The Bangladesh Bank (BB) occasionally censures state-owned commercial banks (SoCBs) and asks them to 'manage' the situation that results in capital shortfall. But the banks appear to turn a deaf ear. Had such directive worked, the SOCBs would have been good banks long ago. But the fact is that the more the BB issues directives, the more the banks go backward as if they are determined not to perform. What has held them back from performing? The short answer is the nature of its ownership and inaction follows in terms of management from such ownership. The SoCBs performed well when no one used to measure performance. Those were days when there was no competitor from the private sector in commercial banking.
But when banking and finance were opened up to the private sector, the SoCBs started losing. At times, they did a little bit better when the government showed seriousness over their performances and when it appointed really capable CEOs and members of the management board. But what had been noticed was that it was not the capability of the CEOs or that of the board members that mattered most in getting good performance from these banks. What mattered most was the issue of honesty of the top functionaries. If the top men use the SoCBs as instruments of making money for themselves, then nobody on earth can fix up the financial health of these banks.
It is said corruption is running high in the SoCBs. When swindling reigns supreme, top functionaries themselves indulge in corruption. There is no dearth of good and honest people in society who could be appointed as CEOs in these banks or also nominated as members of the boards. But unfortunately, political governments brought too much of politics in the management of these banks. They looked for politically loyal persons for the top posts in the SoCBs and sometimes picked political activists who were morally too poor to be the members of the management boards.
The result was that there was no exercise of due diligence while sanctioning loans of almost any size. Sanction and disbursement of loans became the main functions of these banks but when the issue of recovery came up, it became a forgotten issue. Some of the SoCBs opened branches after branches without the BB's permission and without taking into consideration whether newly-opened branches would be profitable. Now they have more losing branches than profit-making ones.
The SoCBs over time over-extended themselves in the name of serving the people. Every time a new management was installed in the SOCBs, the new management wanted to do something new including opening of new branches. It was said by the top functionaries of the SoCBs that these banks were there for public service and not for making profit. When banks forgo its main function of making profit for the equity holders, here the government of Bangladesh solely, someone can imagine what these banks' destination would be. The government was also not serious about asking for profit from its equity holding in these SoCBs. As a result, with a few exceptional periods, these banks turned out to be loss-making financial institutions. When equity shortfall occurred, they asked for new equity from the government and strangely they got it easily. The SoCBs now firmly believe that the government of Bangladesh is there to fill up any shortfall in capital. So they became more carefree in running these banks.
The whole philosophy of having the SoCBs is founded on an idea of asking for not so much of profit against equity holding. When liberal window remains open for fresh equity supply, then these banks will only be too eager to sanction and disburse loan. The recovery of disbursed loan will remain secondary. There were many experiments made with regard to restructuring the managements of these banks including appointing CEOs on contractual basis and offering compensation packages to them on competitive basis. But the result did not come up to an expected level. Whatever improvements were made in the SoCBs in the past, those again got lost when a new political government came to power and did a new experiment with these banks.
The most objectionable part of the whole thing is diversion of tax-payers' money by the government to meet the SoCBs' shortfall in capital. In other countries, this type of fund supply would have been loudly protested by the members of parliament but in Bangladesh, this very important issue is being ignored. The SoCBs have turned out to be bottomless baskets. No matter how much fresh equity the government pumps into them, they will again lose money. The BB should be tougher on them; mere lecturing from time to time will not work. The BB in this case will have to apply its full power for the sake of public interest. Somebody's job in the SoCBs cannot be more important than upholding of public interest. How long will the BB wait to take more meaningful steps with regard to these banks? The more the BB will wait, the more financial bleeding will take place in these banks.
The writer is Professor of Economics University of Dhaka,
abuahmedecon@yahoo.com
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