The worst thing about default loan is that in 2003, a farce of waiving interest was created. I think the government should immediately stop it, Dr Farashuddin says in an exclusive interview
Dr Mohammed Farashuddin was the 7th governor of the Bangladesh Bank (BB). He took the baton on November 24, 1998 from his predecessor Md Lutfar Rahman Sarkar and worked until November 22, 2001.
At present, Farashuddin is the Chairman of the Board of Trustees of East West University.
In an exclusive interview with The Business Standard (TBS), he dwelt on different aspects of the country’s banking sector – new rescheduling facility, role of the central bank and many more.
TBS: The finance minister has said the state-owned banks would not be given money anymore. He asked the banks to make profit at a rate of 15 percent. To what extent the banks will be able to follow the finance minister’s directive?
Farashuddin: I look at it from a different angle. It is not appropriate that the government will provide oxygen to a bank for its survival.
The practice of getting social work done by the banks has to be done away with. The banks will have to stop providing loans to the government and the parastatals.
For example, nobody gives loan to Biman but the public sector banks have to. They have to provide agricultural loans. So, they have to stop this.
I see a very silver line in the banking sector. The tenure of three managing directors have been renewed. They are the best of all time in Bangladesh’s banking system.
Their honesty and efficiency have been proven. It is possible if they stay and make policy in this way, there is no interference, especially no compulsion about interest.
Not giving any more money to the state-owned banks is the start of a good initiative.
But it seems to me that it may initiate another good thing. We have long been demanding the transfer of the public sector banks to the private sector, except Sonali Bank. I do not mean selling them because selling will not bring any benefit.
The shares of the banks have to be given to the middle class after fixing share prices scientifically and objectively so that the upper class cannot grab those. It will bring benefit as the people will own the banks.
TBS: You said this can be an indication of a good start. Lack of good governance is the main weakness of the public sector banks. Another weakness is political interference. Is this work possible without these reforms?
Farashuddin: Good governance lies in the hands of the managing directors. They are good people. Now if they get the proper environment, they can bring about good governance. What the government will have to do is to allow the Board and the management to do their work in their own way.
The job of the Board will be only setting the policy. This is the practice across the world. I also wanted to do this but could not.
One or two changes are coming in the chairmanship which is positive for good governance. Former general secretary of Bangladesh Economic Association (BEA) Jamaluddin has been appointed chairman of a bank, which is superb.
If such professionals are made chairman, they can fix policies. The Board and the managing director can work independently. This way it is not difficult for the state-owned banks to become profitable. Because, here everybody has trust in the public sector banks.
The banks have to be kept free of political interference and they should be exempted from performing the so-called social responsibilities. Then the banks will make profit. One or two have already become profitable.
TBS: How do you evaluate the special rescheduling facility given to the defaulters which is very lenient and compromised?
Farashuddin: This a surprising circular in the world. The loan defaulters will pay a 2 percent down payment while others will pay 10 percent. None of the defaulters is getting their loans rescheduled by making the down payment. During our time, some would pay but in the last 5-7 years, none is paying cash.
If the down payment is 10 percent, the amount is deducted after the loan is rescheduled. This is not a good system. It will not work. It does not mean the down payment has been realised. It then becomes an artificial down payment.
The grammar of rescheduling is if a loan sours up, 10 percent of the defaulted amount has to be paid in cash before rescheduling. This is a condition and if it is broken, then the rescheduling facility is cancelled and stopped.
The rule says rescheduling should not be done more than twice. In case of a special need, it can be done thrice.
In the last 8-9 years, rescheduling has been done five to eight times. The basic thing is that violation cannot be allowed.
If rescheduling is done as per the documents and not looking at anybody’s face, then it will produce results. Some special concession can be given to some unintentional defaulters.
Salomon Brothers, an international consulting firm, came up with a big proposal in 2003-04. They wanted to buy up our default loans. They offered Tk 0.17 against Tk 1 default loan. But the intentional defaulters opposed it; and they are strong, influential. It [buying of default loans] will be a little beyond tradition, but it would be good if something of that sort could be done.
TBS: What did they offer to do after buying up the default loans?
Farashuddin: They would have found out a strategy as to what type of pressure or assistance would help recover the loans. You know more loans have to be given to realise default loans. If they could realise Tk 0.30 against Tk 1 loan, that is a big benefit.
The worst thing about default loan is that in 2003, a farce of waiving interest was created. I think the government should immediately stop it. It was said that let their interest be written off for the time being as they cannot pay interest.
Tk 45,000 crore was lost in this way. Who is waiving whose interest? There is a serious moral hazard here.
If interest has to be written off, the banks keeping provisions against its savings (which they make out of their income from their normal activities). This should be reconsidered immediately and stopped.
TBS: We see some steps by the finance minister, such as calling the bankers and fixing interest rates. Does Bangladesh Bank’s role clash with this?
Farashuddin: I see the matter differently. The Bangladesh Bank has a lot of power. We worked in the 90s. Since then, the governor’s authority and status have gradually increased a lot.
So I say, the central bank could avoid issuing a circular giving rescheduling options by making a 2 percent down payment. None could have done anything for that.
It will not work if only the government is blamed. The Bangladesh Bank will have to be stricter. In the past, such strictness was shown.
TBS: That was during your tenure. Before you, LR Sarkar was the governor.
Farashuddin: Sarkar filed the cases and those were disposed of during my time. You see, 57 of the most powerful people in Bangladesh could not enter their own banks for eight years due to their bad loans. So, this is a question of Bangladesh Bank taking a strict position.
This is not a command economy. There are seven instruments in the monetary policy. One of those is moral suasion. This means interfering morally, controlling inflation by lowering interest rate.
Here the government, Bangladesh Bank and the Finance Ministry can request the bankers to consider whether they can lower interest rates as inflation has gone up and interest rates have increased. This should be the language.
Starting from Saifur Rahman till my tenure, we always said that in the market economy, the issue of interest should be left to the bankers. I do not know whether anybody is following the 6 percent interest limit.
The owners of the banks are actually the owners of trade and commerce. If it is seen that banks bring more profit, entrepreneurs become less interested in setting up industries.
In the 90s, if a bank made an annual profit of Tk 30 crore, it was sensational. Now making Tk 100 crore or even Tk 1,000 crore in profits is just a normal incident.
We are in a market economy, by announcement. Even the Awami League in its primary stage also followed liberal western democratic principles.
In the sixties, when a big leftist wave swept the world, the socialists in the Awami League raised their heads. Bangabandhu kept a room for the private sector and market economy since the beginning. So, fixing rate of interest through command is not a good idea.
Many criticise the World Bank, but they helped a lot in this regard.
Through massive economic reforms from 1981, the rate of interest was freed from command. Except foreign trade and agricultural loans, everything was freed. But here, there is still command in waiver of agricultural loans.
TBS: Different quarters raised a demand for a Banking Commission. The finance minister said he would look into the matter. Is there a need for such a commission?
Farashuddin: Let me put it differently, a Banking and Finance Reform Commission. It is not only reforming banks but also capital market, insurance etc.
In any developed economy, the investable fund comes from the capital market, pension fund and insurance. In Bangladesh, it comes from banks only. So, to develop these, a Banking and Finance Reform Commission is required.
In recent times, I see a good sign. The Finance Ministry is calling the Banking division which is under it as financial institutions division. They are not calling it banking division.
I heard that they would not bother with it as much as they did in the past. If this is implemented as a good intention of the government, they can do without a reform commission.
In the budget for FY15-16, former finance minister AMA Muhith categorically made a statement that he would form a commission. The following year, he said it would be considered. Then again, he said the commission would be formed during the next government led by the Awami League.
Forming a commission is not a big issue. Bangladesh Bank can also do the work. The Finance Ministry can do it as well, if they have good intentions.
The problem with a commission is that recently, a fear is spreading that a commission means Anti-Corruption Commission (ACC). If a banking reform commission is like that, then it may create fear. And if there are people like Farashuddin in it, I heard there is an explanation like that.
In that case, that commission will punish the big investors which will reduce investments. In that context, the commission is not a must.
TBS: India has been suffering from such a problem. They have taken up a reform programme to solve the problem. Do you think we should move forward in the same way to bring dynamism in the banking sector? Do you think the speed and good intentions required for that exists now?
Farashuddin: India is our big and a great neighbour. But I do not think everything they do is good. There is no reason to follow India in this regard.
We are at a much advanced stage. I only say, if it can be brought to the attention of the head of the government that political goodwill is necessary in the banking sector, the way the Father of the Nation wanted, the way you want a welfare state without any discrimination and there will not be a concentration of economic power, then it is possible.
In all the circulars issued in the last 5-6 years, there was concentration of economic power. This needs to be reversed.
Why is the rate of interest not going down? The reason is that the market is segmented and there is no competition. So, the market should be allowed to function smoothly and it is the main job of Bangladesh Bank.
If this can be done, the demand and supply of creditworthy funds will become normal, and the rate of interest will also fall.
TBS: Big scams in the banks are being unearthed. Can these be prevented beforehand?
Farashuddin: This can be stopped beforehand. For that, monitoring is required. There was a time in the past when a director general was responsible for supervising these matters. He would regularly monitor these.
But now a committee has been formed which means nobody has any responsibility.
TBS: Is tax money being spent properly?
Farashuddin: In 30 mega projects, 80 percent of the budget is spent. The prime minister oversees these projects but she cannot supervise everything.
I have been saying this: either make the Planning Commission stronger or a council of advisers in the style of America should be appointed. The prime minister can do this by including those she trusts.
The big issue is that making the span of financial year from January to December, and workweek Monday to Friday, is inevitable. Except a few countries, Friday is a working day all over the world. Budget implementation will be faster if the workweek is from Monday to Friday and the weekend is on Saturday and Sunday.
The cost of electricity production is the highest in Bangladesh. We already know that the cost of bridge construction is the highest here as well. We also know that another cement plant has been issued permit exceeding the capacity.
These should be brought to a logical level. I think why the big taxpayers and all other taxpayers will pay their taxes should be explained.
Transparency and accountability of expenses needs to be ensured. Collecting tax will become easier if this can be done. It can be easily done if political goodwill and stability is there.
The simple thing is, recently, before placing the budget, the finance minister said there was no reason to get worried as the revenue collection target would be fulfilled.
But I see that the revenue deficit will be huge. In the last fiscal year, the deficit was Tk 59,000 crore over the revised target. This year, the target has been set at Tk 60,000 crore more than last year.
However, I do not see any change in the revenue administration or among those who pay taxes.
On the other hand, economist Ahsan Mansur has said the government has messed up the VAT.