CHALLENGES AND THE PATH AHEAD FOR BANGLADESH'S FINANCIAL SECTOR:Â Apart from the glimpses of the financial sector's strengths, the unfinished agenda on the yet-to-do list is also pretty long, with challenges demanding wholehearted commitment and engagement of sustained corrective efforts.
Corporate governance and regulatory discipline: Lending resources of banks continue being channeled largely to well-off borrowers, often with insufficient diversification and inappropriate asset?liability maturity mismatches. Corporate governance weaknesses linger in many banks, allowing dominant equity holders to manipulate credit access, credit appraisal and internal control processes to their own advantage. Boards and senior managements fixated mainly on quick short-term gains tend to get tempted towards speculative playing up of market volatility, heightening destabilisation risks which are harmful for longer-term institutional soundness and viability. Myopic vision and focus on immediate gains deprive bank itself of future earning opportunities from cultivating new customer bases in large population segments of small means (the so-called 'bottom of the pyramid'), besides failing to fulfill an important corporate social responsibility obligation of combating inequity and poverty in the society they profit from.
The first step in overcoming these deficiencies and weaknesses and gearing up for attaining excellence in banking will entail proper orientation of institutional goals and objectives and shifting focus away from quick high gains from potentially destabilising speculative activities towards prospects of stable longer term earning income streams from financing productive and socially responsible economic activities, including those of micro and small enterprises of the poor. Bangladesh Bank's guidance circulars on Corporate Social Responsibility (CSR) and financial inclusion drives are intended to steer our banking sector out of this weakness. Pursuit of excellence in corporate governance will follow next, requiring adherence to proper credit appraisal, risk management and internal control processes in letter and spirit, free of vested interest influences of dominant director groups or colluding senior management functionaries. Bangladesh Bank (BB) expects the banks to adopt and adhere to higher risk management, corporate governance and risk management standards than the minimum regulatory requirement.
Excellence in banking services will require quick attention to and remedy of customer grievances. BB has accorded high priority to consumer interest protection concerns in banking services. Banks will need to accord the same high priority to this in their own strategic plans, putting in place processes and access channels like help desks; and above all, sensitising bank personnel to respond properly and swiftly to customer grievance concerns.
Asset-liability maturity mismatch and long-term financing sources: In our financial system, access of businesses and households to medium and longer term financing is inadequate. Let alone long gestation large infrastructure projects, even modest projects like hospitals and hotels needing financing of ten years or longer tenor usually have to make do with five to seven-year tenors at most, leaving themselves exposed to cash flow difficulties going forward. Outstanding industrial term loans are mostly medium rather than long-term. Long-term housing finance needs of households are likewise insufficiently met, much of the outstanding housing loans being medium rather than long-term. Eventual cash flow difficulties of businesses and households force to use financing of shorter than needed tenors that creates overdue and asset quality impairments in the books of lenders. The paucity of longer-term financing arises from paucity of longer-term savings. The entire aggregate of equity, reserves and subordinated debt stocks of banks is barely enough to cover the long-term funding gap.
Redressing the longer-term funding gap will require policy and market reforms to bring in new long-term savings and to create alternative liquidity augmenting mechanism at the long-term end. Life insurers and pension/provident funds carrying long-term liabilities are the main sources of long-term funds, as they need long-term assets to match the liabilities. Life insurance penetration remains very thin in Bangladesh. Deepening life insurance penetration comes up therefore as an item in action agenda for augmenting long-term savings. Pension/provident fund schemes in the public sector are mostly unfunded and run on pay-as-you-go basis, in the small organised private sector such schemes are not in very widespread use, and none exists at all for the broader population including professionals and self-employed persons. Widening of provident/pension fund coverage comes up hence as another item in action agenda for augmenting long-term savings. The only fiscal liabilities involved in defined contribution pension/provident fund schemes are firstly the income tax waiver on such savings, and secondly, in running a pension/provident fund regulator's office. It is high time for Bangladesh to go for the earliest possible introduction of defined contribution pension/provident fund schemes for the general adult population. The broad demand base of pension/provident funds, life insurers, merchant banks and other institutional investors needed for debt issuance and loan securitisation to thrive hasn't developed yet in Bangladesh, and capital market intermediaries lack familiarity with their various roles as issue managers, underwriters, trustees, market makers etc involved in primary securitisation and secondary trading. Prospective debt securities issuers also find the steps in issue process costlier in fees and expenses than for bank borrowings. The action agenda for enhancing longer-term funding availability need therefore promotion of loan securitisation by concerted initiative of BB and the Bangladesh Securities and Exchange Commission (BSEC) to streamline the issue processes and paring down the issue costs. Access to long-term housing finance will be hugely facilitated by activation of market in mortgage-backed securities. The government-owned HBFC (House Building Finance Corporation) can conveniently be utilised for this purpose, mandating it to assume roles of underwriter and market maker in issuance and trading of securities backed by mortgage loans extended by other primary lenders, instead of its present role as a primary mortgage lender itself.
Debt restructuring and resolution: Absence of a well-functioning mechanism for debt restructuring and resolution comes next as a major shortcoming, leaving distressed businesses starved of financing needed for recovery and tying up lending resources in irrecoverable overdue. Banks and non-bank financial institutions (NBFIs) in Bangladesh are barred by law from fresh lending to defaulting borrowers regardless of circumstances. BB's guidelines for loan rescheduling permit waivers from interest dues but none from the principal. Court-supervised settlements in the alternative dispute resolution (ADR) route under the Money Loan Courts Act can be of some use with downsized claims on principal, but this route is very little used. Bankruptcy court processes of debt resolution through the insolvency route by court-appointed administrators likewise also remain virtually unused. Availability of private equity and other hybrid bridge financing options that could help out debt-distressed businesses is as yet insignificant and rudimentary in the local markets. The market failure in helping distressed businesses recover entails significant loss to the economy, not only in lost output and employment in the stricken businesses, but also in competitiveness erosion of other businesses that face higher cost of borrowing from lenders burdened with overdue from the debt-distressed businesses in limbo.
Redressing the shortcomings and their negative consequences outlined above will require careful rethinking and revision of current legal and regulatory provisions on handling of debt defaults, in light of practices in neighbouring countries and elsewhere, to enable prompt resolution of debt distress of troubled businesses that have realistic possibility of turnaround and recovery and prompt dissolution of the others through effective use of the insolvency route under the Bankruptcy Act. The judiciary may also think of allowing a separate bench at the High Court just for finance-related disputes. Financing options available to businesses also need widening, with policy steps promoting private equity and other debt-equity hybrid financing transactions by intermediaries at the capital market-financial market interface. A good start in this respect could be the restructuring of the government-financed small Equity and Entrepreneurship Fund (EEF) for start-ups in a few specific sectors into a broader hybrid financing platform to support needed restructuring of ongoing businesses in all sectors, enlarging the fund with both increase in government's contribution and induction of private sector investment and management participation. Even foreign financing from multi-lateral organisations like IFC can be welcomed in this equity fund.
Financial globalization: Besides the major shortcomings enumerated in the preceding few paragraphs, limited diversity of available risk management products is another significant concern, particularly following transition to market-based flexible Taka interest and exchange rates. Apart from plain vanilla forward exchange rate covers and swap transactions, more complex derivative transactions like options, credit default swaps etc. are as yet largely absent in the local markets. Cautiousness in widening external openness of the economy is largely the reason why the needs and responding products have remained slower to arise in the local markets. BB permits banks and their clients to access external markets on occasional needs of such products. However, this market deficiency is also indicative of slow pace of adoption of a proactive forward-looking risk management culture in financial intermediaries, urgency of which will heighten as the economy's openness widens further. BB has accorded high priority to addressing this deficiency by steps of phasing in Basel II and III risk-based capital adequacy and forward-looking liquidity management disciplines in banks and financial institutions, alongside prescribing guidelines laying down requisite minimum standards managing the various risks along lines of international best practices. At the same time, steps for firmly instilling a risk-based financial sector supervision culture in BB have also been prioritised. BB is well aware that even though the Basel III is yet to be implemented in full, Basel IV is on the way to emerge requiring banks to maintain higher capital, liquidity and disclosure requirements for cushioning systemic risk buffer.
BB is looking forward to steadily increasing openness and integration of our financial markets with the global financial system, for widening cost-effective access to investment resources from the global savings pool. Hastening adoption of international best practice standards in corporate governance, risk management, internal controls and financial disclosures will facilitate strengthening of correspondent relationships with reputable banks abroad. Increasing external openness will bring in heightened exposure to volatility in global financial markets. Risk management capacities in banks will therefore need to be upgraded and bolstered continually. Correspondent banks in advanced markets abroad are often useful sources of knowhow about new service and risk management approaches.
CONCLUDING REMARKS: To summarise the overview of track record thus far, the banking sector has performed fairly well, overall, in supporting steady, stable and inclusive growth in the real economy, upholding its own systemic stability through episodes of domestic and external shocks, including the global financial crisis. BB is active in spearheading initiatives of putting in place and upgrading countrywide connectivity backbone for the interbank settlements infrastructure. Individual banks will need to be correspondingly proactive in installing and upgrading their own IT platforms in line with rapidly growing and evolving needs. However, various shortcomings in market development and debt distress resolution practices, coupled with governance weaknesses arising from encroachments on operational independence of regulators, are holding financial sector performance stuck at sub-optimal levels below its potentialities. Appropriate corrective steps, including those suggested in the relevant foregoing paragraphs, brook no delay if the financial sector is to rise up to its call of supporting realisation of the nation's inclusive sustainable growth vision of attaining upper middle-income country group per capita GNI level by 2030.
BB's movement towards sustainable banking, including financial inclusion ethos with green banking and mobile banking initiatives, will continue further. All concerned should come forward with innovative new products to meet the appetite of future digital customers, nourishing our vision of full-blown financial digitisation.
Dr. Atiur Rahman is Governor of Bangladesh Bank. The article is based on the speech he gave at the National Conference of the Association of Banks, Bangladesh Ltd. ( ABB) held on November 01, 2014 in Dhaka.
On way to full-blown financial digitisation
Atiur Rahman concluding his two-part article | Published: November 06, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
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