Non-performing loan (NPL) has been a concern for the banking sector in Bangladesh for quite some time. According to the World Bank, Bangladesh had the second-highest NPL ratio of 9.4 per cent in South Asia in 2022, right after Sri Lanka.

The NPL ratio is right below the systematic stress threshold for South Asian countries (10 per cent) and well above the warning threshold (5 per cent). Lenders face a multitude of problems arising from scams, irregular instalments, and lack of corporate governance.

There have been certain amendments to the Bank Companies Act over the past several years and for the most part, they have resulted in the strengthening of the control of directors in the banks. This led to the deepening of the loan default and worsened governance.

Such contrary changes to the governing laws of the banking industry have failed to provide the central bank with the required ammunition to step in and aggressively resolve the crises.

The 2013 amendment to the Bank Companies Act reinstated the bar on bank directors' six-year tenure. This was extended to nine years in 2018 and further to 12 years in 2023, allowing the current individual directors to hold directorships till 2025. These sorts of amendments promote the preservation of self-interest rather than the interest of investors and depositors.

The last amendment to the Act allows defaulters to obtain additional loans. The distinction is to be made whether they are willful defaulters or not. An applicant's payment history and repayment ability should not be convoluted by any subjective judgement if a proper governance mechanism is to be set.

This is where the central bank may step in to promote a path towards automation of the loan approval process. Allowing the loan approval process to remain at the discretion of individuals, especially those owners/directors, will only continue to heighten the loan default problem.

To clearly distinguish between personal interest and the bank's interest, boards should have more institutional investors than individual ownership. Individual ownership may not be the best practice to preserve the depositors' or the investors' interests.

For example, it would not be possible to clearly state which wealthy family owns renowned international banks such as Citibank and Standard Chartered today. But in the case of most Bangladesh private banks, one or more wealthy family appears to exert almost absolute control. This is wrong and it weakens the ability of the central bank to regulate because the wealthy families are politically connected and are more than happy to exercise their influence to preserve their interests.

The board of directors should consist of individuals that are qualified and possess diverse industry knowledge and financial acumen instead of influential owners. The board should have a clear understanding of a bank's strategy and risk appetite and must ensure corporate governance.

A strong governance framework can only be established in banks when directors can operate independently. Independent directors are not directly affiliated with the bank in any way, which allows them to provide impartial oversight and challenge management decisions when needed. Independent directors bring a balance of power and minimise conflict of interest. 

Furthermore, compared to similar countries, the remuneration for independent directors in Bangladesh is extremely low and almost negligible. This low level of compensation and value will not attract the best and brightest to the board.

There is no dearth of banking talent in Bangladesh and many such talented experts would be glad to contribute as independent directors. However, the banking industry must show proper value and respect to such highly sought-after experts.

The author is an economic analyst