Improving treasury management in state-owned enterprises

A recent newspaper report highlighted that three state-owned oil distribution companies—Jamuna Oil, Meghna Petroleum, and Padma Oil—have significant financial exposure of BDT 2,340 crore (approximately USD 200 million) in cash-strapped commercial banks.

This figure includes only the five banks scheduled for merger. If other financial institutions, both banks and non-bank financial institutions (NBFIs), facing similar stress are included, the total exposure is likely to be even higher.

A similar pattern emerges across other state-owned enterprises, including state-owned commercial banks. Ultimately, the state—and therefore taxpayers—risks losing thousands of crores through exposure to troubled banks.

Causes of the Problem

Understanding the root causes is essential. Three major factors are driving this situation:

Lack of transparency in bank financial statements

By concealing bad loans, the central bank has made it difficult for depositors to distinguish between strong and weak banks. While experienced professionals often knew which institutions were safe, the average depositor had little ability to assess risk.

The government should implement a unified treasury policy for all state-owned enterprises. Centralising this decision-making process would significantly reduce the risk of placing deposits in weak banks.

Poor understanding of risk

Some depositors prioritised institutions offering the highest returns without adequate consideration of risk, ignoring a core financial principle: returns must always be evaluated relative to risk.

Corruption and bribery

Kickbacks and bribes may also have played a role, potentially encouraging the placement of funds with weak banks.

Solutions to the Problem

Addressing these issues requires a clear, enforceable framework. Key steps include:

Ensuring full transparency in financial statements of banks and NBFIs

Financial statements must accurately reflect reality, including international best practices for recognising non-performing loans. Fair loan rescheduling policies should prevent banks from disguising bad loans. Bangladesh Bank is moving in this direction, and financial statements are expected to reflect reality within one to two years.

Ranking financial institutions

Banks and NBFIs should be classified into tiers, with Tier 1 representing the strongest institutions. The central bank could initially manage this ranking using parameters such as return on equity, capital adequacy ratio, and gross/net NPL ratios. Rankings should be updated biannually, creating incentives for institutions to strengthen their financial health to attract government deposits.

Adopting a unified treasury policy for all state-owned enterprises

A centralised treasury policy would reduce the risk of depositing funds in weak banks. Ideally, there should be separate policies for state-owned banks and for other state-owned enterprises.

Infograph: TBS

This policy provides broad guidelines. Each state-owned enterprise would apply the framework, along with bank rankings, to manage surplus funds and investment tenors according to liquidity needs. One enterprise may favour short-term treasury bills, while another may invest in longer-term treasury bonds.

Expected Outcomes

Proper implementation would address the underlying problem, reduce financial exposure to weak banks, and strengthen overall risk management. Moreover, state-owned enterprises could play a constructive role in developing Bangladesh's bond market, contributing to a stronger and more resilient financial system.

Asif Khan, CFA, is the Chairman of EDGE AMC Limited and President of CFA Society Bangladesh.