• Tuesday, Sep 18, 2018
  • Last Update : 08:26 pm

Will government concessions help private banks survive?

  • Published at 01:18 am June 25th, 2018
  • Last updated at 01:19 am June 25th, 2018
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'The initiatives that the government has taken will hardly be effective to reduce the lending interest rates, or bring any benefits to the clients and depositors'

In a bid to alleviate the financial crisis that the country’s banking sector is currently riddled with, the government has proposed to reduce the corporate tax rates for banks and financial institutions by 2.5 percentage points – bringing it down to 37.5% from the existing 40% for publicly listed institutions.

Finance Minister AMA Muhith made the announcement during his budget speech on June 7, where he said this step was the latest in a series of initiatives the government had recently taken to reform the banking sector.

Some experts have called the move a prudent intervention in a critical sector. Others, including stakeholders, experts and lawmakers, said the move rewarded irregularities and cutthroat practices prevalent in the country’s banks.

In the post-budget discussions in parliament, a number of MPs came down heavily on Muhith for his “failure” to address the prevailing indiscipline and instability in the banking sector.

Many experts and stakeholders said the government initiatives were mostly in favour of bank owners, bailing them out of the crisis with recapitalization. They demanded that the government take punitive and effective measures to reorganize the most important sector in the country, which include forming an independent Banking Commission.

But those who agreed with the finance minister’s policy say there are no straightforward solutions to the problems in the sector.

“It is easy to criticize our decision, but we have no other options. If we had not taken these steps, these private banks would have inevitably collapsed, which would have pushed the whole banking sector into a slump and caused the country’s economy to be hamstrung,” a secretary in a Ministry of Finance office recently told the Dhaka Tribune, on condition of anonymity, adding that these policies are short-term and the banks would ultimately have to revive themselves in the long run.

Asked about the demand for a Banking Commission, he asked: “Why is it mandatory to form a Banking Commission to reform the sector? Who said we were not taking reform measures? All the recent initiatives we have taken are aimed at reforming the sector.”

He further said forming the commission was indeed in the pipeline for next year.

Dr Toufic Ahmad Choudhury, director general of Bangladesh Institute of Bank Management (BIBM), said it was wrong to assume the government initiatives were entirely in favour of the bank owners.

“There are some credible justifications behind the government’s moves, such as ensuring good governance in the banking sector, reducing the lending interest rate, promoting investment in the country, and reinstating the customers’ confidence on the banking sector,” he told the Dhaka Tribune.

“I think it’s not the right time to comment on the government initiatives; we need to wait sometime to see how these plans pan out.”

He also said it was not mandatory to form the Banking Commission to reform the banking sector.

Md Shafiqur Rahman, former managing director of Social Islami Bank Ltd, said the government measures must be balanced.

“It is difficult to implement punitive measures in a critical sector like the banking sector when it’s in a fragile condition, but the government should also take reformative action as it provides support to the ailing sector,” he told the Dhaka Tribune.

“It is evident that the government is trying to streamline the banking sector. That will be more effective if proper reform measures are implemented as early as possible.”

Both Shafiqur and Toufic said the Bangladesh Bank had to take up a more active, empowered role to ensure good governance and transparency in the banking sector.

Meanwhile, those who are conservative about the government initiatives said they would not bring long-term results.

“The initiatives that the government has taken will hardly be effective to reduce the lending interest rates, or bring any benefits to the clients and depositors,” said Dr Muinul Islam, professor of economics at the University Grants Commission.

He termed the government’s move as “unacceptable and illogical,” adding that the government was focused on protecting the bank owners’ interests.

Amid this debate, owners of private commercial banks decided to bring down the interest rate on lending to 9% and that on three-month term deposits to 6% starting on July 1.

The decision was made at an emergency meeting of the Bangladesh Association of Banks (BAB) in Dhaka on June 20, following a directive from Prime Minister Sheikh Hasina, according to a press release.

This step was taken in order to create an industry-friendly environment, create new entrepreneurs, generate employment, and to accelerate trade, the press release said.