BB Report on Last 10 years; Scams, failures skipped, dev highlighted

The Bangladesh Bank has published a report on the banking sector development over the last 10 years ahead of the national elections, painting a rosy picture of the industry but completely ignoring the deep malaise of the financial sector, including loan scams, weak supervision, the lack of control over monetary policy, high defaulted loan and reserve heist.

The report titled “Role of Bangladesh Bank in the govt success for last 10 years” was published last month on government instructions, which demonstrated only the success stories keeping all the failures in the cupboard.

Analysts now question both the content of the report and the ethical side of the central bank, an autonomous body. This is the first time that the BB has published such a report, and that too giving a distorted view.

Such publications before an election is very unethical because the Bangladesh Bank is completely detached from the government, said Khondkar Ibrahim Khaled, former deputy governor of the BB.

Moreover, the report did not address the weakness of the banking sector which reflects the lack of independence of the central bank, he added.

The report said that the BB played a role in achieving higher GDP growth through implementing contractionary and inclusive monetary policy every year. Inflation remained at tolerable levels since 2009 to 2018 even amid higher growths, the report claimed.

But in reality, the BB’s monetary policy, the main function of a central bank, has often been dictated by the finance ministry.

For instance, the CRR (Cash Reserve Requirement), a major tool used in monetary policy to control money supply, was reduced from 6.5 percent to 5.5 percent bi-weekly and from 6 percent to 5 percent daily in April this year at the directive of the ministry.

It was also the finance ministry that decided that government organisations would double their deposits with private banks.

“Monetary policy is arguably the only remaining realm of the central bank’s autonomy in Bangladesh. Yet in recent months, monetary policy has also succumbed to regulatory capture,” said the Centre for Policy Dialogue (CPD) in its “State of the Bangladesh Economy in FY2017-18” report released in June this year.

There are growing concerns regarding the lack of transparency in the conduct of monetary policy, the think-tank said.

“The central bank should be allowed the freedom to function properly without surrendering to the demands of lobbyists or being overshadowed by the MoF [ministry of finance],” the report added.

“It is true that Bangladesh Bank has contribution behind the microeconomic stability in the last 10 years,” said Mustafizur Rahman, a Distinguished Fellow of the CPD.

At the same time, the banking sector is going through a lot of problems which should have been included in the report, he added.

High defaulted loan, the lack of governance in the board, and the reserve heist eroded people’s confidence in the banking sector, said Mustafizur.

A strong role was expected from the BB to establish governance in the financial sector in the last 10 years, he noted.

The report gave only a partial picture, which reflects political motivation, said Salehuddin Ahmed, a former BB governor.

A report should cover all sides, including success, weakness, challenges and measures to be taken, he said.

It is very rare for a central bank to publish this kind of reports ahead of an election, added the former BB chief.

About financial sector reform, the report said that the central bank took up strategic plans for five years to develop technology in the sector.

The BB has been implementing the financial sector support project financed by the International Development Association (IDA) for infrastructural development in the financial sector.

The report, however, did not mention a number of amendments to the Banking Companies Act that have weakened governance in the financial sector.

For example, it was strictly forbidden for more than two members of a family to sit on a bank’s board to avoid unethical collusion in sanctioning loans or in any other decision-making process. However, this provision has been amended to allow up to four family members to sit on the board.

The tenure of directors has also been increased to nine years from six years.

The amendment drew criticisms from various quarters as it will encourage family grip over a bank.

Giving licences to new banks is another example of how an autonomous body gave in to the government’s political wish.

According to the Bank Company (Amendment) Act 2013, the central bank will grant licences to new banks after assessing the need and the overall state of the economy. Ironically, this principle is not being followed.

Compared to the size of the economy, the number of banks is already higher than required.

In the last 10 years, 11 banks were given licences on political consideration taking the total number to 58. On more than one occasion, Finance Minister AMA Muhith himself said there was no need for new banks.

“These [licences for new banks] are given on political grounds” Muhith told reporters on November 1 at his secretariat office.

But why? “More than economic justification, political pressure works for the issuance of bank licenses. And over time, licence for opening a new commercial bank has, in fact, become a tool for misappropriation of public money,” said the CPD report.

High loan default reflects the weak supervision of the banking sector. The defaulted loan stood at 40.41 percent in June this year. The rate was 9.21 percent in 2009 when the Awami League came to power.

“The general trend of NPL (non-performing loan) has been consistently high for the last few years,” the report said.

Financial frauds, the lack of due diligence during loan sanctioning, political influence in loan disbursement, and the failure to undertake strong measures against loan defaulters and wrong-doers have contributed to high NPLs in the banks, according to the CPD.

A cross-country comparison of NPLs shows that five South Asian countries — Bangladesh, Bhutan, India, Maldives, and Pakistan — had NPLs exceeding 8 percent of total loans in 2017. On the other hand, eight South-East Asian countries — Brunei, Cambodia, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam — all had NPLs below 4 percent of total loans in 2017.

The high loan default is the result of loan scams worth around Tk 18,000 crore over the last 10 years.

Two schedule banks, namely BASIC Bank and Farmers Bank, collapsed over serious loan corruption which eroded client’s confidence in both banks.

The Farmers bank loan scam sparked serious deposit crisis in the market this year leading to a cash crunch in the whole banking system.

The heist of $81 million from the central bank’s account at the New York Federal Reserve in February 2016 was the most discussed issue even in the global financial market.

But the BB did not mention even this incident in its 10-year review report.

The largest cyber heist made it clear how vulnerable the IT system of country’s banking sector is.

BB Governor Fazle Kabir yesterday declined to comment on the report.