BB’s plan to recover “weak” banks

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In the fourth week of his new role as central bank governor, Mr. Abdur Rauf Talukder launched an action that many of his predecessors, deliberately or not, had ignored. He wants, as his latest initiative suggests, to ensure good governance in the banking sector. During a press briefing held at the central bank last Thursday, he sent a harsh message to banks that are prone to breaching discipline and circumventing rules and regulations. He told reporters that the central bank had identified 10 “relatively weak” banks, taking into account four indicators — classified loans, capital adequacy, loan-to-deposit ratio and provisioning requirement. The governor of the Bangladesh Bank (BB) avoided calling the banks concerned “sick”, when they show all the symptoms.

All the banks in question belong to the private sector. The central bank reportedly held meetings with a first-generation private bank and clarified that the bank’s board would only provide policy decisions and that management’s job would be to execute them. The BB asked management to report to the BB if the board was trying to pressure him (the management) in an unethical way. The central bank, according to Talukder, will also prepare three-year business plans for each of the weak banks after holding discussions with their management.

It’s a good start, no doubt on the part of the new governor. But, given the experience, it would be premature to pin much hope on the initiative. Pundits on all sides and men in power and beyond have always felt the need to reform the banking sector. But, so far, none has undertaken well-oriented reforms. Indeed, the reforms are painful and the vested interests oppose them tooth and nail. The creation of the Commission Bancaire is a good example. Repeatedly, experts have suggested forming a commission to streamline the affairs of the banking sector. But the proposed commission did not see the light of day, as there was subtle opposition to such a body from the people who matter.

Banking sector reforms date back to the early 1980s when the government denationalized Uttara Bank and Pubali Bank and allowed a few private banks to operate for the first time. In the mid-1980s, the government also set up the Currency, Banking and Credit Commission to define the scope and modalities of the first phase of financial sector reforms.

In the early 1990s, the World Bank entered the scene. Financial reforms began under a program called the Financial Sector Adjustment Credit (FSAC), designed by the World Bank. With the expiration of FSAC, another reform program sponsored by the World Bank named Financial Sector Reform Program (FSRP) came. Both programs were primarily designed to address structural problems and alleviate the rigidities and flaws inherent in state-controlled banking and currency operations. The reforms yielded partial results, as the government and other stakeholders were not very interested in letting market forces play their role freely. Later, two banking sector expert committees were formed to streamline banking sector affairs, but most of their recommendations went unheeded.

Thus, the reluctance to clean up the stable of Augeas through much-needed reforms has resulted in a plethora of problems for the banking sector. It is difficult to say that the government is firmly in favor of the reforms. Some private bank owners, for reasons they know best, have developed a strong aversion to the word reform. Many big bankers favor reform, but stay away from it to save their jobs.

But the failure of the reforms weighed heavily on the banking sector. The emergence of “weak” banks, loan scams and the accumulation of huge classified loans are among the many symptoms of a weak banking system.

It is undeniable that there is overcapacity in the banking sector, which means that the number of banks is greater than the needs of the economy. Various pressure groups, including politicians, have managed licenses for banks, leading to the creation of an unhealthy environment. Some of the public banks are now in dire straits due to mismanagement and undue government interference. The same goes for some private banks which are now identified as “weak” institutions. However, close examination would reveal an unsavory truth. There might be a few other banks that deserve an identical label. The central bank’s decision to impose a moratorium on loan classification due to the Covid-19 pandemic has made it more difficult to get a clear picture of the classified loans of various banks. Honestly, the central bank itself is partly responsible for the situation in the banking sector. A business plan or the appointment of advisers or administrators is unlikely to help reorganize weak banks. Most of them are good candidates for mergers with relatively strong banks. The BB should actively consider such a possibility. More importantly, the banking sector needs to undergo deep reforms that would ensure discipline, accountability and good governance.

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