The total volume of Non-Performing Loans (NPLs) has more than tripled in the last decade, skyrocketing from BDT 427.25 billion in Q4FY12 to an alarming BDT 1456.33 billion in Q2FY24. The Bangladesh Bank’s Financial Stability Report 2022 paints a stark picture, revealing that as of December 2022, the total gross NPLs stood at a staggering BDT 1,206.49 billion. This report also brings to light BDT 444.93 billion in outstanding written-off loans and BDT 2,127.8 billion in outstanding rescheduled loans. These figures cumulatively amount to a colossal BDT 3,779.22 billion (BDT 3,77,922 crore) worth of NPLs. The situation is further exacerbated by the 72,543 pending cases in the Money Loan Courts, with an outstanding amount of BDT 1,782.77 billion (BDT 1,78,277 crore). The surge in NPLs demands immediate attention and a comprehensive strategy encompassing loan risk assessment practices, strengthening credit recovery mechanisms, and promoting a culture of responsible borrowing.
In this context, the Centre for Policy Dialogue (CPD) organised a dialogue titled ‘What Lies Ahead for the Banking Sector in Bangladesh?’ on Thursday, 23 May 2024.
Professor Mustafizur Rahman, Distinguished Fellow, CPD, Chaired the session and remarked, ‘The banking sector of Bangladesh has grown in terms of the number of institutions, types of financing instruments, and asset volumes. However, it faces significant challenges due to malpractices, scams, corruption, and heists.’ Professor Mustafizur Rahman added that ‘there is a tendency for privatisation of profits and nationalisation of losses, which we must avoid’.
In her keynote presentation, Dr Fahmida Khatun, Executive Director, CPD, underscored the necessity of implementing a comprehensive reform agenda, focusing on reducing NPLs and establishing good governance to address the banking sector’s challenges.
She highlighted that public trust in the banking sector has been eroded due to the continuous deterioration in its health and inadequate measures by policymakers. Sporadic measures have failed because the nature and depth of the problem require comprehensive due diligence and structural reforms. Since reforms will face resistance from vested interest groups, they must be backed by political will.
Dr Khatun recommended that bank mergers should only proceed after a proper audit of weak banks to determine their real balance sheets. She also suggested that board members of weak banks should not sit on the boards of strong banks after mergers.
‘The Government should not inject capital into the proposed public Asset Management Company (AMC) to buy NPLs, as the Government already has supported weak banks using taxpayers’ money’, urged the Executive Director. The government should clearly define the AMC’s mandate, operation, management, and governance.
Moreover, internationally reputed and experienced private AMCs should be invited to resolve the NPL problem. The preconditions for setting up an AMC, such as good governance, transparency, and accountability, must be met to encourage such companies.
Dr Khatun stressed the importance of maintaining data integrity and ensuring timely access to information. She advocated for regular, publicly available reports on banks and financial institutions. Commercial banks must adhere to timely mandatory disclosures under BASEL III and classify loans according to international standards. Implementing a comprehensive risk management policy to identify and prevent malpractices is crucial.
‘A goal-specific, time-bound, inclusive, transparent, unbiased and independent Citizen’s Commission on Banking should be set up to bring transparency to the prevailing situation, identify the root causes of the manifest problems, and suggest credible measures for improving the situation sustainably’ recommended Dr Khatun.
She also suggested that commercial banks need strengthening through depoliticised board appointments based on qualifications, strict enforcement of single borrower exposure limits, and adherence to the Central Bank’s credit risk guidelines. Bangladesh Bank’s independence and autonomy must be upheld. The recapitalisation of poorly governed banks with public money should be stopped, and an exit policy for troubled banks must be formulated.
‘The industrial development, successful growth of businesses, and expansion of the export sector would not have been possible without the commercial banks’ execution of short-term borrowing and long-term lending’, commented Barrister Anisul Islam Mahmud, MP, Hon’ble Deputy Leader of the Opposition, Bangladesh Parliament, while discussing the default of loans. He added that commercial banks took significant risks and significantly contributed to the Bangladesh economy.
Mr M A Mannan, MP, Chairman, Parliamentary Standing Committee on Ministry of Planning, highlighted, ‘Streamlining the process for bank mergers is crucial. Although discussions on this topic have been ongoing, recent efforts have hit a roadblock, suggesting inadequate preliminary research and a lack of clear direction. It is imperative that policymakers, including those in opposition parties, unite to facilitate reforms and prevent unnecessary obstacles’.
Commenting on the lack of good governance, Dr Salehuddin Ahmed, Former Governor of Bangladesh Bank, said, ‘It is uncommon worldwide for governments, business owners, and bank owners to independently own and operate banks. Diversifying ownership of each bank could lead to better governance.’
‘The government’s borrowing from the central bank and commercial banks, due to revenue shortages, is causing a liquidity crisis’, underscored the Former Chairman of the Association of Bankers, Bangladesh Limited (ABB), Mr Mohammed Nurul Amin. He added that although borrowing from the central bank has decreased, the government continues to borrow from commercial banks. Efforts should be made to minimise the impact of these fiscal measures on the money market and monetary policies.
Mr Syed Ishtiaque Reza, Journalist and Adjunct Professor at the Department of Journalism and Media Communication, Green University, emphasised that to ensure Bangladesh Bank’s autonomy, it must be freed from the decision-making authority of the Financial Institutions Division wing under the Ministry of Finance (MoF). He highlighted that this wing exerts administrative and political power over banks and the financial sector, and therefore, its decision-making power should be revoked to protect the central bank’s independence.
High-level policymakers, political leaders, banking sector experts, bank officials, academics, development practitioners, business leaders, civil society activists, international development partners and journalists were present at the dialogue, many of whom participated in the discussions.
Among them were — Mr Mahbubur Rahman, Chairman & CEO of ETBL Holdings Limited; Mr Mohammad Muslim Chowdhury, Former Comptroller and Auditor General of Bangladesh; Professor Dr Barkat-E-Khuda, Dr Muzzafar Ahmed-Chair Professor Bangladesh Institute of Bank Management; Mr A. Gafur, Director, Abdul Monem Economic Zone Ltd and Country Adviser, American Apparel and Footwear Association (AAFA); Dr Md Main Uddin, Professor and Former Chairman, Department of Banking and Insurance, University of Dhaka; Mr Siddiqur Rahman Choudhury, Former Secretary, Finance Division and Former Chairman, Agrani Bank; Mr Shabbir Ahmed, Deputy Managing Director
Al-Arafah Islami Bank PLC; Dr Zahed Ur Rahman, Teacher, Columnist; Mr Mohammad Fazlul Karim,
General Manager, Agrani Bank PLC; Mr Mohammad Habibur Rahman, Deputy Managing Director, Social Islami Bank; DH Choudhury, Former Banker and Independent Director of Bank Asia Ltd; Mr Md. Bahar Mahmud, EVP & Head of IRM, Standard Bank PLC; Mr Md. Zia Arfin, Senior Executive Vice President, Bank Asia PLC; Mr Mosharaf Hossain, Principal Officer, National Bank Limited; Mr Md. Ahsan Ullah, Consultant, SWIFT & Former Executive Director, Bangladesh Bank; Mr Md. Shoaib Choudhury, Former Vice President of DCCI and Dr Shahidul Islam, Professor, Department of Banking and Insurance, Dhaka University.