Scope for irregularities shrink, crisis yet to clear

The financial sector was mired in various irregularities like embezzling people’s money deposited in banks, taking out money from banks in collusion with those in power or by directly joining politics, laundering money in the name of business, benefitting the loan defaulters, keeping banks running by printing money, decline in the forex reserve and so on.

So the interim government had to take prompt actions right after taking over to heal the wound in the financial sector. After assuming office, the interim government first had to close down all loopholes in the sector that opens the opportunities of whimsical irregularities. There are some positive outcomes too. However, the crisis is not over yet.

Although a temporary solution to the long-prevailing dollar crisis has been found in the first 100 days of the government, people’s confidence in the financial sector could not be retrieved. The customers are not being able to withdraw money as per the need from five to six private banks. These banks were affected the most by the massive looting that took place during the 15-year-rule of Awami League. Initiatives have been taken to prevent irregularities in these banks. The previous boards of these banks have been dissolved. However, the banks are still in a liquidity crisis.

Before the regime change, Bangladesh Bank (BB) was printing money to provide loans to some of the banks. This practice has been stopped since the formation of the new government. Special measures have been taken to provide money to these banks. However, the banks are not getting loans as per the demand under this process. As a result, the clients of these banks are now panicking about not being able to withdraw as much money as they need. Overall, people’s confidence in the banking sector has hit the bottom.

The new government undertook several major initiatives to reform the banking sector right after taking over. Newly appointed BB governor Ahsan H Mansur dissolved the board of directors of 11 banks and a financial institution.

However, the experts feel, the initiative has lost momentum due to the hasty reform initiatives taken without any clear roadmap. The central bank officials are also in doubt over the sustainability of the reform initiatives due to lack of necessary policy and initiatives. At the moment, nobody has the answer whether the banks weakened by looting will be dissolved or not or they are to be provided with capital to regain strength.

The banking sector experts think it is a big challenge for the BB to tackle the damage done to the financial sector of the country.

Speaking to Prothom Alo, Mutual Trust Bank executive director Syed Mahbubur Rahman said there are multifaceted problems in the banking sector. The central bank does not have the ability to solve all problems at once.

The dollar-crisis is mostly contained due to the policy change, he said, adding the central bank has said to take initiative to find out the actual situation of these banks through audits and surveys after dissolving the governing bodies.

“The central bank might take timely measures for the betterment of the depositors,” he said.

The dollar crisis emerged in the country following the rise in the prices of products globally after the outbreak of the Russia-Ukraine war.

Dollar price soared to Tk 120 from Tk 85 within a very short time after the start of the war. The prices of fuel and daily commodities skyrocketed as a consequence. The Awami League government tried to handle the situation by selling dollars directly from reserves instead of taking any timely initiative. As a result, the strategy didn’t yield any positive outcome.

After assuming office on 8 August, the interim government appointed Ahsan H Mansur, executive director of private research agency Policy Research Institute (PRI), as the governor of the central bank. He stopped the sale of dollars right after and took several initiatives to increase dollar supply. The ceiling for intra-bank foreign currency transactions was raised to 2.5 per cent from 1 per cent. After that the intermediary price of dollars came down to Tk 117-120 at most as per the crawling peg process of determining exchange rate.

These initiatives had immediate impact. The remittance inflow started to rise. The BB governor also held meetings with the foreign banks. Following those meetings, the foreign banks raised the ceiling of dollar transactions for local banks affiliated with them. The problems with opening new letters of credits (LCs) were mostly resolved after that. The dollar crisis has been almost sorted out as a result. The decline in forex reserve has also been stalled.

The BB figures show the country’s forex reserve stood at USD 25.92 billion on 31 July. However, according to the International Monetary Fund (IMF) assessment method BPM-6, the actual reserve was USD 20.48 billion. The country’s reserve surpassed USD 48 billion three years ago.

According to the BB figures, the country’s foreign reserve stood at USD 24.16 billion on 13 November, which is USD 18.43 billion as per the IMF method. The reserve fell a little last week after clearing an import debt of USD 1.5 billion to the Asian Clearing Union (ACU).

The banks owned by S Alam Group chairman Saiful Alam, who was very close to the then prime minister, were already facing a liquidity crisis by the end of 2022. Following that, the central bank started printing money to provide liquidity assistance to these banks - Islami Bank, Social Islami Bank, First Security Islami Bank, Global Islami Bank, Union Bank, Commerce Bank, Al-Arafah Islami Bank and National Bank. However, the S Alam Group even misappropriated the money from the loan taken from the central bank under special arrangement. These banks now owe nearly 250 billion taka to the central bank together.

However, the banks fell into crisis due to the termination of loan facilities and change in the governing bodies. Later, the BB introduced a system of providing loans from strong banks against their guarantee following reports of vandalism and harassment of officials at different branches of these banks. The seven banks under crisis have received a total of Tk 65.85 billion so far under this arrangement. Although two of these banks (Al-Arafah Islami Bank and Islami Bank) have settled their liquidity crisis following the new initiative, the situation has further worsened in the other five banks.

Concerned BB officials say the central bank once printed money to help loot banks. Now a complex system has been introduced to meet the liquidity crisis. However, the banks are not getting money as per the demand under this system, resulting in lack of confidence because; panic spreads among others when someone does not get the money needed.

Speaking to Prothom Alo, First Security Bank independent director and chairman, Mohammad Abdul Mannan said, “The banks survive on people’s confidence. It’s natural that the clients will want to withdraw their money when the bank fails to provide money to a depositor as per the need. Therefore, pressure to withdraw money from our bank has increased.”

Another major challenge for the Bangladesh Bank is to curb the size of defaulted loans, which at one point (June, 2024) exceeded Tk 2.11 trillion during the tenure of the Awami League. Consequently, some 12.56 per cent of the total loans provided by the local banks is now defaulted.

People relevant to the banking sector say the actual size of defaulted loans could turn out to be further more after the BB survey. Besides, the defaulted loan is likely to increase due to the slow pace of business in recent times.

BB is raising the policy interest rate to control inflation resulting in the increase of interest rate against bank loans. It has already exceeded 15 per cent. Despite that, the inflation rate remains beyond control. The overall inflation rate increased to 10.87 per cent in October, the highest in the last three months.

Addressing an event in the capital on 11 November, BB governor Ahsan H Mansur said they needed at least eight more months to contain inflation. Credit flow in the banking sector has hit the lowest point (9.2 per cent) in the last three years due to increase in interest rate and several other reasons. A decline in credit flow slows down business and investments, which affects people living.

The banking sector is one of the major sectors which were severely affected the most during the AL-rule. Therefore, this sector was on top of the priority list for reform after the mass uprising of the students and people.

Bangladesh Bank has formed a task force for the banking sector reform. The task force will find out the true value of assets of the bank which were subjected to massive irregularities. It will conduct forensic audits in five banks, including the Islami Bank, which starts next month.

At the same time, an initiative has been taken for legislation of a separate law for banking sector reform. The central bank will set the next course of action as per this new law after finding out the actual asset value of these weak banks.

Meanwhile, an inter-organisation task force has been restructured to bring back the assets laundered abroad.

The Bangladesh Financial Intelligence Unit (BFIU) has decided to hire international legal aid agencies specialised in recovering laundered money in the US, UK, Singapore, Dubai and Canada.

Prothom Alo spoke to two managing directors of two local banks regarding the overall situation and progress in the reform process.

Speaking on condition of anonymity, they said the governor will have to play the role as a crisis manager to rise from the woe, not as an economist. This time, there will be nobody beside him as many officials and employees of the central bank are beneficiaries of the corruption during the tenure of the Awami League. As a result, uncertainty remains as to how effective these initiatives will be.

* This report appeared on the print and online versions of Prothom Alo and has been rewritten in English by Ashish Basu