The Bangladesh Bank has suggested incorporating stricter provisions in the Bank Company Act to rein in errant bank directors and control personal, family and group of companies' influences over the financial institutions to restore discipline in the ailing banking sector.
In addition, the central bank has come up with a host of other suggestions to reduce the risks in the banking sector, bring back good governance and to make it more reliable after reviewing the Financial Institutions Division's (FID) draft amendments to the Bank Company Act, 1991.
In the detailed recommendations, the central bank sees it necessary to impose restrictions on investment by an individual or a family or various companies under a single conglomerate in shares of more than one bank or other financial institutions to ensure good governance and sustainability in the sector.
Pointing out that the Bank Company Act does not have any specific provision concerning the nomination of representative directors in bank boards, the regulatory authority says many investors are taking advantage of this regulatory weakness.
In various banks, two directors are appointed on behalf of a single institution and two persons are being appointed as directors on behalf of a single individual, while many persons are being appointed as representative directors in banks who are not related in any way with the shareholder institutions or companies concerned, according to the Bangladesh Bank.
To plug this loophole, the central bank has suggested the Financial Institutions Division incorporate appropriate provisions in the Bank Company Act.
The FID has prepared the draft law in line with a government initiative to amend the act to restore discipline in the financial sector and rein in default loans.
Earlier, Prime Minister Sheikh Hasina in her budget speech for the fiscal year 2019-2020 had presented a range of reform measures, including amending the bank act to take action against willful defaulters and taking measures to form bank commission, to streamline the ailing banking sector.
The FID published its draft amendments to the Bank Company Act on its website on February 21 this year and sought opinions from the stakeholders on that within 21 working days.
Against this backdrop, the Bangladesh Bank gave its detailed opinion that included a set of recommendations seeking amendments to various clauses of the act which the FID published on its website on the 3rd of this month and again seeking opinions within 21 working days.
In its letter, the Bangladesh Bank has stressed the need for amending the law for the sake of minimising risk factors in the financial sector, controlling banks' involvement in investing in banks' shares in the capital market, and protecting the interests of small investors.
It also says, "...currently there is no tool to evaluate as to whether any harm can be caused to a bank by the shareholders."
"Even though there are scopes for regularising a defaulted loan by rescheduling, some bank directors tend to retain their directorship taking stay orders from the court. Any individual who has defaulted on loans should not become director of a bank or retain the post in the greater interest of establishing discipline and good governance in the sector," the Bangladesh Bank argues.
The central bank has also called for amending the relevant clauses regarding the appointment of top executives of banks so that any executive involved in any major offence in their previous institutions can be kept out of banking activities.
The Bangladesh Bank letter also emphasises inclusion of independent directors to bank boards in line with international best practices to ensure good governance..
The FID in its draft law suggested framing a definition of willful defaulters and restricting a host of their privileges including attending state ceremonies. The Bangladesh Bank has endorsed this.
The central bank has also informed the finance ministry that it will issue comprehensive circular specifying procedures of collecting information about willful defaulters.
If willful defaulters are included under clause 37 of the Bank Company Act, the central bank will be able to publish their list, the Bangladesh Bank letter says.
An additional secretary to FID told The Business Standard that the division in its draft has brought amendments to around 50 clauses of the act and that the central bank has agreed to 90 percent of those amendment recommendations.
Besides, the regulator has suggested imposing stricter provisions that will help reduce the dominance of bank directors, prevent the issue of a single family controlling more than one bank or company, and management of non-performing loans, he said.
He argued that the act needs to be amended fast for the sake of implementing various government stimulus packages worth of around Tk1 trillion, which have been announced to revive the economy in the aftermath of the pandemic.
The draft law cannot be placed before the parliament as a bill during the budget session, the official said, adding that it will be finalised after getting opinions from the stakeholders and might be placed before the house in the next parliament session for approval.
According to information revealed by the finance minister in the parliament in January this year, the amount of loans taken out by bank directors in the country was Tk1,73,231 crore. Of this, the directors had taken out Tk1,615 crore from their own banks and the remaining Tk1,71,616 crore was taken out from other banks.
Bangladesh Bank data show the amount of default loans stood at Tk94,331 crore at the end of December 2019, which was Tk93,911 crore a year ago.
Former governor of the Bangladesh Bank Dr Saleh Uddin told The Business Standard that the government announced stimulus packages cannot be implemented properly if good governance is not ensured in the banking sector.
Many loan defaulters will take out loans under the packages changing their names and even the Credit Information Bureau will not be able to catch them, he said. Besides, he stressed the need for taking stern legal actions against corrupt bank officials, which is not possible under the current law.
He called for a fast passage of the new law to implement the incentive packages properly. He, however, said the Bangladesh Bank also can ensure good governance by issuing a circular and strictly enforcing the prevailing laws.
The noted economist emphasised an independent central bank for establishing good governance in the sector. He also called for stopping political and bureaucratic interference in the Bangladesh Bank.
Meanwhile, the central bank will also have to take a hard stance against banks which will not follow the law properly.
Khandaker Ibrahim Khaled, former deputy governor of the Bangladesh Bank, said all the recommendations put forward by the central bank concerning amending the bank act are important.
To ensure good governance in the banking sector, the government must amend the law considering those recommendations.
He said the ministry can send the draft law and the Bangladesh Bank's recommendations on this to noted economists and experienced bankers and collect their opinions.
He also called for taking measures to pass the law quickly after taking opinions from all stakeholders to implement the stimulus packages properly.