The evils of our banking system

It took me some time to choose an appropriate title for this article, as I found it difficult to collectively name the problems of the banking system in Bangladesh. In the end, I opted for the one above.

Although the word ‘ill’ used here is usually associated with illnesses, it seemed appropriate to use it in the title because the problems that persist in the banking system in Bangladesh have turned into illnesses, and these could very well threaten the economic ecosystem of the country if policymakers fail to effectively tackle the problems.

When it comes to problems in the banking system, non-performing loans and/or facility financing (NPL) has always been named as the major problem plaguing the sector in Bangladesh.

But from an industry insider’s perspective, PNPs are only the tip of the coin. The main problems are more deeply rooted and if you ask any banking professional in the country, the majority will highlight the “lack of good governance”.

The lack of good governance has had negative effects on the sector in several ways. The presence of irregularities is reflected in the history of the banking sector in Bangladesh.

But the situation has worsened considerably in recent times, as banking and non-banking institutions have slowly turned into playgrounds for the sponsors of these institutions.

The presence of an excessive number of banks has also exacerbated the situation, most of the large business houses having been able to take stakes in one or more banks or non-banking financial institutions (NBFIs).

This has resulted in clandestine transactions where a sponsoring director of one bank asks the director of another bank to make loans to his business entity, and in return he will make loans to the business entity of the administrator whose bank provided that loan.

The sponsoring directors of banks and NBFIs in Bangladesh greatly influence the operations of these institutions.

The main basis of the banking system is people’s money. The negative performance of any financial institution harms the interests of the people.

The board exists to provide good governance, and a big part of that role is to separate personal gain from that of the financial institution.

Appointments of businessmen with vested interests as directors seriously affect the judgment of managers because managers must then juggle the interests of directors with those of depositors and other financiers.

The lucrative attitudes of these administrators also cause financial institutions to make risky and aggressive investments, which tend to create traps rather than gardens of wealth for these institutions.

This is precisely why supporters of good governance are calling for the appointment of former banking professionals as representative directors on boards of directors. Because they have the necessary experience and knowledge of banking operations, customers, as well as overall market indicators and scenarios to consider in order to make informed decisions.

So far, multinationals and some of the major local banks and NBFIs have proven to practice good governance.

Another reason given by bankers to explain the diseases of the system is the existence of too many banks and financial institutions. The existence of too many competitors has already tainted market conditions.

It is also a fact that most new banks and NBFIs are struggling due to shortage of quality bankers as the industry has grown exponentially while the pool of human resources has failed to make faced with the demand for competent and experienced bankers for new places.

Such a scenario fundamentally weakened the main output generator of the banking system.

There are some organizations in the country that provide good training on banking subjects, but frankly, such institutions are very few. A significant gap also exists between the reality of the banking sector and the knowledge that our academy provides.

Profit-seeking, self-interested interference by sponsoring directors, ill-prepared staff, and unhealthy competition have fostered problems that are pushing the banking system into dire straits. The NPL scenario has been made worse due to unsustainable and aggressive growth drivers as well as customer onboarding without proper valuation.

The influence of leaders as well as the power play of influential circles has also given rise to scams, as can be seen in the cases of Basic Bank, Sonali Bank, Farmers Bank, AB Bank, BIFC, International Leasing, People’s Leasing , etc.

A major scam at a banking institution should have been enough to ring the alarm bells. But here we have many such cases that have rocked the industry in the absence of credible investigation and action to punish the real beneficiaries of these scams.

The goal of financial inclusion has also not been achieved even though we now have sixty-one regular banks, five non-regular banks and thirty-five financial institutions.

On the other hand, in the face of criticism over issuing more banking licenses, the authority used to state that the existence of so many banks will ensure financial inclusion in the long run.

The major problem with this failure is that policy makers failed to distribute the banking channel to other parts of the country as Dhaka remains the main banking hub.

Policymakers should have ordered third and fourth generation banks to place their headquarters in other major divisional cities rather than Dhaka. This would have encouraged banks to develop SME and retail markets close to their respective head offices.

When the NPL issue came to the fore, the big banks and NBFIs collectively focused on fewer corporate customers, which are the largest and most secure business houses in the country.

This attitude gave unimaginable power to a few business houses, which led these houses to set their own loan terms rather than the banking system.

In order to seek safe investment opportunities, the banking system has begun to shun the country’s largest SME sector.

The pandemic situation of 2020-2021 has made the banking system more risk averse, which, in turn, negatively affects the SME sector. The lending system in the rural economy has also been largely taken over by much more expensive micro-finance institutes in the absence of a traditional banking system in these areas.

The pandemic period – although it was a curse for the whole economy – was a blessing in disguise for Bangladesh’s banking system.

The system was already rocked by NPLs and cash flow issues before. The pandemic period has led to a decline in investment activity and government initiatives to increase liquidity to support the economy.

It also gave rise to a much more flexible restructuring/rescheduling methodology and classification reporting system. As such, the situation has given the disease-ravaged system some respite.

But the disease is becoming visible again for a variety of reasons, including the central bank’s “cautious policy with a tightening bias”, strong inflationary pressures affecting the economy, and the illogical decision to cap lending and borrowing rates in the banking system. .

All this has considerably reduced the liquidity of the banking system, in particular for new entrants. Lending and borrowing rate caps have resulted in an unenviable situation where much safer government instruments such as treasury bills and bonds pay higher interest rates than the highest deposit rate a bank can provide in the country.

The overall interbank lending rate offers a lower return than investment in government instruments, which has led larger banks with higher liquidity to invest in government instruments rather than providing liquidity support to the banking system.

The deposit rate cap has also significantly reduced the profitability of the banking system, which, compounded by the NPL, severely affects the overall health of the system. Such an unsustainable policy cannot be maintained in the long term if the authorities really want to protect the banking system.

Bangladesh now stands at an important turning point in its history, as it is on the verge of attaining middle-income country status. To properly guide the country to a better position, it is necessary to upgrade the economy, and this will not be possible without the existence of a dynamic and sustainable banking system.

The diseases that have rocked the system will very soon become a major threat to the economy. The question must now be treated with the greatest attention. A dedicated bank commission to remedy irregularities will bring about good changes.

Giving full freedom to the central bank in the governance of the sector will greatly improve the situation. Misguided interference, such as the imposition of interest rate caps, should not be allowed.

The decentralization of the Dhaka-based banking system will also result in greater financial inclusion and greater development of the rural economy.

With effective policy proposals and implementation guidelines in place, the banking system will be able to shake off its problems and become a powerful support system for the economy. Timely decisions are needed now to get rid of this disease that plagues the banking system of Bangladesh.


Sketch: TBS

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Sketch: TBS

Aamer Mostaque Ahmed heads the structured finance division of a well-known multinational NBFI and is the executive director of the Youth Policy Forum.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.

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