Banking sector and its impact on our economy

SOURCE: chainfor.com

In the last two years, Bangladesh's economic expansion has been quite impressive from the perspective of GDP growth rate, which was seven-plus percent both years, according to figures from government and other sources. Yet, as data has revealed, and as experts have overwhelmingly concurred, the growth rates could have been significantly higher.

But while we should absolutely take the failure to live up to our full potential with a pinch of salt, there is still at least one positive that we should also take from this. That is, Bangladesh, economically, has tremendous potential.

This is no less down to the fact that Bangladeshis are innovative people; as evident from the success that they are achieving in every type of scientific field all over the world, even in the most competitive environments. Additionally, the number of working age (particularly young) people currently in the country is the highest it has ever been, and also the highest it will be for some time, creating for Bangladesh, that window of opportunity—demographic dividend—to rapidly increase its overall production capacity through the efficient incorporation of these people into the economy—as the free market in theory, at least, is supposed to help achieve. Also helpful has been the fact that certain markets are, slowly but surely, shifting to Bangladesh from other countries due to various geo-economic and geo-political reasons, along with opportunities.

Disappointingly, however, data also shows that the fruits of whatever growth we have had, recently, have gone largely to a small minority of our population. According to a government study made public on October 17, 2017, for example, the poorest five percent of our population has had their share of the national income reduced from 0.78 percent in 2010 to 0.23 percent in seven years. The richest five percent in contrast has had their share of national income increase from 24.61 percent in 2010 to 27.89 percent in 2017.

While we have seen a similar trend developing globally, what has accompanied this trend in parallel everywhere is the complete and utter collapse of respect for long-established banking norms and regulations—along with a form of wealth transfer to the rich from the poor in the form of bailout packages and austerity measures. Thus, as it should be to no one's surprise, during the time that inequality increased globally, the same has been the case in Bangladesh.

And this is quite clear to see, as among the eight state-owned banks, 40 privately-owned banks and nine foreign-owned banks, nonperforming loans (NPLs) stood at Tk 80,397 crore as of September 2017, according to Bangladesh Bank (BB) figures. That is 10.67 percent of all outstanding loans. And if restructured or rescheduled loans were included, NPL in the banking sector goes up even more—a mammoth 17 percent of total outstanding loans. Like previous years, state banks were again the worst performers last year as NPL of the eight state-owned banks stood at Tk 44,126 crore or 55 percent of the total.

Put together, these banks also had a capital shortfall of Tk 12,683 crore at the end of June 2017, again, despite the government's most recent injection of Tk 2,000 crore using funds it had received from taxpayers on top of the Tk 116.6 billion handouts it had given to state-owned banks at taxpayers' expense between fiscal year 2011-12 (July-June) and 2016-17 according to its own data. Besides this form of continual wealth transfer from the general public to the corruption-ridden and seemingly incompetent state-owned banks (and ultimately to the defaulters), what is worrying economists and other experts further is the fact that this problem in the banking sector has actually been getting worse in spite of having prolonged for this long.

As, for example, a study by the Bangladesh Institute of Bank Management revealed that banks on average rescheduled bad loans of Tk 109.1 billion annually during 2010-14; whereas on the last day of 2016, defaulted loans in the banking sector stood at Tk 62 thousand 632 crore after years of rescheduling, having risen by nearly Tk 11,000 crore in just one year which is a record for Bangladesh. Yet, in January-March 2017, total bad loans in the banking sector rose by 18 percent from the previous quarter for the umpteenth time, led by a 15.1 percent quarter to quarter increase in state-owned banks.

Unsurprisingly, these high NPLs have wrecked profitability. According to The Economist, operating profits of six state-owned banks dropped by 37 percent annually in 2016 “to Tk 20.1bn, while net losses surged by 309 percent, to Tk 5.1bn. Meanwhile, losses at the two state-owned specialised banks (Krishi Bank and Rajshahi Krishi Unnayan Bank) rose by 150 percent, to Tk 4.2bn.” What is most astounding about this is that net profits of the banking sector as a whole actually rose by 4.9 percent in 2016 while all this was going on in the state-owned banks, confirming beyond a shadow of a doubt the especially woeful performance of state-owned banks in comparison to private and foreign-owned banks.

The report also states, “The overall capital to risk weighted assets ratio (CRAR), a key measure of bank strength and stability,” too has “been affected.” According to The Economist's Intelligence Unit, “The CRAR at private banks was 12.2%, while that at the nine foreign banks was a healthy 23.9%,” whereas “the CRAR of the six state-owned commercial banks was only 5.9%” and “that of the two specialised state-owned banks was an astonishing -35.23%.”

Taking all these figures into consideration, it is nearly impossible to understand the logic behind the government's insistence on bailing banks out, especially when during a March 2017 meeting the government's own finance division observed that, “despite the regular infusion of budget funds, state-run banks have not improved their NPL positions.” In fact, the BB itself did not actually “recommend any capital infusion for these banks to the finance ministry” during the past two years, and banks were only provided bailout money upon insistence by the finance ministry.

Because of this and other reasons, a former deputy governor of the Bangladesh Bank, Khondker Ibrahim Khaled, said that the finance ministry cannot avoid responsibility for the current conditions of our banking sector. And that the two main reasons for the unusually high default loans in the state-run banks were enormous “corruption” and “inefficiency.”

Moreover, according to Khaled, it was the government itself that sowed the seeds of corruption into the sector by appointing “many corrupt people.” Two such examples are Syed Abdul Hamid, the former managing director of Agrani Bank who was appointed by the finance ministry despite objections from the BB, and Sheikh Abdul Hye Bachchu, the former chairman of Basic Bank, who is alleged to be responsible for bringing the once profitable bank to its knees after also being appointed by the ministry.

The terrible consequences of the finance ministry's overreach can also be seen in the case of licensing new banks. According to noted economist Dr Debapriya Bhattacharya, the private banks that were given licences on political consideration a few years back had failed to perform completely and allegations of money laundering through some of these banks were brought forth a number of times. Furthermore, the nine new banks, since obtaining licences, have failed to fulfil the four conditions that they were given by the BB before going into operation and are now pushing the central bank to relax those conditions.

Requesting anonymity, a BB official said that despite providing licences, the central bank could not completely monitor these banks as they were owned by politically influential people—despite some of these banks having been linked to loan scams, aggressive lending and violations of banking regulations among other issues, posing serious threats to the banking sector according to the central bank's own assessment. According to Dr Bhattacharya, not only were no “preventive measures” taken, but the government actually went on to increase “the control of the family members of bank owners through amending the banking law and regulations.”

And following the implementation of the new law allowing four members of a family to be directors of a bank with extended terms, a former chief economist at the Bangladesh Bank, Biru Paksha Paul, wrote in The Daily Star that, “Some bank owners took advantage of this new law and made sudden changes in the directorship positions, triggering a state of panic among depositors and other stakeholders. Some top bankers were courageous enough to voice their apprehensions to the central bank,” finding “the erratic behaviour of bank directors to not only be a threat to financial stability but also unfavourable for corporate governance” (“Taking banks further away from the public,” January 14, 2017). However, Paul also went on to explain that, “While the central bank understands their worries, it can do little if the ministry doesn't want to displease the financial coterie.”

In a similar vein, Professor Rehman Sobhan too criticised the weakness of regulators and how that has contributed to increasing the risks of a major financial disaster in Bangladesh, saying that, “The [banking] system as it works in Bangladesh is now getting deeply integrated with the political economy of society.” As a result, “The economy has now gotten into a situation where the perpetuation of debt default has in fact been ingrained in business practices,” which “is destroying the competitive nature of [the] financial system.” Getting back to how this plays a major role in increasing wealth inequality, Professor Sobhan also said that Bangladesh is suffering from a “perverse and totally unethical situation where the biggest defaulters tend to be the elite, and the most credible debt service agents are low-income households.”

But apart from increasing wealth inequality, the crisis in the banking sector is harming the country's economy in other ways as well, according to a former governor of Bangladesh Bank, Salahuddin Ahmed. To emerge from the pressure that they are under because of rising NPLs, “banks are reducing interests on deposits” and the “government is also considering new taxes,” said he.

Moreover, given that the banking system is supposed to play a major role in the efficient allocation of resources in an economy, it is obvious that its continuing failures are affecting our efficiency and productivity, as well as constraining businesses and industries that truly do have the potential to grow and become a pillar of strength for our long-term growth.

Yet, in spite of the heavy cost, the government's reluctance to hold those responsible for the mess, which can only encourage further corruption and mismanagement at the cost of the overall economy, can best be described as wholly absurd and incredibly damaging. And its selective interventions on behest of special interests to bailout failings banks go totally against the concept of free market which is another reason why we see such massive misallocation of resources and the continual wealth transfers from the general public to members of these special interest groups—making way for the political, bureaucratic and financial classes to divvy up the loot from public coffers among themselves.

As Transparency International Bangladesh has expressed, the “unprecedented anarchy and risk” that is prevailing in the banking and financial sectors is on the one hand down to “the misuse of power”, “political influence” and “lobbying”, leading to “unrestrained forgery”, “corruption” and “dominance of loan defaults”; while on the other, it is also down to the “ineffective ad hoc measures by a section of the regulatory authorities.” Thus, the only possible way to bring about a reversal in this trend is to depoliticise the sector, especially the regulators and to have greater accountability and transparency (where there is now none) in order to prevent the misuse of power and also the lobbying power of money, and to end the collusion between special interest groups and the political class that has now clearly metastasised into a major threat for our economy.

However, in order to have any of that, what is needed first and foremost, as has been oft-repeated, is the political will. That political will, however, especially given that we are yet to see any shred of it till now, is unlikely to simply materialise out of the blue. And, thus, must be brought about by conscious citizens raising their sustained voices to exert enough pressure on the authorities to change their disastrous ways, before disaster befalls our economy, as it surely will, if things continue down their current path, leading to an almost guaranteed reversal of all the economic progress that Bangladesh has made till date.

Eresh Omar Jamal is a member of the editorial team at The Daily Star.