Management of bank loans: Some reform ideas

Mohammed Hossain Of late, we have talked much about the financial scandal involving Hall-Mark. The malpractice found place in the national-level discussions and provoked outcry from all strata of society. Those include politicians, economists, Members of Parliament, high-ups of Bangladesh Bank, the Ministry of Finance, bankers, and other elite groups. Basically, three key issues were discussed such as political connection of the loan disbursement procedure, lack of proper monitoring and control by the regulatory authorities including Bangladesh Bank, and the question of internal audit mechanism within the banking sector. In a kind of brain storming job, the discussions looked to finding out the possible solutions to stop recurrence of such financial scandals or financial irregularities in the disbursement of loans. We must have to make a long-term planning to overcome this unhealthy situation. Such a planning, however, depends on a democratic government's willingness, Bangladesh Bank's (the central bank) active role and the World Bank's support, as the donor-agency is a leading and active working partner for various reform programmes in Bangladesh. Because, the purpose of democracy is to accomplish the objectives that best serve the interests of the people. It requires a government to recognise its people as its sovereign entity, and effectively solve or mitigate societal problems for their benefit. On the other hand, the central bank is the key institute in the process of economic planning. In practice, the central bank largely conforms to the government's agendas, which in turn are influenced by the parties in power and the strength of the stakeholders. Moreover, the concept of 'central bank independence and governance' (CBIG) has sparked a considerable number of debates. In addition, the central bank is created by government legislation; therefore, possibilities are always there to develop some kind of relationship between the central bank and the government. Therefore, if the government is willing to achieve something remarkable, then it will have a direct impact on society. For example, there has been much progress in Bangladesh through the initiatives taken by the Bangladesh Bank. An initiative titled 'Recent Reform Initiatives' by the central bank is highly appreciated for suggesting formation of the database of loan default, money laundering, online transaction, CSR etc. The Credit Information Bureau (CIB) of Bangladesh Bank is responsible, among others, for collection, processing and maintaining an updated database of credit-related information supplied by the relevant participants' institutions which extend credit. Moreover, the formation of CIB has eliminated the need for ad-hoc collection of certificates and decreased the time required for loan approval and disbursement. Regarding money laundering, the responsibility of Bangladesh Bank is to resist the crime of money laundering and prevent such criminal activities. Not only that, Bangladesh Bank has set up guidelines for the implementation of the Prevention of Money Laundering Act. Finally, the World Bank, since Bangladesh's independence, has been working closely with the country being involved with its various economic activities. The recent World Bank report 'Bangladesh Economic Update' in May 2012 mentioned, "The government should continue to build on the policies taken to ease pressures on the Bangladesh economy." In order to strengthen the financial sector in terms of loan disbursement and recovery, it is of utmost necessity to set up a long-term policy, which must be supported by World Bank by providing logistic, technical and financial support to the government of Bangladesh and its central bank. The three key players i.e. the government, the Bangladesh Bank and the World Bank need to work together and newer efforts need to be given the highest priority. The ministry of finance and the law ministry should also work as supportive players. In the first step, we should give legal statutory power to the Bangladesh Bank to control the nationalised commercial banks in terms of lending long-term and big amount loans. It underlies the fact that if we provide the total loan approval authority to Bangladesh Bank, there would be less chance to approve the so-called political or bad loans. In this case, the condition is that we should transfer the long-term loan appeals to Bangladesh Bank, the final loan approval authority. Bangladesh Bank ought to be empowered to scrutinise and follow all relevant instructions before sanctioning the loans. However, the loan disbursement will be made by the respective banks as usual. At the initial stage, any loan application from any nationalised bank could be taken into consideration. We can turn to the Sonali Bank scam to elucidate the case, although the scenario had gone awry there. Having received all the applications for long-term loans, a nationalised bank will transfer the file to Bangladesh Bank. The board of directors of the nationalised bank should be neutral in the whole case. Once the loan is approved by Bangladesh Bank, then the state-owned bank will disburse the loan and will be monitoring the amount used. The audit and supervising process will continue as usual in every financial year. As we have still much confidence in Bangladesh Bank to work in an unbiased way and have efficient personnel to handle this types of work, the government should take this initiative in order to overcome unhealthy situations as well as avert criticism for political appointments to the board of directors of the nationalised banks. In this case, Bangladesh Bank may face four challenges; one is the legal issue, the second is financial, the third is logistic support and the fourth, proper human resources. The first one is important as we might have to amend the Bank Company Act and should work with the Ministry of Law and Finance. For the rest of the issues, I believe, the World Bank can continue to support us in implementing the model. If we envision a long-term achievement, that would be a good and practical idea. Last of all, in an economically emerging country like Bangladesh, the recovery rate of loans is not at a satisfactory level. On the other hand, bad loans or non-performing loans are also leaving a negative impact on the economy. So lending decisions for long-term loans should be made by the central bank of Bangladesh by opening a separate cell. And in order to carry out this activity, the government, the ministries concerned and World Bank should work together to block the flow of bad loans through bad channels. The proposed model of providing bank loans to apparently innocent clients may receive attention of the authorities concerned. Who knows it won't have a long-term impact on the Bangladesh banking sector in particular, and the financial sector, in general? Dr Mohammed Hossain is a lecturer in Accounting, Griffith Business School, Nathan Campus, Qld, Australia. mohammed.hossain@griffith.edu.au