Will it do more harm than good?
The banking sector in Bangladesh continues to be burdened with defaulted loans in the absence of any bold or robust countermeasures by the government over the years. Instead, good policies have been replaced with bad ones to favour defaulters and empower bank directors. It seems there exists a nexus among the policymakers, bank directors, and defaulters which facilitates the process of swindling depositors' money.
As a condition to avail a $4.7 billion loan package from the International Monetary Fund (IMF), the banking sector has to go through reforms to reduce non-performing loans (NPLs) and improve the governance of the sector. The government agreed to comply with the IMF conditionalities in the face of deteriorating foreign exchange reserves. However, it seems the bank directors can influence the policymakers to ignore the IMF conditionalities, even though there is no visible improvement in the bleeding forex reserves.
The Bank Company (Amendment) Act, 2023 was passed in parliament on June 22. The amended bill includes some measures against loan defaulters. For example, it says that habitual defaulters will not be allowed to run businesses and travel abroad. Banks have to periodically send the list of wilful defaulters to the Bangladesh Bank. The banks will also have to publish a list of wilful defaulters on their respective websites and in newspapers. While these are positive moves, the proper implementation of these measures could be challenging in the current context, where powerful individuals get away scot-free while the powerless pay the price and suffer.
As opposed to these positive declarations, some changes in the amended Bank Company Act make it more regressive than its existing form. One may recall that the act has gone through several amendments for the wrong motives, and thus has been damaging for the governance of banks. In the Bank Company (Amendment) Bill, 2018, the tenure of directors in private banks was increased from six to nine years, and the number of family members allowed to be appointed in the boards of directors in the private banks increased from two to four. In 2003, the tenure of directors was made open, removing the bar of six years. Later, in 2013, the amended law brought down the tenure of board directors to six years. Also, the number of appointed family members was limited to two, with a view to curtail the dominance of family members and maintain corporate discipline. However, the 2018 amendment expanded the scope of family ownership in the banks, enabling up to four members to exercise increased control. This modification poses a risk to corporate governance. In the newly amended act, the number of family members is reduced from four persons per family to three, which is still more than the original rule of two members per family.
Moreover, this amended bill makes a very important change that will deteriorate the governance of the banking sector. The tenure of bank directors was raised from nine years to 12 years. Thus, directors can now stay on boards for another 12 years even if they have already served almost nine years, since their tenure will be counted anew from the implementation year of the amended law. Moreover, to be on the board, directors need to wait only three years after completion of a 12-year tenure.
Strangely, this amendment to the tenure of bank directors was not in the original draft prepared by the Bangladesh Bank. Passing such an important change in the bank company law without any proposal from the central bank, and without any discussion in parliament by the public representatives, is unprecedented. This simply reflects the power of bank directors, some of whom are also connected to banks and have an active interest in approving biased and weak policies.
Often, large volumes of loans are given to certain groups, in violation of the rules. Hence, Bangladesh's banking sector has experienced incidences of loan fraud from many business groups and individuals. Irregularities in several banks, such as BASIC Bank, Sonali Bank, Janata Bank, and Farmers Bank led to the syphoning of huge volumes of depositors' money by borrowers, who were given leeway by the banks. A recent audit by the Office of the Comptroller and Auditor General (CAG) unearthed several serious irregularities in the state-owned Janata Bank during 2015-2020.
The banking sector now finds itself in a precarious situation, saddled with a multitude of irregularities and scams that has led to a fragile state of affairs. Unfortunately, the authorities have shown a lack of proactivity in addressing these issues and establishing discipline within the financial sector. The persistence of loan defaulting and the ongoing misappropriation of bank funds is a concerning indication of the government's indifference towards tackling this problem. As a result, the number of NPLs continues to increase. Based on the Bangladesh Bank's annual reports, NPLs in the banking sector amounted to Tk 22,480 crore in 2009. However, as of March 2023, the NPL amount significantly increased to Tk 131,621 crore.
When considering various factors such as write-offs, funds involved in legal proceedings, and the rescheduling of special mention accounts, the actual magnitude of NPLs may be considerably greater.
In the past, some reforms were undertaken, particularly under the auspices of the World Bank and the IMF. However, once these programmes are over, the sector starts sliding back. Unless the urge to change comes from within the government, such measures (taken in a piecemeal fashion) will not be sustainable. The government only comes forward to rescue banks when they face serious capital shortage. But recapitalisation of state-owned banks by the government has not improved their capital adequacy situation. The government also tried to salvage the troubled private banks, but no discernible success has been achieved.
Therefore, without meaningful reforms, the banking sector cannot play its role as a source of resources for private investors. Stronger internal control and skilled human resources within the banks are crucial. Reform of the judicial process is needed. In order to expedite the recovery process for defaulted loans, special tribunals can be set up for swift and efficient resolution. It is essential to increase the number of judges handling cases under the Money Loan Court Act, 2003 and the Bankruptcy Act, 1997. Most importantly, board members at the banks should be independent and selected based on their professional excellence and experience, not their political allegiance.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD) and non-resident senior fellow of the Atlantic Council. Views expressed in this article are the author's own