80pc of NPL are deliberate, banking conference speakers say
Wahiduddin Mahmud, former adviser to the interim government on planning and education, said Bangladesh’s banking sector was initially damaged by a culture of loan defaults. The sector later managed to move away from that practice, but after 2010, it fell into a new culture of “looting banks.”
This, he said, had brought the financial sector to its current dire state.
He made the remarks at the opening session of a two-day annual banking conference organised by the Bangladesh Institute of Bank Management (BIBM) in Mirpur, Dhaka, on Wednesday morning.
Other speakers at the session included Bangladesh Bank Deputy Governor Md Kabir Ahmed; Abdul Hai Sarker, president of the Bangladesh Association of Banks (BAB), an organisation of private bank owners, and chairman of Dhaka Bank; Jean Pesme, the World Bank’s division director for Bangladesh and Bhutan; and Mashrur Arefin, chairman of the Association of Bankers, Bangladesh (ABB), an organisation of senior bank executives, and managing director of City Bank. Zaidi Sattar, chairman of the private research organisation Policy Research Institute (PRI), presented the keynote paper.
At the same session, BAB President Abdul Hai Sarker said nearly 80 per cent of non-performing loans (NPLs) in the banking sector were the result of deliberate defaults. The remaining 20 per cent might be unintentional. Those who deliberately default, he said, have the means to repay their loans but have no intention of doing so.
Recounting his experience of banking sector reform, Wahiduddin Mahmud said, “It took considerable effort to move away from the culture of loan defaults. We introduced and reformed various rules and regulations and restored discipline through a regulatory framework. We managed to bring some private banks up to international standards. But then a culture of looting banks began. This is far more serious. Money was siphoned out of banks without regard for any rules or regulations.”
Mahmud added that those involved in the looting had established banks using money from teachers’ salaries and allowances, welfare funds and pension funds. Those banks later became completely insolvent, leaving billions of taka in pension and welfare fund payments owed to poor teachers, including teachers under the Monthly Pay Order (MPO) scheme, tied up in the failed institutions.
Lessons must be learned from the past
Speaking as a special guest during the opening session, Mahmud urged the banking sector to learn from past experience.
“We must learn from the banking sector’s experience over the years. In the past, we allowed private banks to be established without first putting an appropriate regulatory framework in place. What was the result? We saw sponsor-directors borrow amounts equivalent to nearly one-third of a bank’s total deposits—around 35 per cent—from the very banks they controlled.
“There should have been rules on whether a single group or family could control multiple banks. This should fall under anti-trust legislation. We still have no anti-trust or anti-monopoly law.”
Mahmud said politically influential individuals had consistently used state-owned banks as channels for distributing unfair benefits under elected governments.
“If a political government wants to distribute benefits for political reasons, it should choose sectors where doing so will not cause major damage to the country’s economy. Using the financial sector for political patronage is entirely inappropriate. Political governments must understand this. There is little Bangladesh Bank or bankers can do about it,” he said.
Mahmud also said several banks had become insolvent because they were granted licences “in droves” after 2010 without proper scrutiny. Some failed banks had accepted deposits from government institutions.
He attributed the current state of the banking sector to the excessive relaxation of rules and regulations over the past 15 years.
“To rescue weak banks now, we will have to relax some rules and regulations to a certain extent. But we relaxed them in the past, and that is how we ended up in this dire situation. What assurance do we have that the same thing will not happen again?” he asked.
On how to move forward, Mahmud said banks must be given the opportunity to stand on their own feet, but adequate safeguards must be put in place.
“Each case must be examined individually to ensure that money reaches honest and genuine entrepreneurs and businesspeople. If we cannot guarantee this, we will fall into the same old trap again,” he said.
Nearly 80pc of NPLs deliberate
BAB President Abdul Hai Sarker said there were many ways for deliberate defaulters to evade the existing legal mechanisms intended to force them to repay their loans. The government’s legal measures against defaulters were extremely weak and needed to be reconsidered, he said.
“Banking sector reform requires practical policy decisions. For banks that are struggling and have no realistic prospect of recovery, we can consider liquidation, mergers or acquisitions. But these steps must be taken in a sustainable manner. We cannot rush into them,” he said.
ABB Chairman Mashrur Arefin said banks were struggling to find customers willing to open large letters of credit (LCs) to import capital machinery, expand factories or undertake similar business activities.
“Private sector credit growth is close to zero because businesspeople are worried. Their concerns are primarily political. We are tired of investing in Treasury bills and bonds. We may be making good profits from these investments for the time being, but nothing will be sustainable if businesses are not doing well,” he said.
In his keynote paper, PRI Chairman Zaidi Sattar said inflation in Bangladesh was not entirely monetary in nature, which limited the effectiveness of relying solely on monetary policy.
“Our monetary policy should aim to stabilise market prices and ease people’s expectations and fears that prices will continue to rise. Fiscal policy, meanwhile, should keep government borrowing within safe limits, promote economic growth, invest in education and healthcare, and provide social protection for the poor,” he said.
BB Deputy Governor Md Kabir Ahmed said the country needed a performance-based banking sector. Ineffective rules from the past would be enforced strictly, he said. The recent appointment of private-sector chief executives to state-owned banks demonstrated the government’s firm stance, he added.
Jean Pesme, the World Bank’s director for Bangladesh and Bhutan, said the government’s goals of building a US$1 trillion economy and creating 10 million jobs could not be achieved through the banking sector or public financing alone.
Revitalising the stock market and ensuring the best use of private savings and capital would also be necessary, he said.