New government faces challenge of financial reform and reducing defaulted loans

Every new government faces certain economic challenges. The situation this time is far more serious than before. Economists and analysts believe the BNP-led alliance government will have to continue ongoing reforms in the financial sector while also tackling the challenge of reducing defaulted loans.

Economists and analysts say 36 per cent of total loans disbursed by the banking sector have turned default. The financial institutions sector is in a similar condition. The new government’s main challenge will therefore be to bring banks and financial institutions under proper discipline and provide a strong legal foundation to prevent further irregularities.

Moinul Islam, former professor of the Department of Economics at the Chittagong University, told Prothom Alo that the interim government should have ensured the autonomy of Bangladesh Bank and passed amendments to the Bank Company Act and the Artha Rin Adalat Act 2003 before stepping down. They failed to do so.

The new government should begin by strengthening the sector through a firm legal framework so that no further financial crimes occur. The reform process that has already begun must continue. Those responsible for financial crimes must be brought under punishment. The new government should prioritise the financial sector as it begins its work. It should also give importance to employment generation and controlling inflation, he added.

During the tenure of the Awami League government, which was ousted in the 2024 student-public uprising, the country’s financial sector suffered severe disruption. Several banks and financial institutions were taken over and looted by Awami League-backed businessmen. A large portion of the money was siphoned abroad. As a result, multiple banks and financial institutions have become dysfunctional and many depositors are unable to withdraw their savings. The interim government therefore moved to merge five such banks.

What decision will be taken regarding groups such as S Alam and Beximco Group, which weakened the sector, is crucial. Whether the reform process already underway becomes sustainable will depend on this. Sector insiders also believe several laws must be passed to strengthen the financial foundation.

The banking sector is now the most concerning area of the economy. Five weak banks in the country are being merged to form the 'Sammilito Islami Bank'. Depositors of these banks are protesting with various demands. Officials who lost their jobs are also protesting. The five banks together have 7.5 million account holders and deposits worth Tk 1.31 trillion. The banks are First Security, Social Islami, Union, Global Islami and EXIM Bank. The process is underway to launch operations of the new Sammilito Islami Bank formed through the takeover of these institutions.

Six financial institutions are also being shut down. Completing these two initiatives properly will be a major challenge.

Defaulted loans in the banking sector rose to Tk 6.44 trillion last September. The default rate increased to 35.73 per cent, which was 16.93 per cent in September 2024. Efforts to recover defaulted loans must be intensified. Closed business establishments need to be reopened to create employment. Expanding employment through setting up new factories is a time-consuming process.

Bankers say the earlier tendency during the ousted Awami League government to underreport defaulted loans is no longer continuing. In addition, many borrowers fled, turning their loans bad. A mechanism therefore has to be determined for recovering these loans.

The interim government took initiatives to reform the Bank Company Act to bring banks under proper regulation. This was intended to rein in bank directors and make them accountable. In addition, steps were taken to amend the Bangladesh Bank Order to give Bangladesh Bank full autonomy for overseeing the banking sector. The reform of the Financial Institutions Court Act was initiated to bring defaulters to justice and recover funds. However, none of these measures were fully implemented. Passing these laws and ensuring their proper execution will be a major challenge for the new government.

Sector insiders also believe that to boost business and trade, interest rates need to be lowered, access to loans made easier, and other multifaceted measures taken. With increased remittances, the indicators of foreign trade have improved, so the BNP government will not face pressure over dollars.

Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB) and managing director of Mutual Trust Bank (MTB), has offered a set of recommendations for the new government. He told Prothom Alo that the government’s main task should be to improve law and order. Inflation remains high and employment generation is insufficient. Therefore, the business environment needs to be improved. Tax collection must be increased and loans reduced. This will allow the private sector to access credit.

Syed Mahbubur Rahman also said that initiatives to consolidate banks and repatriate laundered funds must continue. To reduce non-performing loans, the legal framework must be strengthened. Implementing this through the Bank Company Act and granting full autonomy to Bangladesh Bank will be essential to strengthen the financial sector. How effectively this is done will depend on who is entrusted with the responsibility for the financial sector.