Why amendments to Bank Company Act fail to improve governance

The government has amended the Bank Company Act thrice over the past 10 years, but instead of improving corporate governance, these changes have exacerbated the default loan crisis and deteriorated governance in the banking sector. Each amendment has favoured bank directors, strengthening their families' control over the banks' boards while disregarding the interests of depositors.

While the country's private sector banks have been plagued by severe loan irregularities involving directors following the previous amendment to the Bank Company Act in 2018, the latest amendment further extends the tenure of board directors to 12 years from nine.

This trend of granting additional tenure to bank directors has been ongoing since 2013, leading to a deterioration in bank governance.

Influential directors in various private banks are exploiting the banks for personal gain, putting depositors' money at risk.

On 22 June this year, parliament passed the Bank Company Act (Amendment) Bill 2023, introducing two major changes to directors' tenure and allowing defaulters to obtain further loans, which were not part of the original draft prepared by the Bangladesh Bank.

The new amendment permits individuals or companies that are deemed unwilling defaulters or have valid reasons for defaulting payments to take further loans with prior permission from the Bangladesh Bank.

These two major changes to directors' tenure and loan provisions come at a time when the International Monetary Fund (IMF) has identified the high volume of default loans as a major risk to Bangladesh's banking sector.

As part of a $4.7 billion loan package, the IMF has given the condition of amending the Bank Company Act to align with international best practices.

Dr Ahsan H Mansur, executive director of the Policy Research Institute (PRI), who has had a long career with the IMF, noted that there is no specific definition of international standards for the composition of bank boards, but the best practice is to maximise the presence of institutional directors on boards and minimise individual owners' influence.

In Bangladesh, poor governance plagues banks' boards as directors exploit banks for personal gain. Most private banks are still controlled by first-generation businesspeople who invested substantial amounts to obtain licences and expect returns on their investments.

Ahsan H Mansur suggested that increasing the number of institutional investors on boards would improve governance since they would not have personal interests.

He cited Brac Bank as an example. It is owned by the non-governmental organisation Brac and has no individual owners on the board. This arrangement allows for the exercise of international best practices, ensuring that no board member personally benefits from the bank's profits, he observed.

In old Indian banks, institutional investors have representatives on the boards, Dr Mansur said, adding that in Bangladesh, however, the majority of directors in private banks are individual business people who seek to maintain control over the banks.

He believes that the government could have improved corporate governance by granting licences to professional groups or representatives of institutional investors instead of individual businesspeople.

The tendency of directors to hold their positions for extended periods has contributed to malpractices in banks and increased default loans, he observed.

In 2018, the directors' tenure was extended from six years to nine years, and the number of board members from a single family was increased from two to four, sparking significant criticism.

After the amendment, default loans in the banking sector increased by Tk37,700 crore, reaching a record high of Tk1.31 lakh crore in March this year.

Private banks account for 74% of the increased default loan amount, according to data from the central bank.

Default loans in private banks have risen by Tk27,749 crore since 2018, reaching Tk65,888 crore at the end of March this year, which was nearly 6% of total outstanding loans.

The government had removed the bar on directors' six-year tenure in the 2003 amendment of the Bank Company Act. However, in 2013, the provision was reinstated in line with the IMF's suggestion, allowing directors who were already on the board to continue for another six years. Directors' tenure is considered from the year of implementation of the amended Bank Company Act.

Five years after the bar was restored, the government extended the tenure to nine years in 2018, allowing directors to continue for another nine years. Finally, before the nine-year tenure yet to end, directors have been granted additional 12 years. Consequently, directors who were on the board before 2013 can hold their positions for 20 years until 2035.

While most banks in Bangladesh suffer from a lack of governance on the board, India's HDFC Bank has become the fourth largest bank in the world, reflecting strong depositor confidence.

HDFC Bank is led by a part-time chairman, and its board consists mostly of independent directors with extensive experience in public policy, administration, industry, and commercial banking.

The board of ICICI Bank, another leading private sector bank in India, also consists mostly of independent directors and is led by a part-time chairman. Of the 11 directors on the board, seven are independent directors, and two are executive directors.

The board structures of these two banks demonstrate why they are leading the market and becoming world leaders in the banking industry.