Has the banking sector become an obstacle to growth?

In its Spring 2019 edition of the "Bangladesh Development Update", the World Bank said that success of Bangladesh's development hinges on increased private investment and innovation. Experts from different fields have opined the same during various national discussions regarding the industrialisation of the country, and how Bangladesh can maintain or even expand its current growth rate of 7-plus percent.

On the other side of the fence, government officials have had their say on the central government's plan to speed up the industrialisation process. The authorities have also commented on how they believe the growth momentum can be sustained, however, what has mostly been missing from their narrative is the impediments to increasing private investment and innovation—none bigger than the banking morass that the nation has been stuck in now for nearly a decade.

Even the WB recognised this. In its report mentioned earlier, the WB said that the biggest inhibition to increased private investment is the abysmal condition of the banking sector now struggling increasingly with non-performing loans (NPLs). Similarly, the Asian Development Bank (ADB) pointed out in April 2019 that one of the biggest economic problems Bangladesh face is the worsening state of the country's banking sector.

To their credit, economists and analysts have been saying this for years. And so, the problem is not that this has not been identified by anyone. But that government officials have refused to acknowledge this fact.

Bangladesh stepped into 2020 with a great challenge on its hands—to become a developed economy by 2030, meaning it has only 10 years to achieve its next great objective. Economists, however, seem divided over the current year's growth forecast, which the government has set at 8.2 percent, but is forecasted at 8.1 percent by the WB.

According to the Centre for Policy Dialogue (CPD), Bangladesh's macroeconomic stability has now become weaker and performance of economic indicators is under mounting pressure which may lead to a structural slowdown in the economy. One of the most worrying among these concerns is the fact that private investment has remained stagnant at 23 percent for successive years—with no signs of it budging anytime soon.

Private sector credit growth went down to 10.04 percent in October 2019—a nine year low and 3.16 percent less than the central bank's target for the first half of the fiscal year—as higher government borrowing from the banking sector crowded out potential private borrowers. According to Dr Ahsan H Mansur, Executive Director of Policy Research Institute, "the ongoing trend of the government borrowing is unprecedented as the economy has never faced such a situation." But without increasing private investment, the growth rate cannot be improved—nor sustained according to some experts. Which is why, it is extremely concerning to see the private sector experience only a 10.66 percent year-on-year credit growth in September 2019, the slowest after September 2010, despite the relative stability the country enjoyed in the political sphere.

Aside from the "crowding out effect", one of the biggest impediments to private credit growth has been the woes of the banking sector, that have arisen primarily due to non-performing loans, as highlighted by the WB and ADB. As per the central bank's latest data, which is until September of last year, defaulted loans in the banking sector stood at a record Tk 116,288, which is 11.99 percent of total outstanding loans. During a question-answer session in parliament on January 22, the finance minister revealed that the total number of defaulters stood at 8,238 who owed Tk 96,986.38 crore to various public and private banks till November last year, which means the amount fell by Tk 19,302 crore since September—although banks officials told this newspaper that the loans dropped due to relaxed loan rescheduling facilities offered by the government more than anything.

In the first nine months of this fiscal year, loans written off by banks escalated 42.66 percent year-on-year to Tk 1,640 crore. According to Zahid Hussain, a former lead economist of the World Bank's Dhaka office, this may help lenders paint a rosy picture for the time being, however, it "will not bring anything positive as recovery of such delinquent loans is incredibly tough." As of last September, the banking sector's total written off loans stood at Tk 55,055 crore, up 10 percent from a year earlier, the central bank's data shows.

Meanwhile, the former finance minister, in an interview with The Daily Star, said that the latest loan scheduling package, which allowed defaulters to reschedule loans by footing just 2 percent down payment: "is not a good policy—you are just increasing the number of defaulted loans. This was not right." Unfortunately, we saw the same policy implemented under his tenure as well, although, to his credit, the former finance minister did not shy away from owning up to that, during the interview.

Therefore, the loan rescheduling policy that we now see is simply a continuation of the old policy we saw under the former finance minister—and so is the policy of granting a number of other facilities to defaulters and to banks that have been struggling with rising non-performing loans mainly due to corruption and mismanagement. For example, between 2011 and 2018, the government had given handouts of around Tk 13,660 crore to banks—a massive amount of funds that could have been used for other purposes. Despite that, between 2009 and 2016, defaulted loans grew by about 176.5 percent, and even beyond since then.

According to a report by the Global Financial Integrity in 2014, USD 75 billion was lost from Bangladesh's economy between 2005 and 2014 because of trade misinvoicing and other unrecorded outflows. Many suspect that a huge chunk of this came out of the banking sector—and this leakage of funds surely had a huge impact, as none of it was invested in the domestic economy, but was siphoned out of the country and parked abroad. This was the worst possible outcome. When leakages happen because of corruption, but the money stays within the country, at least there is a chance of that money being reinvested into the economy at some point. Yes, that kind of corruption does have negative impacts on the economy. But not nearly as much as when the money is siphoned abroad altogether.

Returning to more recent times, in June 2019, total NPL in the banking sector was 19.71 percent higher than the amount at the end of December 2018. A dozen banks faced a combined provision shortfall of Tk 12,000 crore in the third quarter of 2019 which showed just how weak these

banks are when it comes to their ability to shield depositors' funds from financial risks. According to Dr Mansur, this "provisioning shortfall in a bank means regulatory violation. Developed and many developing countries impose financial penalty against lenders if they breach regulations." Our regulators, however, decided to break with such conventional wisdom—and the result of that is clear for all to see.

In the first nine months of 2019, banks rescheduled a record amount of defaulted loans in their efforts to contain bad debt and manage hefty profits, but only artificially. Between January and September of last year, NPL amounting to Tk 31,175 crore were regularised, the highest on record even for a single year. The previous record, ironically, was set only the year before—in 2018—when banks rescheduled Tk 23,210 crore. According to Salehuddin Ahmed, a former governor of the central bank, the large amount of rescheduling that we see indicates that banks will face liquidity crisis in the days ahead—which the government has been categorically denying. Ahmed further said that, "the random rescheduling has weakened the financial norms in the banking sector and eroded business confidence as well. The private sector credit growth has been sluggish for long and it will not get a boost if the trend persists."

Among the many irregularities has been the fact that until the last September, directors of different banks took loans amounting to Tk 173,230.89 crore from their own as well as other banks, revealed the finance minister, which is around 12 percent of the total outstanding loans. Not only does this expose the shady dealings that have been going on among banks and their directors, but it shows once again just how poorly the regulators have done with regards to preventing corruption and irregularities in the sector. Which forced the High Court to say in May last year that, "the central bank on the one hand is patronising the big loan defaulters by giving them various facilities. And on the other hand, it is harassing small loan defaulters by filing cases related to loans and bank cheques."

During his interview with The Daily Star, the former finance minister said that the regulators must be "strict" in order to force banks to bring down the amount of NPL that they have. This is something that has been badly missing so far. But in order to prevent the banking sector from being such a burden on the rest of the economy, and from holding back growth, the regulators must come to their senses and do exactly as the former finance minister and, in fact, many others before him, have suggested.

Eresh Omar Jamal is a member of the editorial team at The Daily Star. His Twitter handle is: @EreshOmarJamal