Large depositors in troubled banks to be offered shares, bonds: Salehuddin

In a decisive move to overhaul the struggling banking sector, large depositors in financially weak banks will be offered a stark choice: shares in the respective banks or treasury bonds, instead of the full return of their deposited funds. This significant reform, however, will not affect small depositors, who are guaranteed to receive their money back.

Finance Adviser Dr Salehuddin Ahmed revealed these plans in an exclusive interview with The Business Standard at his office yesterday, underscoring the urgency of these reforms.

"We are rushing to enact the Bank Resolution Ordinance and to restructure the NBR because once a political government comes, these reforms won't happen," Salehuddin stated emphatically.

Drawing attention to the swift progress in assessing the situation of vulnerable financial institutions, he added, "Data on distressed assets and funds of six weak banks have already been compiled. We will reform the banking sector by December. At that point, large depositors will be given two options, and we'll clarify who will get full refunds and who will receive shares against their deposits."

Addressing the potential reluctance of large depositors, the Finance Adviser clarified the limited options available. "Those who have large sums deposited won't get all the money at once. They will be told to either accept bank shares or take treasury bonds. One of the two options must be chosen."

In contrast, small depositors will be protected and receive their funds through a dedicated fund managed independently by Bangladesh Bank, with the ministry playing a consultative role only. "They will only consult with us. Bangladesh Bank has already calculated how many billions of dollars will be needed for this banking reform," Salehuddin confirmed.

Infographic: TBS

Unwavering stance on NBR restructuring

Despite ongoing protests from National Board of Revenue (NBR) officials against the proposed division and secretary appointment, the Finance Adviser made it unequivocally clear that there would be no compromise on the restructuring.

"There's a strike and protest at NBR. But we won't compromise. In 2008, NBR officials also tried to resist reform. Customs officials then blocked automation. Had we separated automation and management back then, the revenue situation would be much better today," Salehuddin asserted, projecting the completion of the full restructure by December. He noted that while the organogram might take slightly longer, the policy division would be streamlined.

Dismissing the NBR officials' demand for a legal guarantee that the secretary must be from their cadre, he explained, "During vetting, the law ministry said the draft wouldn't pass if cadre specificity was included for the secretary post. In practice, most NBR secretaries have come from the admin cadre. How many NBR secretaries have actually come from customs, VAT or income tax cadres?"

"NBR officials are demanding both secretaries be from their cadre. That's not feasible," the Finance Adviser concluded on the matter.

Relief for consumers: No hike in utility prices or new tax burden

In a welcome announcement for the public, Salehuddin confirmed that gas and electricity prices would not be increased in the upcoming fiscal year.

"I've already told the energy adviser that prices have gone up enough. Now reduce system loss and wastage to control subsidies. I'll cover any remaining subsidies, but don't push extra costs onto the public," he assured.

Furthermore, he guaranteed that ordinary taxpayers would not face any new tax burdens to meet IMF loan conditions aimed at raising the tax-GDP ratio.

"Much of the money due from customs, income tax, and VAT never reaches the state's exchequer – it ends up in private pockets. If we can bring all of that into the exchequer, taxes on citizens can go down, and we can reduce electricity and water prices," he explained, highlighting the significant revenue leakage.

Salehuddin cited a stark example of corruption: "Just a few days ago, a commissioner took a Tk60 crore bribe and settled a Tk100 crore tax for just Tk10 crore. The NBR Chairman caught him. I told the Chairman to suspend him and hand him over to the police. There are many such corruption cases in taxation."

No change in tax-free threshold or amnesty for black money

Maintaining the current tax policy, the Finance Adviser announced that the tax-free income threshold would remain at Tk3.5 lakh in the next budget. "Around 75% of all filed returns pay zero tax. If we raise the limit further, 80% will pay zero. So, there's no plan to increase the threshold," he reasoned.

In a firm stance against illicit financial activities, Salehuddin declared that there would be no provision for legalising black money in any sector in the next fiscal year.

"I won't give anyone undue benefits," he asserted. "Instead, I'm trying to raise the official land value (mouza rate) and lower the tax rate. For example, in Gulshan, the official rate is Tk15 lakh per katha, while actual prices are Tk5 crore. This means sellers end up becoming black money holders. Many fall into trouble because of this. So, I'll raise land values and cut taxes. That way, everyone's money becomes legal, and the government earns the same revenue."

Addressing capital market concerns and BSEC leadership

Acknowledging the volatility in the capital market, Salehuddin expressed his concern, defending the current BSEC Chairman. "Poor Maksud is a very good banker, one of the best… he worked for Citibank, NA. Now, many people want me removed along with him because I split the NBR."

Responding to speculation about the BSEC Chairman's potential resignation, Salehuddin questioned the alternatives. "Yes, if you remove him, who would you bring in? Someone like Shibli Rubaiyat, who handed over Tk3,000 crore to Salman F Rahman through ICB? He took all the money from Sukuk bonds and extracted thousands of crores from the capital market in various ways."

Looking ahead, Salehuddin affirmed the government's commitment to fostering a fairer business environment. "The upcoming budget will ensure a more open and fair playing field for business. Right now, a single person can own a bank, an industry, a university, and also be an MP. We want to end this trend. If business is spread more widely, ordinary people will also benefit."

He stressed a conditional prioritisation of the private sector. "Private sector will be prioritised, but with conditions. A fair playing field must be ensured, which hasn't happened before. Previously, only influential people benefited while good businesses were left behind. I've asked NBR to facilitate trade instead of imposing extra taxes and to remove business barriers."

Expressing alarm over the insurance sector, Salehuddin revealed, "Some companies have embezzled people's money. Their directors follow no rules. I've already discussed this with the IDRA Chairman. We'll take steps soon."

Increased focus on social sectors and addressing protests

Salehuddin outlined plans for greater investment in human capital. "Next year's budget will increase allocations for education, health, and social safety, though not significantly compared to other countries."

He acknowledged existing challenges within these sectors. "Many complications remain, like pensions in primary and secondary schools. We'll resolve them this time. In the health sector, equipment is purchased and left to rot, and there aren't enough doctors. We're trying to fix that."

Demonstrating a commitment to healthcare professionals, he announced, "We've decided to promote 3,000 doctors to supernumerary positions. Regardless of the added costs, promotions will encourage and honour them. Both operational and development budgets in health and education will be increased."

Reflecting on the impact of public demonstrations, Salehuddin stated, "The adviser said that various groups blocking roads and protesting over demands is hurting business and investment and has become a serious issue for the government."

He admitted a strategic misstep in the initial response to these protests. "In the beginning, we should have made it clear we wouldn't accept any demands – only carry out reforms. But we didn't do that," he said. "Since this government took over, one group after another has been protesting with both reasonable and unreasonable demands," he added.

Support for SMEs and continued austerity measures

In a move to bolster small and medium-sized enterprises, Salehuddin announced, "The adviser said Bangladesh Bank will create a separate fund for financing the SME sector. 'I've instructed Bangladesh Bank that from this fund, banks will receive financing at 5%, and they will lend to small and medium entrepreneurs at 10% interest.'"

He also reiterated the government's commitment to fiscal prudence. "The adviser said austerity measures will continue in the new fiscal year. 'We are still practising austerity. In the upcoming fiscal year, we will avoid all unnecessary expenses. Over the past eight months, we have stopped purchasing vehicles, organising events, and even reduced foreign travel. We will continue these measures.'"

Inflation Control: The foremost challenge

Identifying the primary economic hurdle, Salehuddin identified inflation control as the government's biggest challenge and said, "We are hopeful that we can bring it down to 6.5% in the next fiscal year. By December, it will come down to 7.5%-8%. To control inflation, the supply side must be stabilised."

He further elaborated on the factors driving inflation, particularly the role of intermediaries. "Those who produce don't get the price they deserve. Middlemen dominate the market. Eggplant in Bogura is sold at Tk10, but it's Tk 60 in Dhaka. A dozen bananas cost Tk12 in rural areas, but here we pay Tk100. Some middlemen are necessary, but some are extortionists – stopping trucks and demanding money. That's not an economic issue – it's a law and order issue."