Some tough tasks on the plate for Bangladesh Bank!

The Bangladesh Bank has got a lot on its plate. Though these have been incorporated in the International Monetary Fund's to-do list for Bangladesh, they also appear in the reform measures pledged in the official document prepared for the loan package.

And none of the pledges--elaborated on the Memorandum of Economic and Financial Policies attached with the letter to the IMF asking for the balance of payment support, is beyond the central bank's mandate. The Bangladesh Bank Order, 1972 has assigned the central bank with the job to regulate, supervise and safeguard banking companies and financial institutions to develop a robust financial system.

"We shall provide precise prudential regulatory, risk management and disclosure framework to protect solvency and liquidity of individual institutions and stability of the overall financial system," says its vision on its website.

But lack of independence, poor oversight and weak enforcement of regulation over the years have made things worse in the financial system, providing an uphill battle for it. Even if the bad loan--the most pressing issue in the banking sector-- is taken alone to deal with, it will call for the role like that of the 'Incredible Hulk' in the CBS serial of the '80s to accomplish.

To deliver on the pledges it made to IMF to have full access to $4.7billion loans,  the central bank will have to launch a crusade to reduce average NPL ratios to below 10% for state-owned banks from 23% now and to 5% for private banks from 6.2% now.  

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It will have to develop strategies as pledged and execute those vigorously if it really wants to do it, without taking the short-cut of loan write-offs to make bank books look good.

Banks now shoulder a burden of about Tk1.34 lakh crore in default loans. Analysts however believe the amount would have been bigger if generous loan moratorium and relaxed rescheduling schemes were not there during the last couple of years of covid-recovery.    

In the memorandum, co-signed by Finance MInister AHM Mustafa kamal and BB governor Abdur Rouf Talukder, it has been stated that a holistic and time bound non-performing loan (NPL) resolution strategy would help address bank balance sheet weaknesses. Identifying distressed assets, aligning loan classification with international best practices.

Restarting reporting banks' rescheduled loans in the annual financial stability report along with NPLs by June 2023, fully adopting the Basel III standards for measurement of banks' financial statement, adoption of the International Financial Reporting Standard 9 (IFRS 9) are among the pledges.

"BB has committed to develop bank-specific NPL resolution and capital restoration strategies and establish effective monitoring and enforcement framework to oversee concrete actions adopted by banks," reads the memorandum.

All these are good pledges to build a well-regulated financial sector for the future.

But what about the past scams that rattled the banking sector for the last one decade or so? How big will the task be to heal the wounds of biggest scams of Bangladesh's banking history? To name a few--Hallmark scams involving largest state-lender Sonali Bank, massive loan thefts in state-owned Basic Bank and private sector lender Farmers Bank.

While state-owned banks' vaults were often refilled by the public exchequer, roughly Tk20,000 crore, private banks struggled to repair their damaged balance sheets.

When massive loan scams of Basic Bank involving roughly Tk4,500 crore were revealed, the then finance minister Abul Maal Abdul Muhit had pointed to the bank's former chairman Abdul Hye Bachchu for the bank "robbery".  The issue was also discussed in the parliament. But, things fizzled out later on.

In an exclusive interview with The Business Standard in 2019, Muhith termed the former Basic Bank chairman as "an incredibly evil person who destroyed a good bank."

"But he could not be punished because of a strong culture of impunity," he had said, without elaborating on the reasons for the inaction.

Muhith said he conceded to political pressure while giving license to more banks.

One such bank was Farmers Bank, later renamed Padma Bank.

There was no need to rename it Padma Bank, instead it should have been merged with another bank, he had said in the interview.

Decisions in the banking sector are also influenced in other ways as well.

The decision to cap interest rates was taken in an informal meeting which was put into force ignoring outcry. The rate cap still remains.

An association of foreign exchange dealers took the lead in setting various exchange rates for dollars which still remains in practice defying criticism.

"The private banking sector is controlled by businessmen and bankers. The Bangladesh Bank cannot take proper decisions due to the pressure from different platforms of private banks and chambers of businessmen," says Dr Salehuddin Ahmed, a former governor of Bangladesh Bank.

"On the other hand, the government controlled state-owned banks do not follow the directives of Bangladesh Bank properly. In this respect, the central bank does not have much to do," he told The Business Standard, revealing the limitation of the banking regulator that leads the banking sector from bad to worse.

Referring to similar recommendations given by the IMF back in 2012 to cut default loans and strengthen supervision, he said the government and the Bangladesh Bank did not implement them on various excuses.

This time, the conditions of the IMF must be fulfilled to sustain the financial sector.

But there must be political will, he felt. The government policymakers must have a positive attitude towards implementing the reforms.

"The government policymakers must have a positive attitude towards implementing the reforms. Otherwise, banks' money will be taken away with various excuses," he stresses.

At the same time, honesty, dedication and efficiency of the institution -- both in regards to the central bank and commercial banks -- also matter greatly if the reform pledges are to be implemented in true sense.

In an investigation into loan scams in a number of non-bank financial institutions, the central bank found failures in its own oversight.  

The financial sector regulator needs to set its home right to accomplish its uphill tasks lying ahead, going beyond the trend to put all the blame on external factors.

When unveiling monetary policy last month, it highlighted how the Russia-Ukraine war, US Federal Reserve policy and global price volatility made its task difficult. It tends to ignore internal factors that make things even worse, as often pointed out by economists and analysts.

Since the reform measures incorporated in the memorandum were agreed upon both by the government and the IMF, and the letter was co-signed by the finance minister, it seems political will is there. Now, it remains to be seen how effectively this political will works in carrying out the reforms as fast as pledged. Things rest with the efficiency of the central bank as it will have to carry out most of the tasks.