• Monday, Jul 22, 2019
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Reforms to fix ailing banking sector on cards

  • Published at 10:21 pm June 13th, 2019
Bangladesh-bank
File photo of Bangladesh Bank in Motijheel, Dhaka Mehedi Hasan/ Dhaka Tribune

  • To increase capital (authorized and paid up) of banks gradually
  • Bank Company Act will be amended
  • Stern measures will be taken against willful defaulters 
  • To bring down the interest rates to single digits
  • To make easy merger and absorption of banks, if required

Finance Minister AHM Mustafa Kamal has put forth a number of reforms to bring back discipline in the ailing banking sector. 

Placing the proposed budget for the fiscal year 2019-20 in parliament on Thursday, he said the government was thinking to increase capital (authorized and paid-up) of banks gradually; Bank Company Act will be amended so that the bank management, all components of revenue management (VAT, Customs and Income Tax) can function as usual, without facing any conflict with other laws; Bank Company Act will be amended so that amalgamation, merger and absorption of banks can be legally processed, if required; stern measures will be taken against the willful defaulters of bank loans; working to bring down the interest rates of bank loans to single digits with a view to making  industries and businesses more competitive and necessary amendments will be brought to the Bank Company Act to modernize the functions of holding companies and subsidiary companies.

The budget speech, which was partly read out by Prime Minister Sheikh Hasina as health minister felt sick, says: “We did not observe any mentionable reform initiative in some areas, especially in the banking sector, from the beginning. There was no exit route for the loan recipient if he/she fails to repay the bank loan.”

“This time around, we have arranged an exit for the loan recipient through effective insolvency and bankruptcy laws. Establishing a Bank Commission for bringing discipline in the banking and financial sector has long been in discussion. We would discuss with all concerned in this matter and do the needful,” it reads.

"It is observed that no mentionable instruments were used in our financial sector. This has led banks to give long-term loans by collecting short-term deposits. This creates a mismatch. It may turn out to be critical sometimes. We will take necessary measures to remove such mismatch. We will encourage instruments like Wage Earners’ Bond, venture capital, Treasury bond including a vibrant bond market," it adds.

Talking to Dhaka Tribune, Agrani Bank chairman and research director of Bangladesh Institute of Development Studies (BIDS) Zaid Bakht said that the new government would be successful in addressing problems facing the banking sector.

Stressing the need for formation of a separate bench in the High Court, he said: “A separate bench in the High Court for dealing with cases concerning defaulted loans is of paramount importance to reduce NPLs [non-performing loans].

"The initiative of the government to implement its pledges concerning the banking sector and involving the central bank in this regard is a good move,” he added.

Calls for reform

In the beginning of this year, the government asked the Bangladesh Bank to undertake banking sector reforms as a part of the ruling Awami League's 13-point election manifesto pledges. 

Prior to elections in December 30, 2018, Awami League had pledged to undertake an effective and sustainable strategy to lower NPLs and implement the Bankruptcy Act. 

According to the manifesto, the central bank would keep interest rates under control without hampering the market system, by adopting specific strategies and taking initiatives to inspect the expertise and skill of banks in approving and disbursing loans.

The manifesto pledged to make the ongoing supervision and regulation of commercial banks and financial institutions more effective and powerful, effectively addressing banking fraud, including loan defaulters.

However, at the end of March this year, the non-performing loans (NPLs) of banks rose by a staggering Tk16,962 crore in a period of three months till March this year, increasing the amount of stress loan in the banking sector to Tk1,10,873.54crore, according to the Bangladesh Bank data. 

In February this year, the finance minister assured that the amount of default loan would also not increase. 

The Association of Bankers, Bangladesh Limited (ABB) Chairman and Dhaka Bank managing director Syed Mahbubur Rahman said: “There should be a specific plan for reforming the banking sector. There are several gaps in the budget speech. It has been said that the interest rates of bank loans will be brought down to single digit, but not how it will be done.”

“Banking sector reform issues have been heard for long. Now the government has to go for action,” he added.

Read the full budget speech for FY20 here.