Merging weak banks with strong banks is not easy

What is the present condition of the banking sector and why has it reached this state?

Salehuddin Ahmed: The main reason behind the present problematic state of the banking sector is lack of good governance. Then there are wrong decisions of the central bank. Thirdly is the weak stance of Bangladesh Bank.

When you were the governor of Bangladesh Bank, the banking sector was riddled with problems then too. How would you deal with it then?

Salehuddin Ahmed: Various expert committees and commissions would come up with recommendations regarding the problems that cropped up in the banking sector at various times. Based on that, certain financial regulations and guidelines were drawn up for the central bank. During my term, these were brushed up and measures were taken under the banking act. The main factor was that all banks were compelled to carry out these directives. Action would be taken against those who failed to do so. Another factor was that even if there were some political or bureaucratic interventions, from the central bank we would discuss these issues and resolve them. The central bank would perform with total professionalism.

There is a propensity among many influential persons to take loans with no intention of repayment. How has such a situation come about?

Salehuddin Ahmed: A culture has emerged where loans are taken but not returned. The main cause behind this is the leniency of the central bank in recovering default loans. It displays a lot of laxity, extends deadlines and so on, with no positive results. And in our country, the banks are limited to a handful of powerful big businessmen.  For example, during my term, 10 per cent of the loan would have to be paid for the first time a loan was rescheduled. For the second rescheduling, 20 per cent and for the third rescheduling, 30 per cent would have to be paid. Presently this is down to 2 per cent. Then there are various strategies to take unjustified loans, or to take loans for one purpose and using it for another, and also there is the failure of the banks to take due action.

In recent times Bangladesh Bank has been providing financially weak banks with loans to keep them afloat. These include banks like Islami Bank which were strong banks in the past. Why has this happened?

Salehuddin Ahmed: In recent times a number of banks, some weak and some good, have fallen into trouble. They have, in particular, been facing a liquidity crisis. The major reason behind this is the low rate of default loan recovery. Also, deposits have fallen due to a waning of client confidence in the banks. At such times of crisis, the central bank normally takes certain steps.

There is talk of merging the weak banks with the strong ones. The Bangladesh Bank governor even made such a recommendation at a recent meeting with bankers. Do you think this will be implemented? In 2016 you all made a similar suggestion from Dhaka Forum.

Salehuddin Ahmed: The reason the initiative has been taken in recent times to merge some weak banks with strong ones is that there is large number of banks. Bangladesh has made this suggestion to facilitate proper control and monitoring. It has been suggested that the number of banks been cut down from 61 to 45. And yet over the last one and a half decades, quite a few new banks were given to certain influential persons and this was done on political considerations. To merge a weak bank with a strong, both sides will have to agree. This is not an easy task. It is a complex process to merge assets and liabilities. In 2016, as the president of Dhaka Forum, I had recommended this. Unfortunately, that was paid no heed at the time. During my term at Bangladesh Bank, we had studied the experience of various countries and drew up a merger or acquisition guideline. I have not heard anything about updating that or using it.

There is a dual policy in the management of Bangladesh Bank. What is the point of having a finance division in the finance ministry when there already is the central bank ?

Salehuddin Ahmed: There is dual control in Bangladesh's banking sector. The finance ministry's finance division and the central bank both have been bestowed with the responsibility as regulators. A lack of responsibility and accountability is observed in the central bank in this regard. There is no justification whatsoever in the finance division being in control of the banks. All this should be under the central bank. I do not think such a precedent exists in any other country.

There is a lot of debate over the board of directors in private banks. Many contend that these banks have now become family businesses. How can this situation be overcome?

Salehuddin Ahmed: The family members of the boards of private banks take the banks to be their own establishments. This has led to a lack of good governance, financial irregularities and mismanagement, which has pitched the banking sector into crisis. The reforms in the Bank Company Act have been regressive. Before two members of a family could be on the board, then it was four. Now it has been made three who can remain on the board for none years. This is totally illogical.

The government hopes that the dollar crunch will be resolved to an extent when the IMF releases the next tranche of its loan. How do you see it?

Salehuddin Ahmed: The foreign currency crisis will not be resolved by the IMF loan alone. Once the tranche is received, the crisis will be alleviated to a certain degree. But rather than depend on this, we have to increase the dollar flow, increase export, remittance foreign investment.

CID investigations have found 12 officials of Bangladesh Bank, including its former director Atiur Rahman, liable for the central bank heist. What this simply technical and professional inefficiency or anything else?

Salehuddin Ahmed: There was technical and professional inefficiency as well as lack of supervision involved in the central bank reserve heist. The concerned investigating agencies are trying to identify the persons involved.

Bangladesh has the lowest tax-GDP ratio. There was long been talk of reforming the tax policy, but have the businessmen been stalling this?

Salehuddin Ahmed: The main cause behind the GDP-tax ratio is the National Board of Revenue's limitations in tax collection. The income tax rate and classification are not rational. Then there is a propensity among individuals and businesses to evade taxes. Also, reforms and modernisation of the National Board of Revenue is proceeding at a slow pace. Another thing is incentives to being back laundered money. This creates frustration and anger among the good taxpayers.

The main problem in public life at the moment the is exorbitant price of commodities. In the case of imports, the dollar crisis and the international market are used as excuses. But even the prices of local products are spiralling out of control. Who do you think are behind this?

Salehuddin Ahmed: Inflation is a main problem which is basically related to supply. In other words, products are not being supplies at fair prices to the market, middle-men skim off their profits between the producer and the consumer, and the wholesalers and retailers try to make excessive profit. Another reason is the lack of market monitoring. Various agencies of the government sometimes take action as eyewash, but the unscrupulous traders could not care less.  The price of some imported goods to rise because of the high dollar rates, but that is not the main reason on the price hike in general.

Even the government policymakers admit that the economy is in a crisis. But do you see any effective plan of action to address the crisis? If not, then what do you advise?

Salehuddin Ahmed: Firstly, the policy makers and government officials must pay due attention to the issue. In many cases they sidestep these issues, paying no heed to the sentiment of the public or the experts. This propensity must end. In order to overcome the economic crisis, broadly speaking, strict reforms are required along with transparency and accountability. Then the integrity, dedication and efficiency of the government regulatory and development institutions must be ensured.

Bangladesh's institutions have showed no success in implementing policies and strategies, in providing government services and in addressing people's grievances. This situation must be overcome. The time has come to consolidate our positive achievements and go ahead, addressing the weaknesses mentioned about. And the participation of the people must be ensured in all sectors.

Bangladesh Bank itself has said that the banking sector is in dire straits. It has spoken about drawing up a roadmap to lessen default loans and bring down to zero the number of loans taken under false names and pretexts. How successful do you think this will be?

Salehuddin Ahmed:  Bangladesh Bank has put forward a roadmap with 17 initiatives to resolve the crisis in the banking sector, 11 aimed at lessening default loans and 6 to establish good governance. Default loans have reached alarming proportions. The state-owned banks and specialised banks are in a pitiful condition in this regard. Some private banks too are in a very weak state. It will be very difficult to meet the target of reducing the overall default loans by 2026.

From after 2009, according to Bangladesh bank records, defaults loans have increased from Tk 180 billion to Tk 1,450 billion. Simply coming up with a roadmap without addressing the cause of the default loan increase is not enough to resolve matters. Default loans and good governance are intricately linked. So if all 17 initiatives are not taken up in a coordinated matter, there is little chance of these succeeding.

Another significant matter is that over the past one and a half decades, flowed policies and strategies have led to the present problems. These must be fixed, not just remaining limited to the 17 initiatives.

After so long, the minimum age of a bank director has been fixed at 30. Independent directors have been given some authority. What effect will this have?

Salehuddin Ahmed: The directives concerning a director's age and experience are a good initiative. But the banks can't be fixed merely by depending on the directors. As I mentioned before, the laws and financial regulations that we have are not duly implemented. There are also certain steps regarding independent directors. Just taking steps regarding their experience, honorarium and allowances will not have any impact. In many cases these directors are friends and acquaintances of the chairman and directors. Their opinions are hardly taken into cognizance at the board meetings. Even their objections are brushed aside. Importance must be placed on the experience and efficiency of bank officials at all levels for the overall running and management of the banks as well as monitoring and investigations.

There is one family with five banks and several financial institutions. How did this happen? Doesn't this create problems in policymaking and implementation?

Salehuddin Ahmed: It is not at all warranted for one family to control several banks and financial institutions. This leads to a lack of good governance, transparency and accountability. In Bangladesh, those who are in and around the sphere or power, have a lot of influence in business and even in determining policies. They are even in cahoots with powerful political groups. That is why things have culminated to the present situation. This increases influence of businessmen on the financial sector and ruins the environment of competition.

How would you explain the overall state of the economy in the country?

Salehuddin Ahmed: The overall state of the economy in the country faces certain challenges that create fear, uncertainty and frustration in the public mind. From a macro viewpoint the visible opportunities like growth, per capita income and such may be satisfactory, but the benefits of all this have not trickled down below to the middle, lower and poor classes. The disparity in income and wealth is steadily growing. Basic needs such as education, health and shelter are outside the reach of many. We have not been able to attain overall development in the true sense.

Another thing is that we have not been able to show tangible success in ensuring sustainable development, that is, in reducing the fragility of our economic programmes. Any form of natural disaster, political unrest, global economic impact and other negative influences may slow down our development, even bring it to a halt in certain areas.

Surely there is no risk of facing a Sri Lanka-like situation?

Salehuddin Ahmed: The disaster faced by Sri Lanka does not prevail in our country. Over the last 52 years of ups and downs, Bangladesh has reached a satisfactory level of development. The challenge is to consolidate this and go ahead. This requires a change and improvement. It also requires proper implementation of policies and strategies, a halt to pilferage of public resources, preventing corruption, giving due consideration to people's needs to preparing polices, strategies and projects. All this can be possible if good governance the rule of law is established in all areas.          

Thank you.

Salehuddin Ahmed: Thank you too.