The challenge before Bangladesh Bank was, in a nutshell, to hold the habitual defaulters and delinquent bank officials into account and it has failed miserably to address this.
Bangladesh Bank's epic failure in curbing non-performing loans (NPL) have made headlines in media all over the world over the last ten years. Repeated concerns have been expressed by relevant stakeholders, including the World Bank and the International Monetary Fund, regarding the constant deterioration of banking performances and its potential implications for the sustainability of the sector. Bangladesh Bank, by a number of recent policy changes and actions, has made it clear that not only has it failed to curb NPL, it has also dropped all pretence of having any intention to curb NPL.
News of large-scale fraud and mismanagement in the banking sector began to surface around 2010 with the Basic Bank and Hallmark incidents. These incidents were followed by many more scams, mostly in relation to state owned banks and some in relation to private banks. The common factors in most of these scams were appointment of management based on political considerations rather than based on expertise or experience, concentrated power of the Board of Directors, widespread flouting of Bangladesh Bank's core risk management guidelines by bank officials and, in extreme cases, forgery and other fraudulent practices.
In the wake of news of massive scams, Bangladesh Bank acted as if it were taking steps to curb the situation. Some investigations were carried out by Bangladesh Bank and cases have been referred to the Anti-Corruption Commission (ACC) for prosecution. In some cases, the bank officials responsible for flouting laws and guidelines were silently removed from the Bank but were not subject to criminal investigation. In other cases, nothing was done.
Immediately after filing of these cases, there have been widespread credible allegations from the stakeholders that the masterminds of these massive fraudulent schemes were not being included in the criminal cases. In an address to the parliament in 2015, the then Minister of Finance expressed frustration in his inability to bring major players of the Hallmark and Basic bank scams into account due to their political backing. Around the time of this helpless admission by the Minister of Finance, Bangladesh Bank started making some inexplicable policy decisions to give the habitual defaulters a sense of impunity and to enable the corrupt bank officials to continue their charade.
In 2015 Bangladesh Bank rolled out a rescheduling policy for 11 large defaulters, a group responsible for majority of the defaults in terms of value, and allowed rescheduling of their credit facilities on favourable terms. One of the conditions of the rescheduling facility was that the borrowers would be marked defaulters, and the benefit would be cancelled if they failed to pay two consecutive instalments. In such cases, they would also be barred from any loan rescheduling benefit in the future. The special rescheduling facilities offered to the big defaulters did not do much to curb NPL. Of the 11 business groups, five have become defaulters again while most of the 11 groups had repeatedly been defaulting on repayment. The overall default loans of these 11 groups ballooned from Tk15,180 crore in 2015 to Tk17,103 crore in 2019.
Amidst this burgeoning crisis, the Bangladesh Bank decided to promote crony capitalism by recommending amendment of the Bank Company Act, 1991 which allowed the tenure of board of directors to increase from 6 years to 9 years, and up to four family members would be allowed to be on the Board, instead of the earlier two per family. In the context of an already chaotic banking sector suffering from chronic corporate governance failures, caused by, among others, concentrated powers of the board of directors, this amendment was particularly absurd.
Rather than regulating the delinquent banks and officials, Bangladesh Bank instead eased the regulations for banks this year by, among other, issuing a circular on 6 February 2019 which allowed banks to write-off loans that remain classified as bad debt for three years without keeping 100 percent provisions instead of the previous five years, subject to full provisioning. In the backdrop of massive scams being perpetrated over the years, it is not clear what prompted Bangladesh Bank to relax regulations regarding write offs, and that too by deviating from international standard, for many years is simply inexplicable.
Despite bad results from the previous rescheduling policy, Bangladesh Bank introduced a circular on 16 May 2019 which allow rescheduling of credit facilities of defaulter borrowers in more favourable terms than the credit facilities enjoyed by borrowers who have been repaying regularly. The circular allowed defaulters to pay only a 2% down payment to reschedule their loans to avail a 10-year loan repayment period with a one-year grace period. The rate of interest for these defaulters have been capped at 9%. This move by Bangladesh Bank has sent out a clear message to the borrowers that it is better to default than to service the loans regularly.
It is therefore of no surprise that in order to avail this facility, some of borrowers have deliberately defaulted since middle of 2018, when news of such general amnesty from Bangladesh Bank started circulating in the sector. On 17 November 2019, Bangladesh Bank issued a circular allowing the Banks to offer further credit facilities to the defaulter borrowers who would be availing the rescheduling facilities under this special scheme. This completely obliterated all attempts by Bangladesh Bank to control NPLs. It appears that, as per latest initiative of Bangladesh Bank, not only there is zero consequence of default but there is also additional incentive.
In the meantime, the government has injected large amounts of capital into the troubled state-owned banks and indirectly to private banks, but in the absence of firm remedial action, performance has not improved. It has been estimated that the government has spent Tk15,705 crore in recapitalising the banks during the period financial year 2009 to financial year 2017. The government had also come forward to rescue a private commercial bank, the Farmers Bank Limited (now renamed as Padma Bank Limited), with a bailout package worth Tk1,100 crore. The government or the public would not receive any known benefits in return for these packages.
Bangladesh Bank has thus become the rubber stamp institution which has not only failed to regulate NPL but also, perhaps rather worryingly, has dropped all pretence of regulating NPLs. It has not only failed to perform its statutory duty of curbing NPL by failing to act, instead it has actively encouraged increase of NPLs by its policies which made congenial atmosphere for habitual defaulters not only to survive but also to thrive. It is therefore no surprise that the current Finance Minister also dropped all pretence by suggesting he is in favour of steps being taken to facilitate Hallmark Group's business by offering special rescheduling facility at 2% down payment, and a 10-year repayment facility. The message: special privileges would be given not only to habitual defaulters but also to those who are convicted of swindling money by making fake documents.
So, who is to lose from all these? The answer, simply put, is the general public– more funds would be diverted away from important projects to recapitalise delinquent banks and habitual defaulters, depositors would lose their deposit, small and medium entrepreneurs would be denied the capital they desperately need to finance their bonafide startups or businesses, the public shareholders of banks would denied profit from their shares as the bad loans are provisioned from the profits of the banks, the cost of borrowing would generally go up and financial sector would generally be destabilised.
In all likelihood of falling into the deaf ears of Bangladesh Bank and the government here are some ways to turn their nose at the right direction. Firstly, Bangladesh Bank must come out of the grips of special interest groups dictating increasingly absurd policies in the financial sector.
Secondly, introducing a credit rating system which provides a history of creditworthiness of each individual and business entity so that new lenders can make risk assessment before lending money. The system would contain, among others, history of late payment, defaults etc. which would affect the cost of borrowing for the individual borrower. Under the current system, the cost of delinquency of one borrower is being distributed to the whole segment of borrowers by raising the cost of borrowing generally.
Thirdly, if loans are rescheduled, the time lines and conditions should be strict and it should be a one-time opportunity. There is growing sense of impunity among the habitual borrowers since they are given to believe that there is always a next time when it comes to rescheduling.
Lastly, if public funds are being used to recapitalise banks, the terms of recapitalisation should include massive overhauling of corporate governance in the relevant institution and an option for public exchequer to receive a portion of the profits, if and when made by the bank. All proposal for recapitalisation must be made public and widespread consultation must take place with the relevant stakeholders before recapitalisation is carried out.
If the above steps are taken than perhaps Bangladesh Bank would be able to change its reputation from a regulator who dropped all pretence to one which actually cares.
Ahmed Zaker Chowdhury is a lawyer specialising in commercial law, corporate transactions and Mergers and Acquisition.