Published in The Daily Star on Tuesday 11 June 2019
Fix banking woes
Analysts call for massive reform measures in budget
The government should go for massive reforms to salvage the ailing banking system or else the contagion will batter the entire financial sector, analysts said.
The financial acts should be amended in a way that will arrest rising default loans, ensuring punishment against willful defaulters and keeping banks free from political intervention, they said.
They went on to urge the government to address the issues in the forthcoming budget considering the jumpy mood in the banking sector.
“But, the government thinks that there has been no crisis in the banking sector despite a rapid upward trend in default loans stemming from financial scams,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
In March this year, default loans in the banking sector stood at Tk 110,873 crore, up 18 percent compared to December last year.
The government should give a clear declaration in its budget to amend the Artha Rin Adalat Ain, 2003 (also known as Money Loan Court Act, 2003) and the Bankruptcy Act 1997 with a view to recovering the default loans, Mansur said.
Lenders require at least 8-10 years to settle a single case in the money loan court, creating a long legal tangle for them, he said.
As of December last year, Tk 138,796 crore was stuck against 97,000 pending cases with the courts, according to data from the central bank.
The lengthy process of settling cases can be reduced significantly if the government revises the money loan court act, said Mansur, also a former economist of the International Monetary Fund.
Loan restructuring system through the bankruptcy act is a common phenomenon in the developed countries and even in neighbouring India, he said.
“But, such practice is completely absent here,” he said, adding that at least 2-3 special benches should be set up with the High Court to settle the financial cases.
The assets of defaulters should be confiscated by way of amending the act, Mansur said, adding that fresh financing can also be provided to defaulters if required based on their capacity to run business.
“Some banks are now struggling to survive themselves because of their imprudent lending. But there has been no exit policy for them. It is time to frame policy for merger and acquisition,” he added.
Ten banks, including six state-owned ones, faced a capital shortfall of Tk 26,690 crore last year – in an indication of their precarious financial position.
“If the decay continues in the days ahead, the whole financial sector will face a systemic risk,” Mansur said.
He also criticised the government’s initiative to recapitalise the state-run banks every fiscal year with taxpayers’ money. He went on to urge the government to stop the recapitalisation immediately as it encourages the state banks to continue with their ill practice.
“The entire financial sector will be battered by contagion from the problems in the banking system,” said Salehuddin Ahmed, a former central bank governor.
The finance ministry will have to refrain from disseminating instruction to the central bank for policy making.
“The upcoming budget should address these issues,” Ahmed added.
Fahmida Khatun, executive director of the Centre for Policy Dialogue, echoed Mansur, saying the major financial acts should be amended in the interest of recovering default loans.
She, however, hopes the government will address the issue in its upcoming budget as lenders have been facing the same set of problems for years.
Profit in the banking sector will decline in the days ahead unless financial corruption is rooted out, according to the economist.
“Banks are one of the major players in providing revenue to the state exchequer. The government will be deprived of the revenue if tangible improvement is not ensured.”
The government should form a banking commission and allocate special funds to run the entity, Khatun added.
The imminent budget should give a clear indication on how to stop the political intervention in the banking sector, said AB Mirza Azizul Islam, a former adviser to a caretaker government.
“The banking sector has been in peril mainly due to political interference,” he said.
The central bank has recently extended a relaxed facility to defaulters, allowing them to reschedule their default loans with 2 percent down payment and at 9 percent interest.
“Such policy will not bring anything positive to the banking sector,” he said, while calling for realistic measures to ensure punishment to habitual defaulters.
The High Court, however, has stayed the central bank’s policy until June 23.
Fiscal budget generally does not give any instruction on how to improve the financial sector, but the present situation is different because of the fragility of the banking sector, said Khondkar Ibrahim Khaled, a former deputy governor of the central bank.
The government should explore accurate avenues to get rid of the ongoing crisis, sweeping aside its earlier measures, which have already been proved ineffective, he added.