Eventually a commercial bank is going to be dissolved. Although political clout and regulatory power has been used repeatedly to keep the Padma Bank alive, this wasn’t considered in the final decision.
Despite being in crisis almost from the start, this bank, which got approval based on political considerations, always got special favours. Now, the process has started to merge Padma Bank with Exim Bank under the initiative taken by the central bank to merge some banks in crisis. However, the question remains as to whether the persons, whose endless corruption led the bank to this situation, will be punished or not.
The history of the Padma Bank shameful. The government approved the establishment of nine new banks a decade ago. One of those was Farmers Bank, predecessor of Padma Bank. The activities of this bank were controversial right from the start. The entrepreneurs of this bank are so influential that they opened an office and started recruiting for the bank even before getting the government approval. It was mired in irregularities right from the beginning. As a result, Farmers Bank fell into crisis very quickly.
The chairman of the bank at the time, former home minister Mohiuddin Khan Alamgir, was forced to resign within just four years of its inauguration. The bank was in shambles by that time. However, money from four state-owned banks and the Investment Corporation of Bangladesh (ICB) was provided to Farmers Bank as the capital for its survival. The efforts to artificially sustain the bank, dissolution of which was the rational conclusion, were driven by the decision made by regulatory power on the basis of political consideration. However, Farmers Bank had such a bad image in the financial sector that the authorities had to change its name in January 2019.
Although the name of Farmers Bank was changed to Padma Bank on paper, it didn’t take that much time to realise that there have been no qualitative changes in this bank. Meanwhile, persons those who used to run Padma Bank started taking different sorts of concessions using the regulatory body. The bank took these benefits showing the bait of foreign investments in the future. However, there has been no investment in the bank as promised so far. In the meantime, Padma Bank shrank even more and the depositors lost confidence in the bank.
The bank on its website proudly said that it wants to be the ‘trusted guardian of financial assets’ of the clients. The total deposition into the bank was more than Tk 60 billion by the end of December last year. It includes deposits of different government agencies worth around Tk 28 billion. But some 62 per cent of the total amount of loans that the bank provided was defaulted. Padma Bank was not being able to pay for the interest against the deposit with its own income. Therefore, it can be said that the bank completely failed to discharge its duty as the ‘trusted guardian of financial assets’. Padma Bank tried to convert the deposits into shares as its last attempt to survive, but there wasn’t much response.
After Mohiuddin Khan Alamgir’s departure, four state-owned banks and the ICB now own 68 per cent share of the bank. These agencies invested Tk 7.15 billion into the bank in 2018. However, the control of the bank was mainly in the hands of Nafeez Sarafat, who resigned as the Padma Bank chairman in January. The financial situation of the bank got even worse during the tenure of this businessperson, who is known to be close to the government.
Dissolution of a bank is a rare incident in Bangladesh. However, it’s very common in the financial sectors of the West. For instance, as many as 568 banks have been dissolved since 2000 in the USA alone. It means that some 25 banks were forced to close their operations there every year on average. The number of dissolved banks in the USA was the highest in 2010. Some 157 banks were dissolved that year. The number was 140 in 2009. The reason behind this was the economic recession that emerged in 2008, which had shaken the financial sector of the entire world. Following this, the central banks across the world started becoming strict on controlling the financial sector.
But, it was seen last year that catastrophe may repeat when restrictions are relaxed. Four banks collapsed one by one in the US at the beginning of the year, and another one at the end of the year. The US central bank Federal Reserve released an evaluation on the collapse of the Silicon Valley Bank in April of that year, holding the bank’s senior officials responsible for mismanagement, as well as the Fed Reserve’s regulating officials who could not realise the ‘weakness’ of the bank. The report also blamed the Fed Reserve’s ‘change in regulatory standard’ introduced in 2018, and that means they acknowledged that restrictions were relaxed in controlling the financial sector.
No one takes responsibility for failure in Bangladesh and finance sector regulators are no exception, but this failure has now brought danger to the entire financial sector. Several banks are now in such a dire condition so that Bangladesh Bank has appointed their officials as observers and coordinators. There are 15 such banks, which is one-fourth of the total banks in the country. Even after that, the financial condition of most of the banks that underwent the central bank’s monitoring has deteriorated.
Former chief economist of the central bank Mustafa K Mujeri perhaps identified why the situation of the weak banks is not improving. He told Prothom Alo several days ago that most of these banks’ owners and big clients are close to the government. So, the big question is what role can Bangladesh Bank actually can play.
Padma Bank is going to merge with EXIM Bank voluntarily. Central banks said if banks do not merge voluntarily, the regulator will create pressure on them. The authorities, however, did not release the names of banks that they want to be merged. However, governor Abdur Rauf Talukder said up to 10 banks are likely to merge with other banks, and the figure represents one-sixth of the total banks in the country. That means the governor categorically admitted that the situation of a significant number of banks is not good.
However, it is a big question whether the merger of banks will weather the persisting crisis in the banking sector. Another big question is what actions are being taken against those who are responsible for this crisis, and they may be owners, management authorities or regulatory authorities. Businesspeople are now demanding that they do not want to take liability for ‘looted loans.’ Those who looted the money of the depositors or abated in the looting face no punishment in this country. Banks will get bigger after the merger, but it is necessary to know what steps are being taken to stop looting there.
Farmers’ Bank chairman Mohiuddin Khan Alamgir was offered a safe exit without any accountability and his successor and Padma Bank chairman Chowdhury Nafeez Sarafat also got the opportunity to resign. So, Padma Bank will remain a classic example of corruption and irregularities in the financial sector of Bangladesh.
This report appeared in the print and online editions of Prothom Alo and has been rewritten in English by Ashish Basu and Hasanul Banna