Weak banks sink deeper into crisis

There has been a longstanding practice that the Bangladesh Bank appoints an observer to the banks experiencing financial distress or showing similar signs. However, the regulator started appointing a coordinator instead of the observer in July of last year, soon after the joining of the current governor.

The appointed central bank officials participate in the board meetings and closely monitor the ailing banks. Still, the banks under special supervision mostly registered a decline in their financial health over the last year, according to reports of the Bangladesh Bank.

The central bank has now kept a total of 15 banks under its special monitoring and has been paying an additional allowance to the deputed observers or coordinators.

According to sources, a number of banks are failing to maintain the cash reserve ratio (CRR) as per the central bank's requirements, while their loan irregularities remain unabated.

In addition to the banks already under scrutiny, three Shariah-based banks and some other conventional private banks are facing crises stemming from irregularities. But there is no initiative from the central bank to put them under monitoring, which has prompted some officials to question the effectiveness of the current monitoring model.

Against such a backdrop, uncertainty shrouds the future prospects of the struggling banks.

Some Bangladesh Bank officials said it is too tough to bring the banking sector to order without direction from the high levels of government, as the owners and major clients of the ailing banks are influential and close to the government. Some of them even hold positions in the government.

Therefore, the central bank has been hesitant to implement its policies that may affect the powerful quarters, leaving some good banks to suffer in the aftermath. Here, the banking sector regulator is blatantly failing to act in the best interest of depositors.

Of the 15 banks under central bank monitoring, seven are currently operating under coordinators. The banks are National Bank, Padma Bank, AB Bank, One Bank, BASIC Bank, Bangladesh Commerce Bank, and Bangladesh Development Bank Limited (BDBL).

The remaining eight banks are running under coordinators. They are Sonali Bank, Janata Bank, Rupali Bank, Agrani Bank, Bangladesh Krishi Bank, ICB Islamic Bank, Islami Bank Bangladesh, and First Security Islami Bank.

At least 12 of the banks have registered a rise in their defaulted loans, along with instances of new loan irregularities. Only BASIC Bank, Padma Bank, and National Bank have succeeded in reducing their default loans.

To meet the conditions of a $4.7 billion loan from the International Monetary Fund (IMF), the Bangladesh Bank has directed the banks to reduce their defaulted loans, but most of them are struggling to comply with the directive.

Mustafa K Mujeri, former chief economist of Bangladesh Bank, expressed doubts about the effectiveness of observers and coordinators due to their limited authority.

“There is no scope for the banks to improve much with the observers and coordinators as they hold no authority to play a role. If the Bangladesh Bank really wants to improve the banks, it is enough to force them to follow the rules. Here, who the owner is and who the clients are – these issues cannot be taken into consideration. The central bank needs to adopt a proactive approach to bring about qualitative change. It will safeguard the depositors' money,” he added.

The economist observed that the owners and clients of the ailing banks are mostly close to the government. Hence, it is a big question how far the central bank can exercise its authority. Rather, it requires an initiative from the government to improve the banking sector.

Over the past year, the Bangladesh Bank classified seven banks as weak and appointed coordinators to oversee their operations, though they already had central bank observers.

The coordinators are not allowed to join the banks’ board of directors, but have access to and can monitor all the documents of the banks. The observers used to attend the meetings of the board, executive committee, and risk management committee.

The coordinators – Bangladesh Bank officials with the rank of executive director – receive a monthly allowance of Tk 30,000 from the central bank. Also, there are two assistants for each of the coordinators who receive Tk 10,000 per month.

According to central bank sources, the Padma Bank (formerly known as Farmers Bank) has the highest default rate among the banks with coordinators. Following irregularities of the previous owners, some state-run banks acquired stakes in the bank and renamed it in 2013, but its financial health remained unchanged.

The big clients are still struggling to get their deposits back, while its 63.65 per cent of disbursed loans remain defaulted. However, there has been a slight reduction in the defaulted loans over the past year, decreasing from Tk 39.5 billion to 36.72 billion.

In the National Bank, the defaulted loans have decreased by Tk 30 million from Tk 93.94 billion over the past year. The BASIC Bank also saw a reduction in defaulted loans from Tk 82.49 billion to Tk 80.25 billion.

In contrast, AB Bank, One Bank, Commerce Bank, and BDBL did not register any significant improvement in defaulted loans. In an inspection, the central bank found the AB Bank to have disbursed loans to anonymous entities. Its defaulted loans increased from Tk 43.45 billion to Tk 59.53 billion.

The One Bank's defaulted loans also rose from Tk 27.93 billion to Tk 28.31 billion. The Commerce Bank's defaulted loans increased from Tk 9.84 billion to Tk 11.58 billion, and that of BDBL increased from Tk 7.67 billion to Tk 9.71 billion.

Mejbaul Haque, spokesperson and executive director of Bangladesh Bank, serves as the coordinator for BASIC Bank. He said it is impossible to bring changes overnight. The observers and coordinators are playing a crucial role in preventing new irregularities.

However, when it comes to dealing with previous irregularities, they can only submit reports to the concerned department for taking action.