The Bangladesh Bank (BB), the country's central bank, has issued new directives to private banks on a host of issues. The instruction essentially calls on banks to stop 'overrated' lending, i.e. "commercial banks to heed the prompt corrective action (PCA) framework or face the risk of tough actions, as interbank borrowing overshoots interest corridors." It would appear that many financial institutions are ignoring BB directives, and that this has been going on for some time now.
What the latest regulations state is that either banks follow interest corridors set by the regulator or they run the risk of punitive actions. Actions that may extend to the suspension of opening branches, fresh lending, taking deposits, giving cash or stock dividends. In essence, these measures would mean a death sentence for an errant bank even if a few of those conditions are enforced. This ruling comes as part of the financial sector reform programme that economists have been harping on for years. Things have reached a boiling point.
The issue of course will depend on whether or not the central bank will be allowed to enforce this ruling. With powerful interests governing private sector banks, many of whom are people's representatives, the question will always linger as to whether this initiative will fall flat somewhere down the line. But what choice does the finance ministry have? There is a serious liquidity crisis prevailing in the banking sector. Questions have been raised as to why there are so many banks in operation in the first place. Why indeed banking rules have not been amended to reverse the disastrous decision taken a decade ago that allowed banks to become family businesses.
Of course, it would be too much to expect that things would change overnight. There is new management in the ministry of finance and the team over there must given some time to prove that it means business. According to a report published in this newspaper, "Bangladesh Bank (BB) governor Abdur Rouf Talukder issued the binding instructions to top executives of the country's scheduled banks at Wednesday's bankers' meet held at the BB headquarters." A lot of good advice has been given, especially one pertaining to bankers' heeding the regulatory body's advice to banks to keep interbank borrowing with the SLF (standing lending facility) rate of 9.50 per cent and keeping to the upper ceiling of the interest rate corridor (IRC). Reportedly, the BB will start implementing the new framework from March 31, 2025 so there is enough time for the financial sector to get its act together. It is interesting to note that the BB has pointed out that banks may face drastic actions like "mergers and acquisitions" in case of failure to comply. Extremely strong words coming out of the central bank and surprising too!
With regards to NPLs the regulator has opined that banks should make proper use of ADR (alternative dispute resolution) using competent legal experts. This hardly comes as a surprise. The court assigned for financial scams is hugely overburdened with cases and lacks requisite legal manpower to handle the grave situation. One would have thought that given the plight of the financial sector, the government would have done something at this end, but that hasn't happened. Since that hasn't happened, many will question whether this latest initiative is serious or not. Time will tell if ADR will make more headway where legal proceedings have not. Whatever may be the decision of the BB or the finance ministry, recovering NPL has to be the priority issue here. It is inconceivable to everyone that embezzlers are allowed to get away scot-free and the financial sector remains crippled.
It is January, 2024 and the framework comes into effect end of March, 2025. Ample time has been provided to banks to get their act together. NPL recovery is a must, it is non-negotiable. Billions have been siphoned off over the last decade or so and if policymakers want some semblance of normalcy to return to the sector, then this is where reforms must start. It is ironic that a bank defaulter has been screaming loud about bigger bank defaulters. Perhaps the gentleman's business operations are being hurt because he cannot open as many letters of credit (LC) as he used to keep his operations going. That is a prime example of how bad things have gotten in this country. The small fish are crying for bigger fish's blood. The smaller fry is just as guilty as the bigger fry. Unfortunately, when it comes to banks, they go after the smaller fry because it is easy to squeeze the living day lights out of small-time defaulters; whereas it takes a lot of guts to go after the high and mighty.
mansur.thefinancialexpress@gmail.com
Regulator getting tough on banks!
Syed Mansur Hashim | Published: February 02, 2024 19:39:00
Regulator getting tough on banks!
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