Bank mergers: What about the loan defaulters?

Bangladesh Bank announced its decision to merge five weak banks with five big banks. The first move was in the private sector, the acquisition of the weakest Padma Bank by EXIM Bank.

Next Bangladesh announced the merger between BASIC Bank and City Bank. Then Sonali Bank acquired BDBL. Then Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank were merged.

Finally, on the day before the Eid holidays, Bangladesh Bank announced that private sector National Bank would be merged with UCB.

It is still not clear under what conditions the weak banks will be merged with the relatively stronger banks. But what is clear is that the experts or the officers and employees of the concerned banks are not pleased with these decisions. Once the implementation process progresses further, it will be understood whether the decision has been correct or not.

Another five weak banks were to be sent into the merger process, but that decision has been held up for the time being. Without knowing the details of the conditions, it may not be time to comment on the pros and cons of these mergers, but it would perhaps be prudent to make certain comments.

The merge between Sonali Bank and BDBL is justified. There is no plausible justification in having separate banks to provide long-term industrial loans.

Before BDBL, the two institutions for industrial financing were bogged down with default loan -- one was Bangladesh Shilpa Bank and the other was Bangladesh Shilpa Rin Sangstha (BSRS). Though these were later changed into normal commercial banks, they both failed. BDBL has long-standing default loans. There is hardly any chance at all of these loans being recovered. We wait to see how Sonali Bank handles this burden.

Even the merger between Krishi Bank and Rajshahi Krishi Unnayan Bank is justified. The very decision to establish Rajshahi Krishi Unnayan Bank separately was a mistake. This task could have been carried out simply by increasing the number of Krishi Bank's branches.

BASIC was a very good state-owned bank. Even a decade ago its default loan ratio was not more that 3 to 4 per cent. By keeping Sheikh Abdul Hye Bachchu as chairman and allowing him to loot the bank clean, the present government has destroyed this bank.

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Former finance minister Abul Mal Abdul Muhit has many times called for the removal of Abdul Hye Bachchu, but for some mysterious reason the government did not heed his words.

Finally he was removed and replaced by Alauddin Majid as chairman, but the bank's downslide could not be halted. The bank's default loans now stand at over 68 per cent. It became impossible to run the bank as a single entity and so the wrapping it up by means of merge is a timely decision.

But City Bank is a private bank. It is a glaring question as to how they will bear the burden of a collapsing state-owned bank. Even the officials and employees of BASIC are not pleased with this decision. They have submitted an MOU to the prime minister, expressing their wish to be merged with another state-owned bank.

From its very outset, National Bank has been the victim of rampant looting. Launched as a first generation private bank in 1983, it became a large bank in the private sector.

However, once the bank fell into the hands of the two Sikder Group brothers -- Ron Huq Sikder and Rick Huq Sikder -- the bank has been on the brink of collapse for quite a few years now. (It is rumoured that the bank had been looted from the very beginning by various top businessmen of the country.)

The question also looms large as to how UCB will be able to rescue this drowning bank. The National Bank board has already announced that they do not want a merger. They have said they will make efforts on their own initiative to salvage the bank.

Default loans are the oldest and most serious problems for the banking sector. Of the banks loans totalling around Tk 18 trillion (Tk 18 lakh crore) at present in the country, at least Tk 4.5 trillion (Tk 4.5 lakh crore) is in default, though for various reasons Bangladesh Bank every three months declares only Tk 1.45 trillion (Tk 1,45,000 crore) as classified loans. The remaining default loans for "technical reasons" are kept outside of the classification.

Due to cases pending for years on end with the Artha Rin Adalat, the High Court and the Appellate Division of the Supreme Court, at least Tk 2.5 trillion (Tk 2.5 lakh crore) technically cannot be called 'classified'.

Also, over Tk 650 billion (Tk 65 thousand crore) in 'bad loans' of over five years will be added to this. As various banks have written these off, these cannot be included in the classified loans published by Bangladesh Bank. Alongside this, a massive volume of loans which has crossed repayment deadlines are 'rescheduled' outside of the rules and regulations remain invisible and even Bangladesh Bank has no idea of the exact figure of these loans. Then there is another category of irregular loans adjusted with new loans and shows as regular, by various banks. Bangladesh Bank is unable to control this.

The culture of concealing default loans has become so deep rooted that the former finance minister AHM Mustafa Kamal made unprecedented illogical and unjust arrangements by which the names of the big loan defaulters vanish from the lists of default lists

If all these categories are summed up, it can be said with no uncertainty that the default loan crisis from three decades ago became a non-curable cancer in the banking sector. Unfortunately, despite being well aware of all this, the top officials of the government and Bangladesh Bank have simply been sweeping these problems under the carpet and out of sight for the past 30 years.

In fact, from 2009 the present government in power has whimsically provided licences to over 30 new banks. Before the merger decision, the number of commercial banks in the country had reached 61.

Every time Abul Mal Abdul Muhit has taken a stand against licences for new banks and protest against this, but every time his stand was spurned and the whimsically dishing out of bank licences continued unabated. It is no secret that blatant nepotism and partisan consideration were at play.

It was hardly plausible that many among those who were provided with licences would have the required Tk 200 million (Tk 20 crore) capital, (The 'business directors' of those banks probably paid the licence money.)

I had each and every time protested with all my might against such random opening of banks, but to no avail. I want to inform the readers that that largest source of strength for Bangladesh's banking sector is the 15,500,000 (1 crore 55 lakh) expatriate Bangladeshis. No matter whether they send their remittance through the formal channels or by hundi, a large portion of it is deposited with the banks for the sake of security. This has kept an ongoing deluge of deposits in the banking sector of the country. That is why even though the default loan problem had become an alarming crisis three decades ago, the banks did not have to fall into a massive liquidity crisis.

Being well aware of this, neither the BNP government nor that of Awami League took any effective measures to recover the default loans. In 1998 the president Justice Shahabuddin has proposed that a tribunal be formed to recover the default loans of the 10 top loan defaulters of each bank. No government took up this proposal. In fact, when BNP-Jamaat came to government, concealing default loans became a culture.

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For example, BNP completely deactivated the bankruptcy court set up by Awami League in 1999. Over the past 23 years that court has not be reactivated. The culture of concealing default loans has become so deep rooted that the former finance minister AHM Mustafa Kamal made unprecedented illogical and unjust arrangements by which the names of the big loan defaulters vanish from the lists of default lists.

With such a mindset regarding default loans to remaining in place, how can one hope for bank mergers to strengthen and consolidate the banking sector in any way?   

*Moinul Islam is an economist and former professor at the economics department of Chittagong University.

* This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir

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