however not beyond question. But this does in no way dispute the fact that the countrys overall banking sector in a poor shape. The recent directives by the monetary watchdog the central bank to the banks to take firm measures for controlling the unabated growth of their non-performing loans (NPLs), do largely corroborate this.
The banking sector, embracing both state-owned entities and private ones, thus remains risk-prone, particularly on account of their distressed assets. This is certainly a worrisome situation, though the performance of banks in some other South Asian economies, particularly that of India, the biggest one in the region, is no better, if not worse, than that of Bangladesh.
Yet it provides no good reason to be complacent. Each country must ensure the functioning of its banking sector on a sound footing. This can help leverage its economic growth at an accelerated pace, with banks playing their role as efficient intermediaries in the process of development.
Viewed from this perspective, the banks in Bangladesh that are hamstrung because of a growing volume of NPLs, do need to undergo a process of rigorous scrutiny. Only then their ailment can be properly diagnosed. Here the efforts of the banks will have to be guided well by the central bank that should look at foolhardy, inflexible theoretical or textbook-type approach.
This guideline must also be backed by fool-proof monitoring, inspection, vigilance and evaluation mechanisms, being free from all sorts of extraneous considerations and influence-peddling by the vested interests. Otherwise, the very purpose of the central banks watchdog role will be compromised. Skill, quality, competence and, above all, integrity of its relevant personnel are matters of prime importance here.
All such things, as noted above, are already laid out clearly. But these are easier said than done or practiced. There lies the root of the problem about the swelling level of LPLs of the banks. That is precisely the reason why the obvious facts are recounted here. Banks or, to be exact, bankers must identify their clients, going by their track-record and taking overall borrowing of the latter from the banking system as well as their performance about loan servicing, into consideration.
Furthermore, another critical aspect about loan operations merits attention here. Such operations involve not only sanctioning or disbursement of loans but also monitoring the uses of funds and loan servicing as soon as it becomes due. This is all the more important, considering the fact that the NPLs now continue to rise, despite the cuts in lending rates. This only shows that loan repayment or servicing has little connection, in the given particular context of Bangladesh, with lending rate. This runs counter to arguments by different quarters about high lending rate being the prime factor for inability of borrowers to service their credits.
One of the major duties of commercial banks is to promote financial inclusion for accelerating the economic progress of the country. Many private banks pay little attention to performing this vital job. It is even worse that sponsors of some banks are more interested in making a huge amount of money through embezzlement! They have little regard for banking laws and safeguarding the interest of their clients. Recruitment of officials of less professional integrity in the management has been plunging the banks and the banking sector of the country at large into a deep crisis.
It has been learnt that nine new private banks got the central banks approval allegedly due to political pressure from the government high-ups in 2013. They are found involved in widespread irregularities, including disbursement of big loans to fake or dubious entities. They are playing this open-secret trick which is mainly behind the worsening default-loan culture in the country.
In a short span of time after the start of their operation they proved that they are failure to protect the interest of their clients, to take banking benefits to the mass people, and ultimately, to serve the very purpose of their existence. Also, the long-standing default-culture is being aggravated due to the involvement of these banks in widespread anomalies.
Economists and bankers have rightly identified these banks as burden for the economy. They cannot serve any good to the economy as well as the country. The central bank has taken praiseworthy steps against many high-ranking officials of several of these newly established banks. This is a time-befitting step and there is no alternative to taking disciplinary action against those who are involved in banking sector irregularities.
It will be positive to take short, medium and long term administrative and legal reforms initiative to over come the crisis of the banking sector. The financial institute division has finalized 27 points recommendations to perform reforms, those will be placed for the approval of the Finance Minister. After this approval those related guidelines for implementation, revise and for realization instruction will be given to other banks and financial institutions including Bangladesh Bank. But economists and experts think that before the implementation of these recommendations, for banking sector formation of a commission by the Bangladesh bank or from the government side become necessary. It is not necessary to say, if the commission is formed they will review the recommendations to take necessary steps by taking into consideration implementable recommendations.
With the requirement of the time the banking sector is expanding. This sector should regain the confidence of the people. For this reason it is urgent to establish irregular and corruption free banking system. Unfortunately the fact is that, suitable, competent and honest people are not recruited in the banks. The owners and directors of most of the banks are under political shelter. Even the chairman and directors of the nationalized banks appointed under the political consideration. For this reason the control and supervision of the central bank become mostly week. They are giving birth to different types of scandals by avoiding the set rules and regulations of banks. With the cooperation of the dishonest bankers brought up cheating group captured huge amount of banks.
There is no way to express doubt about the fact that, the corruption of top personnel of banks captured the whole economy. The report on Bangladesh Development Update focused by the Dhaka office of the World Bank in 2016 was given emphasis on initiative to take some reforms activities to achieve higher growth. Though in that report advice was placed in favour of conforming of accountability in banking sector, but the tragedy is that, still the matter of accountability was not confirmed. We think, to overcome the remaining problems of the banking sector, after the formation of a commission if the steps are taken to bring required administrative and legal reforms that will be effective and fruitful. We hope the competent authority of the government will take the matter with proper attention and give priority to implement the reforms programmes in the banking sector for the overall benefit of our economy as a whole.
The writer is an economic analyst, author and columnist.
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