The banking sector is the backbone of a country's economy, especially to promote businesses. However, sadly, the sector is plagued with multi-layered challenges.

For the last several years, defaulted loans have been rising alarmingly. Corruptions and the misuse of depositors' funds are the prime cause of the mounting non-performing loans. So, a number of banks is suffering from capital shortfall and cash crunch.

Already a bank, namely Padma Bank, is in a struggle to revive its activities while many non-bank financial institutions are in a real problem to repay depositors' funds.

Some banks, especially shariah-based banks, are struggling with their treasury management, prompting the central bank to extend support to keep alive. As a result, customer's confidence in banks is eroding.

The crisis of confidence and trust is now becoming a big problem as many customers are already concerned and thinking about whether they should keep their funds in banks. This is not a good sign, and it may escalate the crisis.

Generally, 10-12 percent of a nation's total money is held in cash to meet people's daily needs. However, according to Bangladesh Bank data, cash in people's hands currently constitutes more than 16 percent.

As of June 2023, the central bank reported that the amount of cash in people's hands was Tk 310,156 crore, breaking all previous records. Huge cash in people's hands is also fueling inflation though it has not been the lone reason for the high inflationary pressure in the last several months. The situation has led the Bangladesh Bank to take measures to bring back money to banks.

A higher inflationary pressure for months on a row has been a reason for a drop in deposits in banks. Individuals are fighting to meet their daily expenses. As a consequence, people's savings tendency has squeezed. It also deteriorates the liquidity situation in banks.

The situation didn't happen overnight. The banking sector is facing a crisis due to poor governance, policy weakness, weak legal system and political intervention in the banking system over the years.

Giving licences to new banks, employing directors at state-run banks on political consideration, increasing the tenure of directors, and allowing family dominance in the sector are signs of political intervention. All of these are causing bleeding in the sector.

Still, no visible sign of reforming the banking sector is seen yet and this is the most concerning. To address the problems of the banking sector, the government should implement comprehensive reform programmes, ensure punishment for irregularities, and strengthen the health of banks.

The governance system should be strong so that no scams can take place. The legal system should speed up.

Small banks can be merged with big lenders so that the situation improves, and no banks face any challenging situation. If they do not merge, the government can allow some banks to collapse which will give valuable lessons to others. Otherwise, good banks will not get any extra benefits in attracting customers by following governance.

It is not a sustainable way to keep alive scam-ridden banks year after year by giving support. If the trend continues, a good bank may become rotten. Why should the government take the responsibility of keeping them alive using taxpayers' money? The government should ensure proper policies and good governance in the sector.

The author is an economist