Curbing financial frauds and political interference in SoBs

Bangladesh's financial sector has been plagued with mismanagement, inefficiency, frauds and forgeries that require reform measures to be undertaken from time to time. The worst performing segment of the financial sector has been the state owned banks (SoBs) viz., Sonali, Agrani, Janata and Rupali. Besides these, some other specialised financial institutions such as Bangladesh Development Bank Limited (BDBL), Krishi (agricultural bank), Kormosongsthan bank (employment bank) and the BASIC Bank are also government controlled banks. As for the privately owned banks, their total number currently stands at 39 having more than 6000 branches across the country. A majority of these are loss making branches that have been opened on socio-political considerations without proper feasibility study.
The losses incurred by banks on account of financial indiscipline leading to fraudulent activities backed by political patronage and lack of monitoring have caused a serious erosion in public confidence on the SoBs. The most notable of banking scams is the classic Hallmark case that involved a sum of Tk 40,000 million of depositors' funds. There are several reasons involving large sums of public funds that have been lost due to unholy alliance between unscrupulous bankers and clients that have manipulated and used political influence to siphon off large sums of money, creating bad debts. This has caused a major problem of capital inadequacy and the government has to pump in TK 40,000 million to improve and meet the capital adequacy requirements of the SoBs. Government borrowings from the SoBs, central bank and the PCBs (Private Commercial Banks) to support the budget deficit have created a situation leaving insufficient funds for private sector business. Budget target for FY-2014 for borrowing has been fixed for TK 339.64 billion of which Tk 251.93 billion will be from banks and Tk 79.71 billion from non-bank sources.
Since 2009, overall performance of the banking sector has not been satisfactory. Non-performing loans (NPLs) in SoBs have increased significantly. Financial malpractices, scams, returns on assets and returns on equity have significantly declined with the Bismillah Group and the Hallmark Group leading the bandwagon of most corrupt business houses with large scale embezzlement of funds from the SoBs.
The central bank has followed a policy to restrict credit to unproductive sectors to contain the double digit inflation rate to single. Credit flow in 2011 grew by 24.36 per cent for the private sector and 39.87 per cent for the public sector. However in 2012, credit to private and public sectors declined to 19.72 per cent and 25.43 per cent respective. This has been a negative impact on the investment and GDP growth in Bangladesh.
There has been a marked increase in the liquidity situation of the banks, doubling between the period of 2012 to February 2013. Call money rate was about 10 per cent during 2009-2010. This however increased to 33.5 per cent in December 2010 due to liquidity crunch and adjustment of CRR and SLR rates by the Bangladesh Bank.
 On account of the high rate on advances due to bad debts and non-performing loans, the commercial banks have opted to change a higher interest rate which was 13.73 per cent in February 2013. The banks have been maintaining an interest rate spread (IRS) of 5.68 per cent in February 2012 that was reduced to 5.05 per cent in February 2013. The bigger business houses are arranging loans from oversees sources at a considerably lower rate of interest.
Loan recovery has been slow, particularly by the largest SOB Sonali Bank that has been involved in Hallmark scam. So far, no adequate steps appear have been taken to recover this massive amount. The Anti-Corruption Commission (ACC) has also become involved in this matter to help recover these large sums of money without any visible results as yet. This scam has created a capital adequacy problem for the Sonali Bank. The situation is similar for the other SoBs where capital adequacy has become a major constraint.
 The government is required to make some policy changes to reign in the corrupt practices of the SoBs. Equipped human resource is needed supported by state of the art ICT infrastructure to ensure transparency and enhanced level of efficiency within the banking sector. The culture of non-repayments of loans by clients needs to be reversed. Selection of capable directors for the boards of the banks and capable honest officials, MDs/CEOs are also important issues that the central bank needs to ensure.
In 1972, population to bank branch ratio was 57,700. This has since improved to 17,760 in June 2011 which indicates banking service availability to a larger segment of the population. Financial inclusion has been improving along with the quality of performance measured by CAMELS i.e., capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk. Central Bank adopted Basel 1 with risk-based capital approach that was in practice in 1991. 8 per cent minimum capital is required (MCR) out of the risk weighted asset (RWA) with core capital of 4 per cent. MCR level rose to 9 per cent of RWA to 4.5 per cent of core capital as stipulate in Basel II. During the period between January 2010 and June 2010, minimum capital level was 8 per cent of RWA with core capital of 4 per cent of RWA. Since July 2011, the minimum capital was raised to 10 per cent of RWA with core capital of 5 per cent of RWA. The overall performance of the SoBs has been less impressive than that of the PCBs. Soon, BASEL III will be implemented to ensure capital enhancements to seek to improve both quality and availability of capital. It is a global regulatory framework for more resilient banks and banking systems.
 The impact of the losses incurred by the SoBs results in massive capital inadequacy, adjusted through government funding which is basically the tax payer's money. These valuable resources could have been utilised for education, health care and infrastructure development. The government needs to work with honest, dedicated banking professionals and directors with impeccable honesty and competence. People in power must realise that they are only the custodian of the depositors' hard-earned money not meant for embezzlement and looting through frauds. The central bank must be fully empowered to control the SoBs including appointments and termination of the MDs/CEOs and directors and chairman. The posts of the governor and deputy governor of the central bank should be made constitutional posts, answerable only to Parliament.
The central bank should be fully autonomous and in no way be controlled by the ministry of finance. There should not be any scope for interference by politicians and government officials in the management of the central bank and the SoBs. Let us empower the central bank and the SoBs to enable them to function at their optimum level of efficiency for objective financial management.  
The writer is Chairman, Policy Research Centre Bangladesh (PRC.bd) & Vice Chancellor,                 Darul Ihsan University.                          akbarudinahmad@gmail.com