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Throwing good money after bad

  • Published at 09:58 pm June 3rd, 2017
Throwing good money after bad
The practice of recapitalisation continues to meet the capital shortage of state-owned banks (SoBs), but no significant steps are in sight to stop the ‘bad move’. Though the government is trying to ease the SoBs’ fund crunch with the help of tax payer money, the default loan situation of the banks still remains a far cry. Finance Minister AMA Muhith on Thursday has proposed to allocate Tk2,000 crore for recapitalisation during the Fiscal Year 2017-18. Recapitalisation is a type of corporate reorganisation involving substantial change to a company’s capital structure, motivated by a number of reasons. Usually the large part of equity is replaced with debt or vice versa. But in Bangladesh, recapitalisation fund is being termed a ‘black hole’ in the financial sector after the largest loan scams at the two SoBs – Sonali Bank and BASIC Bank. The financial conditions of the two deteriorated due to massive loan anomalies and malpractices. The government has been providing liberal support for the state banks as recapitalisation fund so they can meet the capital shortage created by loan defaults. It has been said the recapitalisation funds could only improve the banks’ balance sheet. The government injected a total of Tk11,705 crore as recapitalisation fund into the SoBs from FY2009-10 to 2015-16. busi Among the receiving banks, Sonali Bank got the highest amount of Tk2,794.8 crore followed by BASIC Bank Tk2,390 crore. While the other fund-receiving banks, Agrani Bank received Tk1,081 crore, Janata Bank Tk814 crore, Rupali Bank Tk272.5 crore, Bangladesh Krishi Bank Tk789.7 crore and Rajshahi Krishi Unnayan Bank Tk318 crore. In the outgoing Fiscal Year 2016-17, the government also disbursed Tk2,000 crore for state-owned banks, with BASIC Bank getting Tk1,000 crore from the allocation in the revised budget. Probashi Kallyan Bank will get Tk250 crore while Bangladesh House Building Finance Corporation will be given Tk200 crore. The Finance Ministry will provide Tk184.65 crore to the IFIC as the private commercial bank earlier decided to increase paid-up capital through issuance of rights share after considering bonus shares for stock dividend In the upcoming fiscal year, Tk2,000 crore has once again been set aside for the state banks’ recapitalisation. Though the government recapitalisation from the citizen’s tax money to the SoBs, the default loan situation of the banks is not improved. The Non-Performing Loans (NPLs) soared to 82% of total bad loans in the banking sector till March 2017 while the SoBs alone have 84% of them, according to the latest Bangladesh Bank data. The central bank data also shows that the default loans reached Tk35,715 crore in the six state banks while Tk29,920 crore is classified as bad loans. As the growing non-performing loans in the state-owned banks are increasing, the government has failed to realise the money, rather it is interested in recapitalisation from public exchequer in every budget. It has been alleged that the ongoing mechanism is mainly helping some vested quarters, mainly the ruling party’s blessed businesspeople, take loans from banks without proper mortgages and documents. Even the loanees do not pay monthly instalments. “The wilful defaulters and plunderers feel encouraged as more and more public money is injected into troubled banks without holding anyone accountable,” Director General of Bangladesh Institute of Bank Management (BIBM) Dr Toufic Ahmad Choudhury told the Dhaka Tribune. He said the government provides recapitalisation for financially weak banks instead of taking exemplary legal action against those making the banks vulnerable. “Good governance will not be fully established in banking unless people like the former chairman of BASIC Bank, Sheikh Abdul Hye Bacchu, are punished for their corruption.” The quality of good governance in the banking sector also comes into a question again after the government’s latest move to change to the Bank Company Act. The government has approved amendments to three provisions of the Bank Company Act including increasing the tenure of board of directors of a private bank from six years to nine years. The change to a third provision states that up to four members of a family may be appointed as board of directors for a bank while the law currently permits only two members from one family. The Centre for Policy Dialogue, an independent think tank in the country, stated that, “The most recent amendment is regressive in nature since it will be taking a step back from the previous changes made to the act.” “This law means that family ownership will have a greater control on the banks with the possibility of erosion of corporate governance.” As the good governance in the banking sector is decreasing and the number of default loans is on the rise, economists and experts strongly criticised the government’s repeated draining of public money on the SoBs in the name of recapitalisation. AB Mirza Azizul Islam, a former adviser to the caretaker government, told the Dhaka Tribune, “The government could recapitalise the SoBs in the short term, but the banks had to be financially solvent as they have not to take money from the government, rather they would pay their profit to the government.” “In this regard, increased loan recovery capacity and end to political influence on loan disbursement are needed to make the banks commercially viable and stable.” BB Governor Fazle Kabir, however, said the government is trying to improve asset quality of the state banks to reduce their dependency on public fund. “We are trying to improve their asset quality. No further recapitalisation will be needed then,” Fazle Kabir said at a post-budget press conference at Osmani Auditorium in the capital Friday. He said sometimes the SoBs need recapitalisation as they do many important works for the government, including financing priority projects, making payment of all types of government wages, social security-related payments and receiving utility payments without any commission. Reforms: Time has gone It has been a much-talked-about demand of the stakeholders of the banking sector to reform financial sector to bring accuracy, accountability and good governance, but the time is flying by while no reforms have been made over the years. Experts said since the election is nearing, the government will not be able to meet the stakeholders’ demand like establishing an Independent Financial Sector Reform Commission (IFSRC) for the banking sector. “There is very little scope to reform the banking sector as big businesses are involved in anomalies. One has to understand political economy in this regard,” said Debapriya Bhattacharya, distinguished fellow of CPD. Meanwhile on February 6, Finance Minister AMA Muhith declared formation of a Bank Commission during the tenure of current government to monitor the banking sector.