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Banking in jeopardy

  • Published at 06:44 pm December 9th, 2017
  • Last updated at 10:00 am December 10th, 2017
Banking in jeopardy
Over the past few weeks, the media has drawn attention to the startling rise in the number and volume of non-performing loans within our banking sector, both public as well as private. At the end of September 2016, the figure of bad debt stood at Tk65,731 crore, but a year later this figure had increased to more than Tk80,307cr. In the last three months, the amount has increased by nearly Tk6,000cr. It may be added that until June 2017, the defaulted loan stood at Tk74,148cr. These details were based on information released by the Bangladesh Bank. The seriousness of the situation will be better understood when one realises that the total figure is more than 30% of Bangladesh’s 2017-18 budget and equivalent to about 13% of our Gross Domestic Product (GDP) at constant price. Bangladesh Bank data also show that six state-owned banks have the highest amount of default loans. By the beginning of October 2017, the total bad debt of Sonali, Janata, Agrani, Rupalo, Basic, and BDBL stood at Tk38,517cr. The Bangladesh Bank has also drawn attention to the fact that 23.79% of loans disbursed by specialised Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank have also turned into default loans. In September 2017, local private banks had default loans of Tk33,973cr or 5.97% of the total disbursed amount. This trend has also been true of foreign banks operating in Bangladesh. At the end of September 2017, their total bad debt amounted to Tk2,298cr or 7.89% of the disbursed amount of Tk29, 116cr. Things came to a head when reports indicated that Farmers Bank had failed twice to honour a cheque worth Tk35.44cr presented by Bangladesh Telecommunications Company Ltd. This surfaced soon after Bangladesh Bank forwarded a report in October 2017 to the Parliamentary Standing Committee on Finance that suggested that this bank did not have the capacity to pay back funds to depositors and also to other banks.
We must not forgeat that financial regulations are codified with certain important objectives
Farmers Bank had apparently failed to maintain the statutory liquidity ratio and cash reserve ratio as required under the Banking Company Act. In a desperate bid to attract funds, this bank is now apparently offering up to 12% interest to any institution or person wishing to deposit funds in this bank. As of September 2017, the bank’s weighted average interest on deposits was 8.79% in contrast to the industry average of 4.9%. The high interest rates have pushed up the bank’s cost of funds, which in turn has sent its lending rate upwards to about 14% in contrast to the industry average of 9.45%. These reports eventually persuaded Bangladesh Bank to agree to provide this bank a short-term loan amounting to Tk96cr by way of repo to meet instant liquidity demands. It may be recalled that the last time the instrument was used by the Bangladesh Bank was back in August 2016, when a bank took out a loan for Tk47.50cr. It may be mentioned here that in terms of generic basis lending through repo occurs on an overnight basis, but banks can renew the loan through mutual understanding. The situation in the troubled Farmers Bank appears to have evolved towards a new direction on November 27 with the resignation of its Chairman MK Alamgir and the stepping down of that bank’s audit committee chairman. One hopes that some of the financial problems will now be addressed with greater care by the Bangladesh Bank. Indicators suggest that the continued status of the non-performing loans (NPL) paradigm is indeed a cause for serious anxiety. In terms of percentage, Bangladesh Bank statistics state that since September 2016, it was 10.34 %. In December last year, it came down to 9.23%. It increased again and crossed the 10% barrier to 10.53% in March 2017. It reduced slightly to 10.13% in June 2017 before rising again to 10.67% in September 2017. Economists associated with banking have observed that the matrix of bad debts in this sector has continued to rise due to two critical factors associated with misgovernance. Most of these default loans are approved through misuse of socio-metric overlay (in public administration terms), political considerations, family connections, and director of one bank taking loan from another bank with the help of a director of another bank and vice versa. Perfect examples of such misuse and inappropriate governance of financial and banking institutions were identified in the unfortunate cases of Hallmark, Basic Bank, and the activities of the Bismillah Group. It is true that the past decade has seen efforts to improve the quantity and also the quality of banking services in Bangladesh. A broader spectrum of digitalisation has enabled us to expand our competitive banking sector and also our range of banking products across our urban and rural areas. Electronic banking has added to this dimension. However, despite efforts, complications are emerging along with such growth and diversification, and they need to be addressed. The difficulties are a growing incidence of NPL, and growing asset concentration among single borrowers. Bankers are now saying that these factors need to be understood against the requirements and norms underlined in the Basel rounds. This would apply particularly with regard to NPLs in private banks. There is also the significant question of “prudential instruments for portfolio management.” In this context, attention has been drawn to the need for selecting bank board members, particularly in the private banking sector, based on the “fit and proper test.” Consequently, on different occasions, decisions are taken not on “solid business evidence but on connections.” That adds to the risk and probability of NPLs. Consequently, at this critical juncture, the last thing one needs is the passing of the Banking Companies (Amendment) Act, 2017 with its controversial provisions of allowing four directors from a single family in a bank’s board and also extending the tenure of directors. We have seen, in this regard, examples of large Bangladeshi business houses creating serious mal-function through massive loans used for speculative commodity trading or in stock market shares or real estate transactions. Such large exposure creates a greater risk of NPL. It is such a potential scenario that requires a greater inter-active engagement on the part of Bangladesh Bank. This institution also needs to be given full autonomy and independence with regard to its regulatory responsibilities. We must not forget that financial regulations are codified with certain important objectives. That includes protecting depositors, investors, the general public, and the economic dynamics associated with trading in goods and also services. However, this will be only possible through transparency within the decision-making format. That will then ensure accountability and, to a great extent, help in the containing of NPLs. This process will also be taken forward by stopping the disclosure of misleading information and improving management norms as are done in the banking sectors in Switzerland and in Luxembourg. Following these factors will ensure better corporate governance within the banking sector. It will also reduce the possibility of the financial institutions suffering from non-performing loans and brighten the scope of foreign direct investment in Bangladesh. Muhammad Zamir is a former Ambassador is an analyst specialised in foreign affairs, right to information, and good governance. He can be reached at [email protected]
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