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BB should be given full autonomy to supervise banking sector independently: Prof Mustafizur Rahman

Published in The Daily Star on Sunday, 31 December 2017

Looking back, looking ahead: Scams dent good show in economy

Sajjadur Rahman

Scams in the banking sector have paled the country’s fair economic performance in the outgoing year.

Bangladesh has achieved a record economic growth of 7.28 percent in 2016-17, up from 7.11 percent in the previous fiscal year, according to Bangladesh Bureau of Statistics data.

Exports have started bouncing back since October from a sluggish growth for over a year. Imports have been growing at double digits in recent months. Private sector credit growth, which is an important indicator to measure the vibrancy of the economy, grew by six years’ high of nearly 19 percent in October.

Also, the government has been implementing a number of mega projects to improve the country’s ailing infrastructure, which, if done efficiently and timely, could add further value to the growth of the country’s domestic product (GDP).

The projects include the Padma Bridge, Rooppur Nuclear Power Plant, Payra Sea Port, coal-fired Matarbari and Rampal power plants, Metro Rail and Liquefied Natural Gas Terminal. Two more large projects, one for a Padma Bridge rail link and another for the Karnaphuli River Tunnel, have also been taken up for fast implementation.

Yet, the government’s success was not praised enough by analysts, experts and businesses, mainly because of its mishandlings in the financial sector, particularly banking industry, which they said undermined the government’s success.

Muhammad A (Rumee) Ali, former deputy governor of Bangladesh Bank, said the role of the financial sector, especially the banking system, has become vital as the country has been implementing many large infrastructure projects.

“All the goods can be undone with the failure to run the banks efficiently,” said Ali, now working as chief executive officer of Bangladesh International Arbitration Council.

He said the banking system is key to financing resources to industrial and infrastructure projects and if any disruptions happened there, it would affect the entire financial system and the economy.

Toxic loans and recapitalisation in the banking sector, especially in the state-owned banks, have always been a cause for concern in Bangladesh. But takeover of two banks by a Chittagong-based business group and deteriorating health of two new banks were the much-talked about issues in 2017.

First generation lender AB Bank’s $20 million money laundering to accounts of a bank in the UAE revealed two weeks ago was another major scandal. And the government’s plans to allow three more banks have become controversial in 2017.

Bangladesh’s banking system consists of eight state-owned banks, 40 private sector banks and nine foreign banks. All these banks have nonperforming loans (NPL) worth Tk 80,397 crore or 10.67 percent of the total outstanding loans as of September 2017. The NPL would go up to 17 percent if rescheduled and restructured loans were included.

Like previous years, state banks were the worst performers as they failed to improve their health in 2017. Bangladesh Bank data shows NPL of eight state banks were Tk 44,126 crore or 55 percent of the total. Some 40 private banks and nine foreign banks together have Tk 36,271 crore NPL.

Together, the state-owned banks had a capital shortfall of Tk 12,683 crore at the end of June 2017 despite the government’s injection of Tk 2,000 crore.

But neither the NPL nor capital shortfall was the big issue. Takeover of Islami Bank Bangladesh and SIBL by a Chittagong-based business group was the most-talked about matter as concentration of a number of banks could trigger a systematic risk in the financial market. The group already has a strong grasp of five other banks.

During the last couple of months, two new banks — Farmers and NRBC –grabbed the headlines for their sheer failure in running the banks within four years of their inception.

Bangladesh Bank, though late, stepped in and removed managing directors of these two banks for their failure to protect the depositors’ interest. The BB also helped these banks restructure their boards, including forcing Muhiuddin Khan Alamgir, a ruling party lawmaker and former home minister, to resign as the chair of Farmers Bank.

NRBC Bank also brought changes to its board, including removal of its chairman.

Prof Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue (CPD), said the government failed to cash in on the macroeconomic stability for inclusive and accelerated growth, mainly due to its failure to establish good governance in the banking system.

He said problems in the banking sector were due to the government and the regulator failing to address root causes.

“Urgent actions are needed, otherwise things will go beyond [bad] and affect the overall economy,” said Mustafizur.

“Bangladesh Bank should be given full autonomy so that it can supervise the banking sector independently,” said the CPD fellow.

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