Given the fact that our existing banks are in such perilous state, granting approval to new commercial bank by the Bangladesh Bank does not seem to be a prudent or logical decision
Overburdened with non-performing loans - Tk94,422 crores owed to various public and private banks till December last year - our banking sector is in an ailing state. Instances of capital flight drawn from banks have been rampant in recent years.
Given the fact that our existing banks are in such perilous state, granting approval to new commercial bank by the Bangladesh Bank does not seem to be a prudent or logical decision. On February 17, the Bangladesh Bank approved three new commercial banks - are Bengal Commercial Bank, People's Bank and Citizen Bank - bringing the number of scheduled banks in the country to 62.
There has been speculation that a banking commission will be formed in no time. Before the formation of the commission that would oversee the entire banking sector, the latest approvals seem irrational. Instead of approving new banks, we should rather focus on issues hurting the existing banks.
The central bank oversees the private banks and other banking and financial institutions, while the ministry of finance oversees the government banks. Given the current situation, it is surprising that the central bank does not have control over our government banks.
The Bangladesh Bank and the parliamentary standing committees are responsible for investigating irregularities in the private sector. Meanwhile, the standing committee on the ministry of finance has discussed many irregularities in banking sector, and provided many important recommendations, which are advisory in nature. The committee cannot force the banks to implement its recommendations.
If a banking commission was in place, it could have served as a platform to inspect issues of irregularities in our banking sector and come up with a set of recommendations on how to minimize them.
The activities of people who are at present responsible for investigating irregularities in the sector is not very satisfactory. We observed volatilities in their decision-making process.
Take for an instance, capping the interest rate at 9 percent, which was supposed to be implemented in January. But the implementation now lingers on and as per a new decision, and it will be implemented in April, at the insistence of the government authorities.
We live in the era of market-driven economy. Every institution has its own individual decision-making process, especially when the institutions in question are private banks. Capping the interest rate under double digit may limit the scope of operating at an optimum for private banks.
The government, through this step, wants to boost investment and encourage people to borrow more. However, we cannot ignore the interests of the banking sector into the process.
It is true that government banks offer loans at a comparatively lower rate of interest in some cases, take for an instance, home loans. But numerous hassles lie in the way of getting such loans, including bribery and corruption. As a result, many opt for loans in private banks instead of state banks.
If the government caps the interest rate at such a definite figure, I doubt whether the private banks can run properly after meeting all the necessary operating costs.
Moreover, when our private banking sector is already struggling with so many issues, and default loans soar almost every day, granting approval to more banks can leave one very worried about this sector.
If we look at the scenario surrounding universities - multiplying the number of universities in the same pattern did not bring very positive results in terms of quality of education. Taking a lesson from it, we also need to bring the existing banks under strong regulation and take care of our ailing banking sector instead of giving approval to new banks.
Nevertheless, when so many new banks are getting approval regardless of the current state of the sector, we also need to analyse if the banks are getting approval on the basis of merit or whether political influence is the main contributing factor. This remains a big question.
The writer is a Professor of Development Studies at the University of Dhaka