Critics doubt state-owned banks’ recovery plan

Critics are sceptic about whether the action plans submitted by the four state-owned banks for their health recovery will work and rather think it would be temporary in nature before things go back to worse.

In their turnaround plans submitted to the finance ministry last week, the state-owned banks – Sonali, Janata, Rupali and Agrani – have projected that the new rescheduling policy allowing lower down payment and longer time loan restructuring, if exercised, will help them halve their default loans in the next three years. They will also be able to raise their capital adequacy ratio above 10 percent.

Ahsan H Mansur, executive director, Policy Research Institute

State-owned banks can achieve something in three months in books only, but things will revert back to square one in three years.

The 2 and 9 percent scheme of rescheduling may help state-owned commercial banks reduce their default loans, which are roughly 35 percent of their total advances now, in books. They may be able to instantly show in their balance sheets a sharp reduction of their bad loan portfolio by Tk20,000 or Tk30,000 crore or even more. But in reality, the loans would remain problematic and the outstanding amounts in all likelihood will become non-performing within a short time.

If state-owned banks cannot recover the money they lend, nothing will help them. I do not feel these banks, under existing system of management and state of overall governance, will ever be able to do exactly what the banking business means.  Lending money with little or no care about getting those back has been the culture practiced in these banks for 40 years or more, and there is no sign of immediate change.  The whole system in the state-run banks has been plagued by corruption, mismanagement and lack of professionalism. As the Boards of these banks have for the most part been weak, lacked integrity and professionalism, the financial positions of these banks deteriorated over time without any sign of significant improvement till now. Since the government appoints the members of the boards, it is the responsibility of the government to appoint the Board of Directors with persons of integrity and professionalism to change the bad culture and set example.

International experience suggests that competent external management teams can be engaged to manage these banks and transform their state of affairs in sate-run banks. Management experts can be hired from Bangladeshi bankers with international experience at senior positions.
In our region. Pakistan saw success in improving the health of public sector banks by putting in place teams of experts in bank management from the USA and Middle East. External teams – bringing in international good practices – took over the management and streamlined overall operations. State-owned banks in Pakistan are now more efficient than they were till mid-1990s.

The government can also think over hiring external management for state-owned banks here. They can be hired from abroad, or can be pool of experienced bankers who served local banks with integrity. Bangladeshi bankers, who worked in reputed global financial institutions, can also be inducted in these teams.

However, such external management will not be able to do any good to the state-run banks if they are not free from undue interference by the board members and allowed to work professionally.

Action plans to make banks' balance sheets look good through mere window-dressing will not help state-owned banks to grow out of their current dismal state. If the government really wants the banks to implement their individual action plan, it should benchmark the plan, set time-bound targets and review the performance every three months.

The resolution of bad debts must be resolved independently, but not by resorting to ease regulatory provisions and rescheduling on excessively attractive terms.

Ahsan H Mansur, executive director of Policy Research Institute, on left, and Khondokar Ibrahim Khaled, former deputy governor of Bangladesh Bank

Khondokar Ibrahim Khaled, former deputy governor, Bangladesh Bank

The proposed 2 percent repayment for rescheduling loans may curb default loans only in papers, but not in reality. If the state-owned banks try to reduce default loans in this way, it will not be fruitful. This method is unethical too.

I fear that if no new loan is given, the loan defaulters will not even repay the 2 percent. The matter is still stuck in the High Court, though. If the court upholds the system of repaying old loans after taking new ones, no loan defaulters will go for rescheduling. This process is not good at all. It is one kind of reward for the bad people. That is why, this process is not going to work for long.

To get long-term benefits, the state should boycott the loan defaulters. China solved a similar problem in this way. The government of China barred loan defaulters from getting passports, air tickets etc. Then many businessmen repaid their loans and thus default loans in China came down.

The Bangladesh government should follow the path of China. The state should take a hard line. The loan defaulters should be punished. The banks should also be strict.

Now, the question is how loans get defaulted. There is a group in banks that manage loans for clients being influenced by different lobbies. On the other hand, there is another section who work for money. Powerful people manage to get big amount of loans in this way and later, they do not want to pay the loans back.

So, if the process of approving a loan is not transparent, the default loans cannot be reduced in the long run.

I think it will be more difficult for the state-owned banks to implement their future plan of action.