Bangladesh Bank (BB) failed miserably in containing defaulted loans due to the pressure from political forces, illegal interference of business syndicates and weak leadership, finds Transparency International Bangladesh (TIB) study.
According to the study, the vested interest groups have influenced the recent amendment to the Banking Companies Act 1991 and other policies, including bank inspections and the appointment of deputy governors of the central bank.
Such malfunctions at the central bank that enjoys autonomy in supervision and regulation of banking activities merely on paper contributed to a 417 per cent increase of defaulted loans against a 312 per cent increase in the amount of credit between 2009 and 2019 said the study.
The entire banking sector is now at the edge of a cliff. The authorities concerned should take immediate measures to avert a probable collapse in the days ahead, it noted.
Organising a virtual press conference on 22 September 2020, TIB unveiled the research study titled ‘Banking Sector Supervision and Regulating Defaulted Loan: Governance Challenges of Bangladesh Bank and Way Forward’, aiming to identify the governance challenges of BB. The study considered activities of BB from January 2010 to June 2020, collecting information from January 2019 to June 2020.
TIB Research and Policy (R&P) Director Mohammad Rafiqul Hassan shared the study findings while Outreach & Communication Director Sheikh Manjur-E-Alam conducted the press conference.
Referring to the study, TIB Executive Director Dr. Iftekharuzzaman said, "Bank owners, regulators and the government – these three parties jointly create the scope for depositors' money to be looted. The government must provide security for people's money. But what is happening is quite the opposite of that. The government has been made hostage by loan defaulters."
“Bangladesh Bank, whose responsibility is to ensure the protection and security of the people's deposits has become non-functional in controlling defaulted debts by succumbing to leadership inefficiency while political influence has taken an institutional form, and businesses captured political power,” said Dr. Zaman.
According to the study, the bad-loan figure would be around Tk 3 lakh crore if the written-off loans worth Tk 54,463 crore is added to the IMF-calculated Tk 2,40,167 crore in defaulted loans up to June 2019 given the volume of restructured and rescheduled loans and the amount of NPLs shown as unclassified ones because of higher court's stay orders.
The amount of defaulted loans was brought down artificially after September last year as the BB offered a relaxed rescheduling facility that allowed delinquent borrowers to regularise NPLs by making a down payment of only 2 per cent of the outstanding amount with a repayment period of 10 years, finds the study. This helped the habitual borrowers to carry on their misdeeds, leaving depositors in dire straits.
The study identified two main reasons behind the deterioration of BB’s supervision and regulation over the banking sector.
One of them is “external challenges” that include limitations of law/policy and political influence by highly connected business owners. Another is Bangladesh Bank’s “internal challenges” that include limitations in capacity, lack of transparency and accountability, irregularities and corruption in supervisory activities, and weak leadership.
For these reasons, BB has gradually declined from the regulatory role of the banking sector and has become subservient to the stakeholders, observed the study.
In addition, shortage of human resources in departments relevant to supervisions, inadequate time for inspection, decreasing delegation of authority to the inspection teams etc., widened the opportunity and risks.
The study found that the central bank had earlier tried to take action against the delinquent borrowers, but its efforts proved futile due to political pressure.
Dr. Zaman blamed the corrupt political culture of Bangladesh for the crisis in the sector and also opined that the businessmen have taken the country’s politics hostage.
“As a result, although there is strong commitment in the government declaration on the control of defaulted loans and establishing good governance within the regulatory body, its application or effective implementation is not possible; which has brought the entire banking sector to the edge of a cliff,” he said.
Dr. Zaman warned that if the situation is not brought under control, the mass people will have to bear the brunt. So, he suggested forming an independent and neutral commission, free from the control of the government and central bank.
The study suggested 10 point recommendations including, the formation of a banking commission consisting of experts, empowering BB, setting specific guidelines on the appointment and termination of the BB board members, governor and deputy governors, and increasing the number of posts for the experts in the BB board by reducing representation from the government organisations, and scrapping of Articles of 46 and 47 of the Bank Companies Act.