Harsh reforms must to reverse elite capture of Bangladeshi banks
A deliberate negligence and abuse of the banking sector has put the entire economy under extreme stress, and stringent reforms need to be taken immediately to come out of the situation, economists and bankers recently warned at a Focus Group Discussion hosted by The Business Standard
Bangladesh's banking sector is now in a fragile state, with NPLs rising abnormally, credit growth slowing, Islamic banks turning even worse, and distressed assets approaching Tk3.78 lakh crore.
A deliberate negligence and abuse of the banking sector has put the entire economy under extreme stress, and stringent reforms need to be taken immediately to come out of the situation, economists and bankers recently warned at a Focus Group Discussion hosted by The Business Standard on 10 December 2023, as part of a series celebrating the newspaper's fourth anniversary.
They also urged the government to establish a banking commission promptly after the election to formulate a comprehensive strategy for financial sector reform.
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Govt needs an objective strategy
Ahsan H Mansur, Executive Director, PRI
A deliberate negligence and abuse of policy everywhere including the banking sector, fiscal management, exchange market management, macroeconomic management, inflation control, dragged down the entire economy to a state that the government cannot survive for long with as usual business strategy.
The government must undertake a comprehensive financial sector reform, addressing the underlying political economy. This is essential to overcome pressure groups, ensure its own survival, and ultimately, salvage the economy.
No government can withstand an economic crisis. The government should learn from Sri Lanka's plight and take immediate action to restore the banking sector's stability.
Only by escaping the influence of pressure groups and adopting an objective strategy can the government ensure its own survival.
The controversial amendment to the Banking Company Act extended the tenure of bank directors from nine to 12 years. This change raises concerns about undue influence and potentially weakens corporate governance within the banking sector.
A Banking Commission should spearhead a comprehensive reform strategy for the sector. This commission should comprise experts both from within and outside the government, fostering open and transparent dialogue with stakeholders.
Additionally, the inclusion of international best practices and expertise would be invaluable, and the government's commitment to this initiative would serve its own long-term interests.
Political issues responsible for dire state of banking sector
Dr Debapriya Bhattacharya, Distinguished Fellow, CPD
Political issues are responsible for the dire state of the banking sector.
While last year I might have called the banking sector 'dysfunctional,' I now describe it as being in a 'very dismal state.' The deterioration is ongoing, and unfortunately, the issue has become politicised.
Many of us are hoping for positive change after elections. Unfortunately, I see very little opportunity for that. Powerful interest groups and individuals are hindering progress.
Without breaking the cycle of power play, we cannot realistically expect any new government, regardless of its constitutional mandate, to solve our problems immediately.
Another critical issue is the independence of the regulating body, particularly the central bank, which bears the primary responsibility for overseeing the financial sector's sound conduct. The Sri Lankan governor's recent remarks highlighted the importance of genuine, not merely paper-based, central bank independence. Ultimately, the regulator's independence hinges on the individual's mindset and their ability to uphold professional and technical autonomy.
That is why the Sri Lankan central bank governor received an A grade, we here in Bangladesh received a D grade [in the Global Finance ranking].
Just a year ago, Bangladesh and Sri Lanka were in similar positions. Yet, while Sri Lanka has shown signs of recovery, we have fallen further behind.
There are three primary reasons for Bangladesh's lagging performance: A weakening political commitment, the central bank's failure to implement corrective measures, and the detrimental influence of the political economy.
Recent amendments to the Banking Company Act favouring sponsor directors have eroded corporate governance within the private sector.
Strong corporate governance needed for discipline
Syed Mahbubur Rahman, managing director, Mutual Trust Bank
Ensuring strong corporate governance is crucial to discipline banking. We need to take action independent of political influence and hold all defaulters accountable, regardless of their status. Resolving the NPL problem is critical to improving the efficiency and stability of the banking sector.
The imposition of a lending rate cap and the lack of a market-driven exchange rate have had a significant negative impact on the economy.
Banks were against the lending rate cap imposed in 2020 as real industrial growth in Bangladesh occurred when the lending rate was higher. So interest cost is not very important for investment growth.
Another major challenge has been the foreign exchange rate, which has severely impacted our economy. Between 2011 and 2021, the taka depreciated only 14% from Tk75 to Tk85, while India saw a 75% depreciation in their currency during the same period.
We failed to adequately appreciate the significance of the exchange rate and mistakenly viewed the taka's limited depreciation as a badge of pride. This misplaced focus has ultimately crippled the banking sector.
Delaying the implementation of market-driven lending rates and exchange rates will prolong the economic woes.
While the central bank's recent policy rate hike is a welcome move, it comes at a time when the harm is done. Although better late than never, the increased liquidity costs for banks have led to a significant rise in treasury bills and bond rates. This has shifted banks' preference towards holding government bonds instead of lending.
Ensure robust and impartial implementation of law
M Arfan Ali, Chairman, Jaytoon Business Solution and Former Managing Director, Bank Asia
The main way to solve the crisis in the banking sector is to ensure robust and impartial implementation of the law.
However, around 70% of lawmakers in the parliament are businessmen. This concentration of political power within the business community creates a conflict of interest, hindering effective regulation and potentially hindering the fair enforcement of the law.
There needs to be increased insurance penetration in the financial sector. With a meagre 1% insurance coverage compared to India's 4%, Bangladesh has a vast potential to expand access to financial protection and security for its citizens, he said.
Bangladesh Bank's policy of regularly rescheduling classified loans needs a gradual phase-out.
This practice hinders the creation of new entrepreneurs as existing borrowers repeatedly get loans. Additionally, we must focus on increasing the tax-to-GDP ratio, which currently stands below 10% and needs to reach the 18-20% range.
Loan rescheduling to deal with NPLs should be stopped
Birupaksha Paul, Professor, State University of New York
The practice of loan rescheduling to address NPLs needs to be stopped. Borrowers, aware of the possibility of repayment extensions after defaulting, take loans with less intention to repay, leading to a stagnation of bank capital.
There is also a need for increased transparency within the Bangladesh Bank board arguing against closed-door meetings and advocating for greater media access to Board proceedings.
Additionally, the central bank board should eliminate the practice of selecting board members based on political expediency or personal connections. Instead of the usual practice, they should opt for a meritocratic and transparent selection process.
Policy inconsistency creates moral hazard. The governor announced a free-float exchange rate regime in the current monetary policy, but now he is saying that it is not possible to implement the policy. Such inconsistency in commitment and action creates chaos in the financial sector.
Robust bond and equity market essential
Dr Prashanta Kumar Banerjee, Professor, BIBM
A robust bond and equity market must complement banks, drawing inspiration from successful models in India and Malaysia. There is a need for long-term loans to be financed through equity and bonds, and this practice is currently absent in the country. Adopting this approach would reduce pressure on banks.
Improving the tax-GDP ratio would provide a secure avenue for government funding without foreign currency exposure. It's imperative to enhance the tax-GDP ratio, ensuring a safe and sustainable source of funds for the local government market, shielded from foreign currency risks.
Banks should shift their focus from large loans to small loans to support small businesses and promote economic development.
To enhance good governance in the banking sector, the central bank could create a pool of qualified independent directors. Commercial banks would then select directors for their boards from this pre-vetted pool.
