Reforming state banks' governance

The state-owned commercial banks have long been on life support, grappling with unacceptably high ratio of non-performing loans (NPLs) and massive capital shortfalls, forcing the government to repeatedly inject significant amounts of taxpayers' money to recapitalise those. Reportedly, the government has recapitalised these banks in 13 of the past 15 years; and yet, the condition of these banks has not improved, rather deteriorated. The latest Bangladesh Bank report reveals that the aggregated NPLs of six state-owned banks reached Tk1.46 trillion as of March this year, with their NPL ratio soaring to 45.79 per cent of total loans disbursed. This high level of NPLs in state banks is largely due to weak governance, politically influenced lending and various irregularities, and willful loan defaulting culture nurtured during the previous regime. Recapitalisation without addressing the deep-seated governance failures in these banks has been nothing but a colossal waste of state resource.

Now, in a bid to rectify the past misrule, the interim government is reportedly preparing strict criteria for appointing chairmen and directors of state-owned banks. To limit bureaucratic control over public banks, the draft guidelines stipulate that no top bureaucrat can serve as chairman or director of public-sector commercial banks and financial institutions. The move is welcome given that political cronies of the Hasina regime siphoned off huge amount of funds from these banks exploiting both the Financial Institutions Division and the banking regulator. By appointing subservient bureaucrats to banks' boards and even at the helm of the central bank, the past regime had exerted undue pressure on the banking system. In numerous cases, these politically appointed MDs or board members were found exerting undue pressure to approve loans based on political considerations rather than professional judgment. Insulating the regulatory process from political influence is, therefore, indispensable for the long-term stability and credibility of state banks.

The new guidelines stipulate that among the directors, a chartered or cost management accountant, a lawyer, and a skilled banker must be included. After appointment, their continuation would depend on their annual performance reports, reviewed by the board chairman. A government selection committee would be formed to appoint chairmen and directors at nationalised commercial banks, financial institutions, and private-sector banks where the government holds shares. The chairman would review the directors' annual performance and submit a report to a higher authority. Similarly, the chairman's performance would also be reviewed by a higher authority comprising officials at ministerial, advisor, and secretary levels. Specific eligibility criteria would be set for board directors, including minimum educational qualifications, banking or financial sector experience and other requirements.

However, this step only partially meets the objective of limiting bureaucratic control over public banks and financial institutions. The central bank, as in the case of private banks, should exercise greater control. Its government must also ensure the independence of the central bank so that it can enforce accountability, transparency and good governance across the banking sector, free from political and bureaucratic interference. Ensuring good governance will not only help prevent the recurrence of mismanagement and politically motivated lending but also restore confidence among depositors.