There\\\'s a hole in the bucket

The government injected Tk 41 billion (4,100 crore) into the four state-owned commercial banks (SoCBs)-Sonali, Janata, Agrani and Rupali-to make up for their capital deficit caused mainly by mismanagement, corruption and the latest financial scam. The Sonali Bank got Tk 19.95 billion (1,995 crore), Janata Bank Tk 8.14 billion, Agrani Bank Tk 10.81 billion and Rupali Bank Tk 2.10 billion. Is the government's effort really going to stabilise those SoCBs? It did not work earlier. The government is in fact going to pour water into a bucket with a hole.
The World Bank earlier provided $ 388 million during the period between 2004 and 2008 to carry out reforms in Sonali, Janata, Agrani and Rupali banks and increase their capacities. However, in less than half a decade since completion of the project, those SoCBs were again asking for tax-payers' money to make up for their capital shortfall.
Powerful people in the country devote all their abilities to get a banking licence, as it is a very lucrative business virtually at zero risk. It is the only legitimate business which delivers very high return without any capital from the owners' pocket. The risk is also limited as the central bank in Bangladesh extends implicit guarantee so that no banks go bankrupt. For instance, with only 67 branches, the Eastern Bank Limited (EBL) earned a net profit of Tk 2.39 billion (239 crore) in 2012. On the contrary, during the same year, with 1,203 branches, the Sonali Bank earned Tk 30.69 billion in interest on loans and paid Tk 32.97 billion in interest on deposits, i.e., it lost Tk 2.27 billion in its core business area. Why does Sonali Bank with its monopoly in some products and segments register a heavy loss while others are making tonnes of profit? Why do SoCBs with a wide customer base face capital shortfall? A few points that cause losses to the SoCBs and thus entail the capital shortfall have been listed below.
Firstly, loan disbursement under pressure of government high-ups and lack of monitoring by the authorities concerned are primarily responsible for the situation. Most of such loans are defaulted on and the banking sector is left in a mess. For instance, the much-talked-about scams involving the Hall-Mark Group and Bismillah Group left a wound on the country's banking sector and it would take a long time to heal. Regulatory bodies need to address this awkward problem in the perspective of Bangladesh.  
Government-nominated directors should not be from any political background. The Bangladesh Bank should set stringent criteria on appointment of government-nominated directors for a bank. Only political loyalty should not be the qualification for one's appointment as a director in an SoCB.
Also the voluntary work the SoCBs carry out on behalf of the government is a cause of this chronic problem. For example, the Sonali Bank provides about 21 types of free services on behalf of the government of Bangladesh through its rural and urban branches. These services include collection of utility services bills, payment of allowances to freedom fighters, old-aged people, widows and acid-burnt women and also collection of taxes and revenues on behalf of government organisations. If the SoCBs allocate a significant part of its resources in unproductive activities, how can we expect responsible banking from them?
Finally, if you ever have experienced banking with any private bank in Bangladesh and then have visited any SoCB, you feel like you went back to the 1950s with the help of the time machine. The concept of service delivery to customers is still unknown to the bankers in SoCBs. A major change in the leadership and training for employees are needed to elevate the quality of services. Also, automation is an essential part of serving the customers better. Without introducing cutting-edge technology, employees would not be able to serve customers to their full satisfaction, even if they wanted to. Setting up computers in a branch would not bring much benefit, until they know how to reap maximum benefit from it.
Given the situation in the SoCBs and their role in the financial system in Bangladesh, there should not be any argument against injecting fresh capital into the state-owned banks. However, bailing out a bank will create a moral hazard. When a bank is under the government's safety net, bank managers may put less efforts towards screening and later monitoring of projects. If the efforts are made, the probability of an investment's success will increase. The government's safety net will also make the bank managers less active in persuading delinquent borrowers and thus the borrowers will have less incentive to service their debts. Furthermore, the government bailouts may lead to another moral hazard which may impact on willingness of the authorities concerned to monitor bank managers. This would enable managers to more freely pursue value-decreasing projects that enhance their personal benefit. For instance, the government has a 44 per cent stake in Bangladesh Commerce Bank and the remaining 56 per cent shares belong to private owners. Outsider directors, despite owning 56 per cent of the shares, failed to ensure accountability in the bank as they knew that at the end of the day the government would bail out the bank, if needed.
The government should also have a long-term exit plan relevant to the SoCBs. Does the government really need to have so many banks under its ownership? The viable solution to the current and so many other problems of the SoCBs is to privatise them gradually. The National Credit and Commerce (NCC) Bank could be a benchmark in this case.
Before recapitalising the SoCBs, the government really needs to understand the causes of the problems the SoCBs are facing and act accordingly. Otherwise, recapitalisation would not bring any good for those banks. Unless the problems are addressed, it will look like the government is pouring water into a bucket with a hole.
A. F. M. Mainul Ahsan is a lecturer of the Independent University, Bangladesh (IUB). His email is:            [email protected]. Karin              Paulina Rozario is a BBA student of the Independent University, Bangladesh (IUB). [email protected]