Cenbank to review 'fit and proper test' for existing bank directors: Governor

• Form committees to propose process for appointing directors
• Recovering assets from troubled banks could take 5-10 years
• Fixing capital shortfalls may take 3-5 years even with systemic capital injections
• BB will provide forbearance to banks if default loans rise to 30%-40%
• Policy rates would not be reduced until inflation is under control
• Not willing to compromise to get IMF money

The central bank will review the "fit and proper test" for existing bank board directors, and those who are not genuine owners of their respective banks will be removed, Bangladesh Bank Governor Ahsan H Mansur has said.

"We don't want just anyone to become a director. A housewife should not be placed on the board without meeting the proper qualifications," said the governor at a roundtable organised by The Business Standard at its office yesterday.

The roundtable, titled "Path to Recovery for the Banking Sector", was attended by economists, top executives, and chairpersons of 11 banks, who discussed the existing challenges and the way forward for the sector.

During the meeting, the governor suggested that banks form a committee to propose a structured process for appointing directors, citing that other countries have clear definitions for bank ownership.

The "fit and proper test" is an evaluation process that includes background checks on whether previous activities, including  regulatory  or  judicial  judgments,  or profession,  raise  doubts concerning their competence, sound judgment, or integrity, according to "Guidelines to establish a banking company in Bangladesh" of the Bangladesh Bank.

Meanwhile, regarding independent directors, the governor said the process of creating a panel for this has begun. "Once formed, we may circulate it for review and expert suggestions. We aim to appoint directors from this panel, but will consider exceptionally qualified individuals outside it if recommended by the bank."

He also announced that the Bangladesh Bank will establish a "regulation simplicity task force" to streamline banking operations.

Massive reformation plan for Bangladesh Bank

Mansur outlined a massive reformation plan of the Bangladesh Bank, including a fully paperless data submission system, strengthened loan documentation, central bank modernisation, and the finalisation of a bank resolution framework by July to facilitate mergers and acquisitions.

"We cannot complete all the reforms, but we will lay the foundation for a solid banking sector. The next elected government will take it forward," he added.

Asset recovery

Speaking on asset recovery, Governor Mansur said, "The best we can expect is to secure attachment of some properties at home and abroad, but repatriation will take years. However, we should not give up, as Malaysia and Nigeria have successfully recovered their assets. We hope the political leadership will continue the process."

He noted that the recovery of troubled banks could take five to ten years, regardless of the resolution strategy adopted, citing the cases of Eastern Bank and City Bank.

The governor said the financial position is now strong as foreign savings have increased, turning the current account balance into a surplus. However, he raised concerns over low savings in both the private and government sectors due to negative returns in terms of real interest rates.

He stated that he would not reduce the policy rate under pressure from the business community until the real interest rate becomes positive.

Banks must focus on mobilising deposits

He suggested that banks emphasise mobilising deposits to increase savings for resolving default loans and instructed bankers not to compromise on quality when revealing the true picture of default loans.

"The central bank will provide forbearance support to banks if default loans rise to 30%-40%," he mentioned.

Audit firms come under fire

Additionally, he raised concerns about audit firms, stating, "Something needs to be done about audit firms as they have committed serious crimes. I will sit with them, and in future, they will face immediate sanctions if they repeat such offences."

Concerns raised by bankers and economists

Bankers at the roundtable urged the governor to take action against rating agencies that had assigned high ratings to vulnerable banks, concealing their actual financial condition.

BRAC Bank MD Selim RF Hussain said loan classification should align fully with international standards, even if it leads to a rise in non-performing loans.

He also noted that banks have been onboarding low-value accounts via E-KYC (electronically know your customer) with the National ID for the past two years, but the Election Commission is now attempting to shut it down.

In response, the governor said NID is a national asset, no longer solely the EC's and it should be accessible to the appropriate authorities with proper safeguards.

"It should not be controlled by any single entity or fall under the Ministry of Home Affairs, as it is not a security instrument. All relevant agencies must have access while ensuring integrity and safeguards," Mansur added.

Ali Reza Iftekhar, managing director of Eastern Bank, suggested that the "fit and proper test" should also be applied to bank MDs.

He also said many banks are facing a shortage of capital and provisions, suggesting the central bank should refrain from offering forbearance to these banks.

In this regard, the governor said capital shortfalls will take 3-5 years to address. "Even with systemic government capital injections, it will take time. These issues will be closely monitored, and new boards in various banks will be held accountable for overcoming them."

Mashrur Arefin, managing director of City Bank, raised concerns with the governor, stating that businesses are waiting for elections to invest, and banks have excess liquidity but limited credit growth. Additionally, treasury bills and bond rates have dropped.

The governor responded that their goal is to reduce inflation and interest rates. "As bill and bond rates decrease, other rates will follow. I want the policy rate to be positive in real terms to control inflation. Look at the EU, US, and India - all maintain significantly positive real-term policy rates."

The governor asked bankers why deposits are not increasing despite higher interest rates.

At this point, Bank Asia MD Sohail RK Hussain asked if the deposit insurance coverage could be increased. The governor replied, "We have increased the coverage from Tk1 lakh to Tk2 lakh."

The governor also noted, "We've already sent the Bank Resolution Act to the government and are now working on the resolution guidelines."

"Won't compromise with IMF"

Regarding IMF loans, Governor Mansur said "I don't need IMF money. While we have some issues with the IMF, I'm not willing to compromise. Our financial position is strong; the only challenge is the budget deficit, which can be solved through better revenue collection."