Where are the state-owned banks heading to ?

My uncle stepped into a branch of a state-owned bank (SOB) in Dhaka for a bank draft to send some money to his home town on the eve of Eid-ul-Fitr. "The gentleman who issues the drafts has gone to attend the staff union meeting," an official sitting behind the desk in the front row informed him casually.

"I want to send my zakat money for my poor relations in our native village," uncle tried to reach the tender side of his heart. "The imam sahib of our local mosque says that Allah will reward profusely those who pay zakat," he added as a postscript.

The official momentarily suspended chewing the betel leaf, raised his face skyward to prevent the precious reddish concoction from spilling out of the edge of his lips. "Come tomorrow," is all he could blurt out in his critically suspended condition.

Did my uncle get the draft?  He did, but not before blowing hot and cold mixed with pleading and cajoling a host of officials before reaching the manager. The mandarin finally relented and drafted another official to issue the precious draft as a 'special favour to this elderly gentleman'. When the uncle stepped out of the bank, with the precious draft in hand, one hour and a half had already elapsed into the black hole of eternity.  

Since that fateful encounter of my uncle, the planet earth orbited ten times around the sun, the state power changed hands from one party to another via a caretaker and another 'not so caretaker' government, the World Bank and IMF delivered impractical sermons for the umpteenth times for reforms, tens of thousands of taka had been pumped by the government to prevent the banks from sinking into the abyss and to make a mockery of reforms, the word  'limited' was added to their names to put the 'old wine' in new bottles.

And another Eid was approaching when my uncle stepped into the same bank with the same pious hope of easing his passage towards the eternal garden of bliss. This time he was pretty confident that the 'Limited' sign emblazoned across the bank's name alongside the golden logo must have done the magic. The story he narrated, however, was a rerun of the one he had told a decade ago. My exasperated uncle wondered, rather loudly, "What this addition of 'limited' means for the bank". A new incumbent of the same old desk enlightened him that it meant limited access to its services for the customers unless you happen to be big one like Tanvir of Hall-Mark.

So much for the reforms!

One could have thought that it is an imaginary story concocted to undermine these special breeds of banks but sadly it is drawn from real life experiences. It also epitomises the general ambience and work culture of a typical branch of state-owned banks. I would refrain from underlining corruption as part of that culture because it has become part of almost all state-owned entities. The bankers, like all gullible mortals, are not expected to remain immune from the contagion effects for long. However, to highlight the popular perception of SOBs I am tempted to quote the comments by a reader at the end of an article on 'classified loans in the state owned banks' that appeared in the electronic version of a daily newspaper: "100 per cent high officials of state-owned banks get expensive cars as bribe from bad loan seekers. ACC can easily arrest hundreds of these criminal bankers along with their illegal cars mostly registered to their wives or relatives".

That was some comment but undoubtedly unkind for the otherwise  few honest ones who survived the onslaught of lures and lucre. However, we cannot remain oblivious to the sinister implications of bad loans because the burden of money lost by the state-owned enterprises eventually fall on the slender shoulders of the people of the country.

 With so many financial institutions operating in the country there is not much that anyone can expect the SOBs to achieve for the economy which is, for a change, advancing quite satisfactorily for some years now. Every day SOBs are losing grounds to the banks in the private sector. Starting with a virtual monopoly in the early eighties when the first set of private sector banks began to appear in the horizon, the SOBs have consistently ceded their grounds to the new entrants. The latest count shows that in spite of government patronisation by way of allocation of deposits and other businesses their share of deposits have plummeted to  26.67 per cent and loans to 20.28 per cent by the end of last June. By extrapolating this trend, it would perhaps not be wrong to suggest that sooner or later they may turn into virtual nonentities like the government-sponsored cooperative banks of the older vintage that dotted the country's landscape for close to a century.

The prognosis looks certainly worse than what one would have feared. The latest number shows that the loan portfolio of SOBs is infected with more than 28 per cent of nonperforming loans. It translates into a staggering sum of something like TK. 88.63 billion (8,863 crore). Our experience of SOBs' performance during the last 42 years tells us that whatever reforms are made at the behest of the World Bank and other agencies to resuscitate these ailing behemoths, this number of bad loans will continue to escalate to new heights.

It is not that the reasons for their terminal illness and the remedies - and that include denationalisation-- are not known to the policy makers.  The entrenched interest groups are, however, reluctant to let anyone to slacken their strangleholds. They even recently spurned the proposal to strengthen the hands of the central bank to oversee the SOBs. With powerful people presiding over their destiny, the regulatory authority has turned into a mere spectator of the deteriorating health of SOBs.

To forestall any major reforms the vested groups are never tired of repeatedly espousing the myth about the SOBs' supposed contribution to the rural communities and obligatory financing. A myth is a myth but when it sets in the psyche it is difficult to cut through its thick wall of resistance to dispense reasons.

For instance, the myth about their contributions to the rural communities is exploded by their negative role in lending money to the borrowers outside Dhaka. Bangladesh Bank's publication — Scheduled Banks' Statistics — shows that they collected Tk 514.65 billion (51,465 crore) from the rural areas by the end of June 2013 but lent only Tk 178.46 billion (17,846 crore) to that region.

Transfer of nearly two-third of deposit money i.e. Tk 336.19 billion (33,619 crore) away from rural depositors certainly works as a disservice to the credit-starved rural borrowers. Depending upon whom you ask, you will hear about lack of creditworthy borrowers in the upcountry region but there will be long silence if asked about the creditworthiness of Hall-Marks, Bismillah Groups et al in the big city. To set the record straight, however, I could add that the private sector banks are also guilty of this kind of disservice of shifting money to the cities but they do not impose a burden on the exchequer for bailout packages.

So much for contributions to the rural communities!

The story of directed financing is no different either. Bangladesh Bank's publication mentioned above shows that, the four SOBs disbursed only Tk 23.99 billion (2,399 crore) as agriculture credit against the target of Tk 27.07 billion (2,707 crore) fixed by the authority. These obviously include recycling of credits by sanctioning new credits to pay off the older ones but they are known to have delivered bigger amount of loans to single borrowers than the funds allocated for all the farmers combined.

As I try to draw a conclusion to this article, the paper boy on his regular trail delivered the day's morning paper with the dateline of December, 27, 2013. 'The 4 State-Owned Banks will get Tk 41 billion (4,100 crore) to cover their capital shortfall', screams one of its headlines. The paper added that it is the first installment and more would be coming to cover the capital shortfall of Tk 88.63 billion (8,863 crore) raked up by the quartet up to the quarter ended September 30, 2013.   

And where would the money come from? It is from you and me, the guys who drive luxury cars and live in posh localities as well as 160 million including close to 40 million who go to bed every night with empty or half-empty stomach.   

Halfhearted measures and cosmetic reforms would be of no avail to save these banks from becoming a permanent burden on the government and the people of the Republic. As they say, you cannot make an omelet without breaking the egg. The best solution is to break each bank into six or seven regional pieces and sell these to the entrepreneurs in private sector with good records. This process of decentralisation will also advance the cause of financial inclusion, an issue that has been lately occupying the thoughts of many in the country. Let us make it part of our wish list for the New Year.

The writer is a former central banker who also served stints as CEO of a commercial bank and Independent Director in another. [email protected]