Ignoring bank failures creates a 'zombie financial system': Economists

Ashikur Rahman, principal economist at the PRI, has said that non-performing loans (NPLs) are creating a severe liquidity crisis in the banking sector. Such high-risk exposures directly affect the stability of the foreign exchange market and further weaken overall economic conditions.

"We know that bank failures have two critical dimensions. One is insolvency, which can occur when a bank has high NPLs, chronic under-provisioning, evergreening or restructuring of loans, or faces macro shocks like FX depreciation or weak recovery enforcement. The other is liquidity problems, which happen when depositors lose confidence — something that almost occurred in August 2024, but we were somewhat able to prevent it," he said while speaking at a discussion on banking failures and resolutions, organised today (11 December) by the Policy Research Institute of Bangladesh (PRI) at a city hotel.

"In the past, we have seen that if you don't address bank failures, you create a zombie economy, you create zombie financial institutions, you create a credit branch, you create a stagnant economic space, right?" Ashikur continued.

"And that past experience of the Great Depression and all the financial crises that have followed, especially after 2008, has given birth to the idea of the resolution framework," he said.

"If we don't accept the trade-off, a Tk6.4 trillion NPL on our balance sheet will lead to a high-interest-rate economy. Banks will keep pressuring the central bank to print money, fueling high inflation, which in turn suppresses investment and slows economic growth," he said.

"We will be trapped in four negative cycles: high inflation, high interest rates, low investment, and low growth. That is the cost of ignoring the problem. I hope we do not let that happen," Ashikur Rahman added.

With a good strategy, Sammilito Islami Bank can be strong 

Mashrur Arefin, managing director of City Bank, said that Sammilito Islami Bank, which is being formed by merging five weak shariah-based banks, needs a comprehensive plan to rebuild public trust. If the bank's management moves in the right direction, customers will bring in new deposits, which in turn will help resolve the liquidity crisis. The upcoming political government will also have to play a vital role in all this. 

"If the government's intention and political will are there, proper actions are taken, then change will come," he said.

Mashrur Arefin also noted that banks have multiple fronts to generate income, including the foreign exchange market. He said banks are not solely dependent on lending, but operate on seven major earning pillars.

Foreign investors remain hesitant to invest amid high NPLs

Akhter Hossain, the chief economist of the central bank, said, "Foreign investors remain hesitant to invest due to high levels of non-performing loans, limited economic reforms, rising inflation, and policy uncertainty. The absence of a stable, long-term, elected government further adds to the challenges, creating a difficult economic trap, experts say."

"NPLs have created a serious problem for the banking sector. This is not a recent phenomenon but has been continuing for a long period of time. But it has now come to a stage where everybody is taking note of it, and it has affected the economy in a big way," he added.

Special Envoy to the Chief Adviser on international affairs Lutfey Siddiqi attended the event as the chief guest, while Zaidi Sattar, chairman of PRI, Ashikur Rahman, principal economist of PRI, Mohammad Akhter Hossain, chief economist of the central bank and Mohammad Zahir Hussain, executive director of the Bank Resolution Department of Bangladesh Bank, were also present.