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Banks should court mergers and acquisitions for bailout

Banking largely being infested with irregularities, NPL swelling, ABB chairman tells FE

Mehdi Musharraf Bhuiyan | December 18, 2017 00:00:00

Anis A Khan — FE Photo

Banks in Bangladesh should go through mergers and acquisitions, which a leading banker believes will make the overall banking sector better and stronger through troubleshooting.

"I think merger and acquisition should take place in our banking arena," Mr. Anis A Khan, Chairman of the Association of Bankers, Bangladesh, said in an exclusive interview with The Financial Express last week.

The suggestion from the bankers' body chief himself came at a time when various problems with banking operations, like forgeries, suspicious lending and resultant ballooning of default loans, came to light in tandem.

The ABB chairman cited how banks abroad overcame the odds that had stemmed from a past financial flu. "Back during the Asian financial crisis of 1997, banks in Thailand and Malaysia went through an era of consolidation when a number of their banks went through merger and acquisition," he said.

"Similar thing should happen in our banking sector whereby banks which are not performing well should get merged with those who are doing better," insists Mr Khan, who is Managing Director and Chief Executive Officer of Mutual Trust Bank Limited.

The ABB chairman's observations came when the number of banks in the country has boomed to 57 while the government is reportedly planning to give permission to set up three more. Also, the ballooning of nonperforming loans has become a major concern for the banking sector as statistics from Bangladesh Bank show the NPLs

have far outstripped the credit growth in the last five years.

The volume of NPLs increased by more than 21 per cent between 2015 and 2016, the central bank found.

Mr. Khan, however, noted that there are several factors which led to such inflating of bad loans in the country.

After the political unrest of late 2013, Bangladesh Bank adopted a policy of large loan restructuring to help the businesses to rejuvenate. During that time, huge amounts of loans from a number of big companies were restructured, he recollected.

"Despite that restructuring, now we find that many of those big borrowers are not able to repay those loans. As a result, banks now have to go through loan loss provisioning for those restructured loans," the leading banker said to explain the predicament of the banking sector.

In addition, he noted, there are some business areas which indeed have gone through tough times. Many businesses have earlier struggled due to lack of gas and electricity.

"There are some businesses which have over-diversified themselves. There are also some entities which have taken loan in one sector but have spent them in some other sectors. Meanwhile, there are also some who have taken short-term loans but have spent them in long- term schemes."

And all these factors together have contributed to the inflating of bad loans in the country, he said.

To tackle such a lumped-up situation, the veteran banker, however, emphasized strong leadership, skilled manpower and strong credit monitoring from the side of the banks.

"We need strong leaders and skilled manpower," Mr. Khan said. "We need skilled, efficient people who understand credit, analyze credit and monitor credit."

They, he added, also need to understand the man behind the credit and the succession plan of the borrowing entities. "In today's world, it is also critical to understanding the issue of product obsolescence."

Mr. Khan, who, prior to joining MTBL, had headed country's leading non-banking financial institution IDLC for six years, also believes that corporate governance is an area within the banking scenario of the country which needs further improvement.

"The directors of the banks should not exert too much influence on the senior management of the banks. They should trust the CEOs and the senior management," he said.

He further noted that despite their poor business performance and increasing capital shortfalls, the state-owned banks are continuously getting recapitalised by the government with public money.

According to a recent report by the Centre for Policy Dialogue (CPD), around Tk 137.05 billion has been injected as recapitalisation funds into the state-owned banks from FY2009-10 to FY2016-17. Meanwhile, the latest budget has allocated Tk 20 billion for recapitalisation during 2017-18 fiscal.

However, the ABB chairman opined that such feeding of the state-owned banks with public money should not go on. "Rather these state-owned banks should get merged. This would make the capital base of those banks stronger while decreasing their dependency on the state exchequer," he said.

Recent months have seen continued depreciation of the local currency, taka, against the US dollar. The interbank exchange rate of the dollar reached Tk 82.60 last Thursday, up from Tk 78.50 a year before.

Reflecting on this one of the macroeconomic factors, Mr. Khan called for introducing 'Managed Floating' exchange-rate system in the country.

Managed Floating regime is a system in which exchange rates fluctuate day to day, but central banks attempt to influence their countries' exchange rates by buying and selling currencies.

"Similarly, Taka should be allowed to float on a daily basis. This may result in the fluctuation in the exchange rate of the local currency ranging from two to four takas. However, if it fluctuates even more, only then the central bank must intervene."

Entrepreneurs in the country had long been demanding cuts in lending rates. The MTBL Managing Director, however, observed that further rate reduction is not feasible.

The lending rate, which once ranged from 15 to 19 per cent, has already come down to a range between 8 to 13 per cent, the banker mentioned.

"In recent times, we are witnessing credit growth and rising cost of funds. The amount of non-performing loans has also increased a lot. The coming times are likely to see increased government borrowing from banks and rising rate on deposits. In this context, further reduction in lending rates is not viable," he concluded.

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