Finance Minister A H M Mustafa Kamal said the government would encourage banks to offer simple interest loans instead of compound interest ones from the next financial year (FY).
"Simple interest calculation will be applicable (in the case of bank loans). This will be announced in the next budget," the minister said on Monday.
He was talking to reporters after an exchange of views meeting with directors of the state-owned banks at the NEC conference room in the city.
There is no country in the world where loan interest is calculated on a compound rate, he said, adding, "They follow simple rate."
For long term financing, the minister announced that the bond market would be developed shortly.
Noting there is no bond market in the country, he said: "Had there been a bond market here we would have been able to arrange long term finance."
There are few countries in the world, where banks provide long-term loans by collecting short-term deposits, he said, adding this is happening in Bangladesh because of the absence of a bond market.
"The governor has assured me that from the next year we will be able to float long-term bonds in the market," he said.
The minister said good businessmen will be rewarded while the dishonest ones will be punished in accordance with the law.
Bankers who are involved in providing loans to dishonest people will also be made liable, he noted.
He admitted that there was a "slight mismanagement" in the banking sector, which is a long-time problem.
"That has reached a level we need to intervene to clean up. If we cannot make our balance sheet clean, on what basis will we make our future work plan?" he asked.
In this regard, he said, steps have been taken to conduct special audit in both government and private banks.
"We also need to identify who are good customers of our banks and who are dishonest. We will assist our good businessmen and will definitely recover money from bad businessmen using all kinds of legal arms we have," he added.
"We attained 7.86 per cent economic growth last fiscal year. No country could attain such a constant 7.0 per cent GDP growth for several years. If the banks are in bad position, we may not be able to attain that kind of growth," he said.
"What we have heard about banks-some are: error of calculation, error of omission, and there are some mismanagement (as well)," the minister said.
Mr Kamal praised businessmen for taking risks for employment generation, which is a prime need of the country.
But he said if any businessman gets into trouble, there is no way to address it.
"We don't have insolvency act which can help them get out of the problem. We also don't have asset management companies to help recover non-performing loans," he said.
The minister also emphasised enhancing insurance coverage in the country.
"In many countries, hundred per cent people are covered by life insurance. That is almost absent in Bangladesh," he said, adding "We need to enhance insurance coverage, including the crop insurance."
Mr Kamal also said the present number of banks is not enough to cater to the needs of 160 million people.
Mr Kamal said he will try to staff bank boards with people who "really know what banking is."
"The present practice of bringing in unemployed people by appointing them as bank director would not be followed," he noted.
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