• Tuesday, Nov 12, 2019
  • Last Update : 10:13 pm

Reforms on the cards to fix ailing banking sector

  • Published at 09:20 pm June 13th, 2019
Web_bangladesh-bank--Mehedi-Hasan
File photo of the main entrance of Bangladesh Bank in Motijheel area of the capital Mehedi Hasan/Dhaka Tribune

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

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

Placing the proposed  fiscal year 2019-20 budget in parliament yesterday, the finance minister said the government was thinking of increasing the capitalization (authorized and paid-up) of banks gradually. The Bank Company Act will be amended so that bank management, all components of revenue management (VAT, Customs and Income Tax) can function as usual, without facing any conflict with other laws.  The Bank Company Act will be amended so that amalgamation, mergers, and the absorption of banks can be legally processed, if required.   Stern measures will be taken against wilful bank loan defaulters. The government is working on bringing down bank loan interest rates to single digits with a view to making industries and businesses more competitive, and necessary amendments will be made 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, said: “We did not observe any reform initiatives from the outset worth mentioning, especially in the banking sector. There is no exit route for a 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 to bring discipline to the banking and financial sector has long been discussed. We shall discuss matters with all concerned and do the needful,” reads the budget speech.

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

  • To increase capitalization (authorized and paid up) of banks gradually
  • Bank Company Act will be amended
  • Stern measures will be taken against wilful defaulters 
  • Interest rates to be brought down to single digits
  • Easy mergers and absorption of banks to be facilitated, if required

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

Stressing the need for the formation of a separate bench at the High Court, he said: “A separate bench in the High Court for dealing with bank 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

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

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

In February this year, the finance minister assured that the amount of default loans 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 digits, but not how it will be done.”

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