Cleaning banking sector's Augean stables

FE Team | Published: February 02, 2024 19:36:24

When plagued by indiscipline, mismanagement, unethical practices including outright plundering of deposit money from banks the banking sector has suffered erosion of public trust in it, its regulator, the Bangladesh Bank (BB), seems to have put its foot down to rescue it from the quagmire. Notably, in order to identify and take early measures aimed at preventing the troubled banks from deteriorating further so far as their financial and operational conditions are concerned, the BB, in line with the Bank Company (amendment) Act, 2023, came up with the so-called Prompt Corrective Action (PCA) framework in early December last year (2023). Set to come into effect by the end of March next year (2025), the corrective actions for problem-ridden banks, as prescribed in the PCA framework of the BB, would be based on a set of selected parameters/indicators.
But what happens when the ailing banks fail to improve their financial health despite adoption of the recovery measures under PCA framework? Merger would be the recipe for underperforming banks. The BB governor during a meeting with the managing directors of different banks on Wednesday expressed his strong commitment to carrying out reforms in the banking sector. Noting that more than one third of the banks are performing poorly, he gave a strong hint that those could be the candidates for merger with other banks.
Merger of banks takes place when the assets, liabilities and operations of two or more banks are consolidated to form a single entity. It can lead to the creation of a new, larger bank or acquisition of an underperforming bank by an existing stronger one. In the exercise of the amended Bank Company Act 2023, the central bank has empowered itself to effect forced merger of a bank if its management or board of directors are found to have been involved in activities that go against the depositors' interest. This is in addition to the remedial measures the banking regulator can take against poorly performing banks including imposition of restriction on receiving fresh deposits from clients, provision of loans and opening of new bank branches. On this score, the executive director of the central bank, as reported, further informed that the banking regulator had provided a new time frame for underperforming banks to address their financial lacunae. With a renewed emphasis on the banking sector reform, the central bank, as a further positive move, likes to direct its attention to reducing the nonperforming loans in the banking sector.
Now that the relevant regulator has acquired the ability and the required tools as well as demonstrated the willingness to firmly deal with the troubled banking sector, let the problems of underperforming banks be addressed as appropriately as they deserve. The sooner order and discipline can be restored in the banking sector the better for the country's overall finance. Equipped with an instrument in the form of the Prompt Corrective Action (PCA) to tag banks with various categories according to their financial health and state of governance is no doubt a positive move. But the point is to act before it is too late.