The crisis that currently grips the country's private banking sector could have been avoided, had the central bank and other banking regulators stepped up and adopted timely, preventive measures, banking and finance experts said.
Speaking to the Dhaka Tribune, they also criticized the government's decision to bail out the failing private banks using public money, saying that the regulators should focus on recovering the money that is missing from the banking sector and take appropriate action against the people responsible for the situation.
The private banks in Bangladesh are currently facing a grave liquidity crisis, caused mostly by an alarming rise in bad loans accumulated by these banks, which is the result of the growing tendency among borrowers to default on paying off their debts to these banks.
According to the Bangladesh Bank data, the amount of default loans in the country's banking sector stood at Tk74,303 crore at the end of 2017, of which Tk29,396.19 crore was in the private commercial banks.
The central bank data further reveals that the amount of excess liquidity stood at around Tk82,000 crore at the end of January 2018, as opposed to Tk1,27,000 crore of excess liquidity a year ago, which means Tk45,000 crore has been disbursed to the market in the last one year.
Most of this money was channelled through private commercial banks. Due to the massive amount of bad loans, these banks are now running out of money to lend.
This is also affecting the country's businesses. Traders want to get bank loans at single-digit interest rates, but at present, the interest rates are above 10%, which is affecting the country's industrial growth.
Sources in the sector say the ongoing liquidity crisis in the private banks is mainly the result of financial anomalies that have been sponsored by influential bank owners.
Experts believe that the best way to tackle the current crisis is to force the banks to recover the defaulted loans.
“The regulatory bodies should put pressure on the crisis-hit banks to collect their bad loans to overcome the crisis,” said Dr Salehuddin Ahmed, former governor of Bangladesh Bank.
He also criticized the decision to raise the interest rates of bank loans to double digits.
“The banks could increase deposit collection by raising savings interest rates, instead of raising the rates on loans,” he added.
“The government as well as the Bangladesh Bank should take necessary steps in order to ensure good governance and transparency in the banking sector first, instead of finding ways to save the private banks,” the former governor added.
Also Read - Bad debts plague banking sector
'Bail-out is not the solution'
The government on March 29 decided to inject Tk715 crore into the Farmers Bank Ltd, which is struggling with a number of financial anomalies.
Four state-owned commercial banks – Sonali, Agrani, Janata and Rupali – will invest Tk160 crore each in the fund, and state-owned Investment Corporation of Bangladesh will invest Tk45 crore.
This step has been heavily criticized by banking experts.
“Injecting money into a scam-hit private bank will create a bad example in the banking sector, as it is not the duty of the government to bail out private banks, even though it is the government's duty to ensure a licensed bank's survival,” said Dr Toufic Ahmad Choudhury, director general of Bangladesh Institute of Bank Management (BIBM).
Dr Salehuddin Ahmed echoed Toufic's remark when he said the regulators should find a way to recover lost money and establish good governance in the banking sector.
The Farmers Bank has become a particularly risky organization in the banking sector as the amount of its default loans has risen to more than Tk700 crore in the four years since it started operations.
The bank has also continuously failed to return the deposits of the depositors over the last few months.
Sources say the bank’s present situation has been mainly caused by former chairman Dr Muhiuddin Khan Alamgir, who resigned from his post last year after its financial anomalies came to light.
State-owned bank BASIC Bank Ltd is in a similar boat; insiders in the sector say its former chairman Sheikh Abdul Hye Bachchu is behind the crisis the bank is currently facing.
Both of these former chairmen and many other influential people in the banking sector have been able to get away with their crimes, which should not be the case, said the experts.
“The government and other regulatory bodies should take punitive actions against the people who are involved in the scams and have caused this crisis, instead of giving assistance to these banks,” said Toufic Ahmad Choudhury.
Also Read - Default loan rises by Tk12,000 crore
Owners desperate to save private banks
Leaders of the private bank owners' association Bangladesh Association of Banks (BAB) met with Finance Minister AMA Muhith in a closed-door meeting on the night of March 30, where they placed a list of demands in a letter to save the struggling banks.
The core demands in the letter, signed by BAB Chairman Nazrul Islam Mazumdar, are: reducing the private banks' case reserve requirement (CRR) by one percentage point, allowing state-owned agencies to deposit 50% of their funds in the private banks, instead of 25% which is currently allowed, and forming an agency under the Ministry of Finance and Bangladesh Bank to prevent “negative reporting” about the banking scams.
The government has already consented to meet two of these demands.
On March 30, the finance minister declared that the state-owned agencies would have to deposit 50% of their funds in the private banks.
He announced that the CRR rate would be slashed down to 5.5% from 6.5% to mitigate the liquidity crisis.
Commenting on allowing state-owned agencies to deposit 50% of their funds in private banks, former financial adviser to the caretaker government AB Mirza Azizul Islam said this would put public money at a greater risk.
“The private banks are already grappling with anomalies. The rate could be increased for a certain period, but that should be 30% at best, not 50%,” he said.
Instead of showing positive attitudes toward bank owners, the government should take strict action against the perpetrators of this crisis, he added.
Azizul also criticized the bank owners' demand to prevent negative reporting on the banking sector, which was echoed by former central bank governor Salehuddin.
“There is no need to form any agency to stop negative reporting,” he told the Dhaka Tribune. “People have the right to know what is happening in the banking sector.”