Are state-owned banks bottomless baskets?

The issue of non-performing loans (NPLs) have now reached a phenomenal amount. As of June, defaulted loans amounted to Tk 63,365 crore, which is 10 percent of total outstanding loans (as per Bangladesh Bank data). The situation is particularly serious in State-owned Banks (SoBs) which unfortunately can no longer function without regular cash infusions from state coffers every year. Indeed, tax payers’ money is now being injected to keeps these SoBs afloat. This is money that is being diverted away from investments and social welfare programmes and the sad reality is that political will has been sorely lacking in tackling the root causes of corruption and mismanagement in SoBs.

As per a news report in this paper recently, “at the end of the first quarter of 2016, the nonperforming loans of state owned commercial banks stood at 24.27 percent. In contrast, it was 6.2 percent in neighbouring India. The default loan situation improved when the Awami League-led government assumed power in 2009, with the bad loan ratio coming down to single digit. But in June this year, it again crept up to double digits.” Although the finance minister stated recently that he felt “ashamed” at the fact that SoBs now have bad debts around 27 percent, we have witnessed time and again the foot dragging when it came to loan recovery or giving out loans to known defaulters. We have been silent witnesses to seeing these SoBs lend huge amounts of money to big, influential borrowers who have had a track record of not repaying loans.

The net result of poor risk management over the decades has led us to this situation. Today we have in effect established a culture of giving out loans that do not pass basic banking guidelines, i.e. they are given adhering to “anomalies and corrupt practices”—as explained by a former Bangladesh Bank governor. There is hardly any monitoring on loans given out, particularly through SoBs and then when loans go bad, we see little in way of any concrete action taken to recover them. Not only that, we see repeat offenders get away rescheduling their thousands of crores of Taka worth of bad loans and then be given the opportunity to take further loans. Is it any wonder that these SoBs are in such a state? And why should they bother with reforms knowing that the State will bail them out every fiscal year.

We have written extensively on the need for reform at board level of such banks, particularly because politically appointed members have been found to wield excessive influence over loan sanctioning. When we have corrupt people on the boards, we end up with situations like BASIC Bank. We end up with entities like the Bangladesh Commerce Bank that saw its default loans rise up to 32 percent of its total loans in June this year. The presence of political appointees remains a major hurdle for proper functioning of banks and it is most noticeable in SoBs. It is interesting to note that the last national banking advisory committee formed by the government had recommended a panel of qualified people should pick directors, but that recommendation went nowhere. What we got instead was a tussle between Bangladesh Bank and the ministry of finance on the re-appointment of a managing director to a SoB against whom there were specific corruption allegations. The central bank was overruled and the gentleman was re-appointed. This has been made possible because there is a provision in the Banking Companies Act that allows for the government to appoint a bank’s chairman where the Bangladesh Bank has no say.

A recent study by the Bangladesh Institute of Bank Management opined that the unconditional recapitalisation of SoBs basically sets the stage where there is little or no incentive for the sorely needed reforms we have been talking about. We have, wilfully, provided the grounds for wholesale malpractice in SoBs and “feeling embarrassed” is not going to cut it unfortunately. The World Bank has called for a few things to be done if we want to see a change in these banks. First is the removal of government’s improper influence on the operations of these banks. Second, there is the need to strengthen the independence and accountability of state banks’ boards. Third comes the question of recapitalisation which must be “conditional”, i.e. these banks must demonstrate willingness to automate branches to strengthen financial reporting and efficiency, put in place improved loan recovery systems and temporary credit growth limits.

Whatever regulatory reforms that are undertaken will prove futile as long as there is scope for political appointments at board level of SoBs. All the scams that have hit our SoBs of late smack of political influence being used to get loans and the subsequent inaction by these same banks is understandable since there is little in way of accountability. We have allowed for a scenario where there is near-zero transparency in these operations and SoBs are treated as ATM machines for those with the right “connections”. Today there is talk of privatising these banking institutions and playing the blame game, but little headway in “de-politicisation” of the management which could bring about qualitative changes is simply not on the agenda.

Source: The Daily Star

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