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Why not let failing banks fail?

  • Published at 10:17 pm February 15th, 2018
  • Last updated at 10:24 pm February 15th, 2018
Why not let failing banks fail?
The government’s move to bail out the dying Farmers Bank Ltd by injecting more public money into it has once again raised eyebrows. Experts and bankers have heavily criticized Bangladesh Bank, the central bank and apex regulatory body for the country's monetary and financial system, and the government for such measures, saying that instead of ensuring good governance in the country’s crisis-riddled banking sector, the authorities are desperate to save a bad bank. They stressed the need for improving management capacity, and adopting merger and bankruptcy declaration measures to address the prevailing crises.
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The experts also said capital is the principal pillar of a bank’s financial health, and clients’ confidence hangs on it. But when the central bank and the government try to save bad banks by injecting public money into them, owners of these banks will grow even more interested in looting clients’ savings, they observed. University Grants Commission (UGC) Prof Dr Muinul Islam slammed the government for its lack of political will and sincerity to address the pressing issues. “Bad banks have been encouraged to commit crimes one after another as there is a belief among owners of the banks that the government will certainly take measures to save their organizations. The government will have to make sure banks owners have come out of the closet of such consolations,” he told the Dhaka Tribune.
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To address such crises, there is a merger policy practised all over the world. But, neither the central bank nor the government has ever taken any such step fearing that people will lose their trust in banks, added the eminent economist, who has been named for “Ekushey Padak 2018,” the second highest civilian award in Bangladesh, which will be distributed on February 20. The conditions of some commercial banks are so bad that they ought to be merged with healthy ones as early as possible, he stressed.

BB letting looters walk away

[caption id="attachment_247106" align="alignright" width="284"] File photo of Toufic Ahmed Chowdhury[/caption] Dr Toufic Ahmad Choudhury, director general the Bangladesh Institute of Bank Management, said: “In our country, it has become a trend that once a bank is launched, the entrepreneurs feel that the regulatory body will take care of it and they have no responsibility in this  regard. “To address the prevalent crises, some recommend that bad banks be acquired or merged with healthy ones.  But, merger and acquisition is a part of a total banking resolution policy, which is also called ‘exit policy'.” He added said: “In market economy, if someone qualifies for a licence, regulators should give it to him or her. But the regulators are not responsible for keeping their businesses alive. If a bank is on the verge of dying, the regulator should let it die. “But, in our country, Bangladesh Bank (BB) has been taking over the responsibility to take care of bad banks, paving the way for owners to avoid their liabilities.” Dr Toufic further said: “Therefore, a total banking resolution policy is needed so that bank owners failing to compete in the market can shut down their businesses. Depositors’ interests should be given the highest importance in such circumstances.”
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Bank owners ignorant of merger policy

[caption id="attachment_247109" align="alignleft" width="284"] SM Amzad Hossain, chairman of South Bangla Agriculture and Commerce (SBAC) Bank Rajib Dhar/Dhaka Tribune[/caption] Although some owners are willing to let their crisis-riddled banks be merged with healthy ones, many said they still do not have a clear idea of merger policy. SM Amzad Hossain, chairman of South Bangla Agriculture and Commerce (SBAC) Bank, said: “I actually don’t understand the merger policy. If it is meant for taking over the charge of a bad bank, then for sure, we will have no objections in this regard. “There is a process of winding up through legal proceedings. If a bank is on the verge of dying, its management board should be reformed, or its name should be changed. I think there is no other alternative.”

Focus should be on depositors’ interests

Dr AB Mirza Azizul Islam, a former finance adviser to a caretaker government, said:  “Currently, there is no law in place in the country regarding the forced merger. So, why will a good bank be interested to take the liabilities of a bad bank? He also stressed the need for making sure that depositors’ interests are not hampered during the merging process. [caption id="attachment_247114" align="alignright" width="284"] File photo of Dr AB Mirza Azizul Islam Dhaka Tribune[/caption] Former Bangladesh Bank governor Dr Salehuddin Ahmed said: “A bank that fails to properly function, causes severe harm to the entire banking system as well as the economy.  Allowing banks to fail will end the policy of rewarding banks for acting in a reckless, irresponsible manner with the money they have been entrusted with.” Criticizing the authorities’ measures to save bad banks by injecting money into them, he said:  “At first, the banks should improve their management capacity to recover their bad debts and continue their business with the recovered money. Injecting public money into bad banks can never be a good practice.” Merging and declaring bankrupt should be the second and third options to mitigate such crises, he observed. “If a bad bank is merged or declared bankrupt, there must be strict measures to protect depositors’ interests,” said Dr Salehuddin, adding that in Bangladesh, it is not so easy to declare a bank bankrupt without a strong insurance policy in place to protect depositors’ interest.
[caption id="attachment_247117" align="alignleft" width="284"] File photo of former governor of Bangladesh Bank Salehuddin Ahmed Dhaka Tribune[/caption] Amid widespread controversies, Bangladesh Bank is working to find out some way to resolve the ongoing capital shortfall in Farmers Bank Ltd. On Tuesday,  it held a meeting with the Investment Corporation of Bangladesh and Sonali Bank, Janata Bank, Agrani Bank and Rupali Bank to inject around Tk1,100 crore from the state-owned entities to Farmers Bank. As of September, 2017, nine out of 57 banks faced a capital shortfall of Tk17,700 crore. The banks include Bangladesh Krishi Bank, Sonali Bank, BASIC Bank, Janata Bank, Rupali Bank, Rajshahi Krishi Unnayan Bank, Bangladesh Commerce Bank, ICB Islamic Bank, and Farmers Bank. In a latest development, seven state-owned commercial and specialized banks at a meeting on Wednesday demanded Tk20,398 crore in capital injection. The government has a recapitalization plan to inject Tk2,000 crore into the banks during the current fiscal year 2017-18.