Revamping the banking sector

The finance minister spilled the beans on the syndicated plunder of the state-run Basic Bank and also shed light on the deadweight of bad loans dragging down some other public and private banks. The finance minister disclosed in Parliament the other day about the swindling of around BDT 45 billion from the bank.
As disclosed by the finance minister all in the top ranks of the state-owned bank were involved in the scams. The bank was steeped in recruitment and promotion fraud too, not only in forged lending. Fifty six organisations, 27 bank officials and eight surveyor firms were involved in the bank-loan forgeries.
The finance minister said to lawmakers' queries that external audit firms appointed by Bangladesh Bank (BB) and BASIC Bank found involvement of the then chairman of the bank in granting irregular loans, recruitment and promotion. Among other suspects are its two former managing directors too. This in short is the narrative on the BASIC bank. Another state-owned commercial bank, among others in the business of public confidence, Sonali Bank, also hit headlines for huge forged lending that hollowed its vaults and mismanaged management. To the dismay of all, a unique case came to light. A nondescript upstart called Hall-Mark Group bagged nearly as much as the BASIC bank amount mentioned above.
Balance sheets of many other public and private-sector banks are also found not straight in investigations by the regulator - the Bangladesh Bank (BB). The BB in a bid to keep the banks on track has so far deputed its officials to a number of banks as observers in the role of a whistleblowers. The banks particularly in respect of their loan portfolios have to resort to cooking the books to show their conditions workable. Some tricky instruments are used as escape routes, albeit devised by government's finance authorities.
In the banking world, loan write-off, rescheduling, restructuring and provisioning are the main magic wands. Because of manoeuvring in these areas, some banks go bust under the weight of accumulated default loan or dud money. Generally insider lending, directed loan and lending under political influences are blamed for default loan - now euphemistically called non-performing loan (NPL). The aggregate amount of default loans in different banks, as per an account furnished in Parliament, has stood at around BDT 747.69 billion since 2009. According to the latest reports, the NPL has been on the rise. Despite the rescheduling and large loan restructuring by the central bank to tackle the problem, the amount increased by 2.42 per cent in the last calendar year 2014.
The volume of NPLs rose to BDT 513.71 billion as on December 31, 2015 from BDT 501.66 billion a year (2014) before. The finance minister told Parliament that the government took "various measures to ensure that the state-owned commercial banks make profit". These steps include reconstitution of the banks' boards, the signing of annual performance contracts with them and amending the Bank Company Act 1991 and the Anti-Money Laundering Act 2012.
Banking analysts and experts see political appointments to bank management and recruitment of staff as a major cause of mismatch in the banking sector. They emphasise that merit should matter in recruitment of manpower, especially for the banks so that banks are on public confidence and credibility.
A very recent avowed government stance in this respect may prove a saving grace - of course, if it really holds water in the end. It says only bureaucrats and bankers would run banks. The bottom line is no more 'politicisation' here.
The recent mushrooming of banks - mostly in hands of politicians - made the situation worse. In the wake of such developments in the Bangladesh banking sector, the International Monetary Fund (IMF) has offered the government a three-pillar recommendation for improving the overall financial health of the state-owned commercial banks (SoCBs), in particular. Ensuring good governance in banking, recapitalisation, and automation of all branches of the SoCBs by the end of the 2016 form the basis of the recovery recipe. Changyong Rhee, director of IMF's Asia and Pacific Department, was quoted as saying recently, "We've given the three-pillar recommendation to the government for improving the financial conditions of the SoCBs".
That the banks are not well managed is evident in words straight from the horse's mouth - the country's finance minister's disclosure in Parliament. So, the global watchdog on monetary matters now comes to the rescue of the banks in Bangladesh with a recipe for healing their health deemed not sound.
The IMF recipe comes against the backdrop of deteriorating trends in the overall financial health of the SoCBs despite a two-pronged monitoring by both the country's central bank and the ministry of finance. Capital shortfall is a major syndrome nowadays. According to the central bank statistics, capital shortfall of the six SoCBs stood at BDT 121.10 billion, as on September 30, 2015. A total of BDT 150 billion has already been sought from the ministry of finance for three fiscal years to feed the cash-strapped six out of total eight state-owned banks.
The government has already injected into the BASIC Bank Limited some BDT 12 billion for exclusively replenishing its waning capital. The six state-owned banks, which faced capital shortfall as on September 30, 2015 are Sonali, Janata, Rupali, BASIC, Krishi and Rajshahi Krishi Unnayan Bank. Dr Rhee noted, "It is an ongoing reform that requires steady efforts over the medium term". Strengthening state-owned banks, the IMF executive also said, would hinge critically on improving the quality of their lending practices. This, in turn, will depend on making sure that the management and executive boards of these banks exercise proper, professional oversights and are held ultimately accountable by the central bank and the government.
However, the healing therapy of IMF is not only needed for the public banks. A comprehensive reform is also deemed sine qua non for all of the banks - public and private. Right mode of banking can promote business and economy, and wrong one demote all, including the depositors. All that is now required is to build bank-business camaraderie through joint ventures, stop politicians' poking nose in the banking affairs,  cut high overhead costs, narrow the spread between lending and deposit rates of interest and compete with the oncoming challengers from global offshore banking. It is high time that banks should learn how to walk around, without government protection.
The writer is a retired Professor of Economics, BCS General Education Cadre.
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