No effective initiative to fix banking mess

Even the much-talked-about banking commission to reform the sector did not see the light of hope as Finance Minister AHM Mustafa Kamal left the issue for discussion.

The finance minister also did not come hard on bad loans – a major problem, stopping only at issuing a warning of “stern actions” against defaulters, but without specifying any measures.

“We have heard for long about establishing a bank commission for bringing discipline in the banking and financial sector. We will discuss with all concerned on this matter and do the needful,” said the minister in his budget speech for the next fiscal year.

In June last year, Kamal’s predecessor AMA Muhith announced that a bank commission will be formed within a month.

At that time, the Banking Division sent a proposal to the then finance minister, outlining the number of members of the planned commission, their names and functions. But there has been no progress since then.

Financial analysts have long been demanding that the government go for reforms to bring discipline in the banking sector.

The Centre for Policy Dialogue (CPD) – an independent think tank – has been continuously calling for a bank commission.

In 1996, the then Awami League-led government formed a five-member banking reform committee, which submitted its report in 1999.

Headed by Prof Wahiduddin Mahmud, the committee made 188 recommendations for the Bangladesh Bank, state-owned banks, and new private banks. But the recommendations were not implemented.

The finance minister’s warnings came at a time when defaulters were being awarded long-term rescheduling package offers.

For instance, instructed by the Finance Ministry, Bangladesh Bank in May issued an easy loan rescheduling policy allowing defaulters to regularise loans for 10 years at only 2 per cent down payment.

The move drew harsh criticism as it will intensify the ongoing liquidity crisis by putting the loans stuck for a long time. However, the policy was not ultimately executed due to a stay order in the High Court.

Days after taking charge of the Finance Ministry in January this year, Mustafa Kamal announced that default loans will not increase further, but it did not happen as default loans have risen by Tk17,000 crore in the first three months of this year.

The total default loans in the banking sector crossed Tk1 lakh crore in March.

The minister also touched upon the lending rate issue in the proposed budget, saying, “We have been working to bring down the interest rates of bank loans to single digit with a view to making our industries and businesses more competitive.”

However, he did not give a clear outline of how it will be done.

Single-digit interest rate is now a burning issue as the government’s interference in controlling interest rate worsened the liquidity crisis.

In April last year, the then finance minister Muhith announced a cut of cash reserve ratio (CRR) for banks to mitigate ongoing liquidity crisis and asked the banks to bring down interest rate to single digit.

Bankers enjoyed an additional money flow of around Tk20,000 crore in the banking system as a result of CRR reduction but they did not execute the single-digit interest rate.

In the proposed budget, the finance minister hinted of amending the Bank Company Act if required. However, he did not mention the need of the amendment.

“The Bank Company Act will be amended so that our bank management, all components of revenue management can function as usual without facing any conflict with other laws,” said Kamal in his budget speech.

“The Bank Company Act will be amended so that amalgamation, merger and absorption of banks can be legally processed if required.”

In January last year, the government amended Banking Companies (Amendment) Act 2017, allowing four family members in the board from two and increasing the directors’ tenure to nine years from six years.

The amendment also drew huge criticism from different quarters as it will increase family grip in the board.