Talks on reform in the banking sector started late following the announcement of mergers of weak banks, and Bangladesh Bank itself began the talks. Bank top executives have been told by the regulatory agency to initiate the merger talks.
People from various levels of the government delivered political speeches on the ‘strong banking sector’ several years ago. No attention was paid to economists’ advice on reforms in the banking sector. Now when the central bank itself is advocating reforms, the question arises of what have they been doing this long. Some even question how much reforms will be possible in the banking sector by the central bank.
At the bankers' meeting on 1 February, Governor Abdur Rouf Talukder mentioned that 40 of 61 banks in the country are in good condition. Of the remaining, some 8-10 banks could merge with others. For this, he advised managing directors of better-performing and weak banks to initiate discussions among themselves.
The governor began this discussion through the Prompt Corrective Action (PCA) framework issued in December 2023, which will come into effect in March 2025 based on the financial statement of 2024.
Under the PCA Framework, the banks shall have to carry out a schedule of corrective actions directed by BB based on selected parameter indicators i.e., Capital to Risk-weighted Assets Ratio (CRAR), Tier 1 capital ratio, Common Equity Tier 1 (CET1) ratio, Net Non-Performing Loan (NPL) and Corporate Governance.
A bank that continues to perform a downtrend in all five indicators will be categorised as ‘unsafe’ and ‘financially unhealthy or weak’ by Bangladesh Bank. A bank slips in two categories simultaneously will be classified as the ‘weakest’ bank.
If the concerned bank fails to implement the plan to overcome its weakness, Bangladesh Bank may initiate penal measures or a compulsory merger with any other bank. People concerned said measures must be taken now to merge the banks under this framework and the process must start as soon as possible.
Mutual Trust Bank managing director Syed Mahbubur Rahman told Prothom Alo, “This a timely initiative, and this may improve the situation in banking. However, we are awaiting the Bangladesh Bank’s guidelines on the merger of weak banks with the better-performing ones, and once the guidelines are formulated, the bank can start working on it.”
Bankers said the actual scenario is worse than what was shown in financial indicators. The amount of defaulted loans is said to be 1.5 trillion, but the actual amount is Tk 4 trillion. If anonymous loans are added, the total figure will rise to Tk 6 trillion. The actual scenario must be revealed first, and then a merger of banks can be carried out for reform.
Three officials involved in the central bank’s inspection operation told Prothom Alo authorities have been inspecting a bank of a person holding a government position over the past five years just for formalities. A similar situation has also arisen at five Shariah-based banks. Besides, money is being printed for lending. Besides these, the central bank cannot work independently at several new and old banks. Talks on reform are meaningless unless these are fixed.
According to a top official of the central bank, currently, how the central bank functions it will not be possible to identify the weak banks in the true sense. In particular, banks of influential people will remain left out of the weak banks’ list. The banking sector will be fine only when a green signal on actual reform will come from the top level of the government, not before, the official added.
It is to be seen how far these reforms will actually be carried out.