Finance ministry can't avoid responsibility for banking sector woes

The finance ministry cannot avoid responsibility for the current wobbly state of the banking sector, said Khondkar Ibrahim Khaled, a former deputy governor of the Bangladesh Bank.

In the parliamentary system, the respective department is liable for all the incidents that happen under it.

"So, the finance ministry should be liable for the miserable situation of the banking sector right now," he told The Daily Star in an interview recently.

Khaled went on to criticise Finance Minister AMA Muhith, saying that he should have resigned from his post, for what happened in the banking sector, including the recent debacle in Farmers Bank.

Established in 2013, Farmers Bank plunged into acute liquidity crisis in the past couple of months, failing to pay back clients following the maturity of their fixed-term deposits.

Another fourth-generation bank like Farmers Bank, NRB Commercial Bank is also in a precarious state.

Khaled, however, said the overall health of the private banks is comparatively better than the government-owned banks.

"Though the financial health of the private banks has deteriorated, their bad loan rate of 6 percent plus is still acceptable."

But in state banks, the bad loans account for about 32 percent of their outstanding loans.

"This is highly unusual -- no country can run the banking sector with 32 percent bad loans."

Subsequently, the former central banker urged the government to undertake wholesale reforms of the state banks on a priority basis.

The two main causes for the unusually high default loans in the state-run banks are the enormous corruption and inefficiency, according to Khaled, who previously served as the managing director of state banks Agrani, Sonali and Bangladesh Krishi Bank.

The government itself started corruption in public banks by appointing directors and chairmen on political consideration. "Many corrupt people got appointed."

For instance, Syed Abdul Hamid, the former managing director of Agrani, was appointed by the finance ministry even though the BB objected to his appointment.

Sheikh Abdul Hye Bacchu, the former chairman of BASIC Bank, who is alleged to be responsible for bringing the once-sound state bank to its knees now, was also appointed by the finance ministry in September 2009.

"He was the worst choice of the government," said Khaled, who served as the deputy governor of the BB from 1998 to 2000.

Bacchu had to step down from his post in July 2014 following allegations of graft involving Tk 4,500 crore between 2010 and 2013.

A BB investigation found that he had influenced all activities of the bank during his tenure -- and played an active role in the loan scams.

"But Bacchu still has not faced any legal action -- it is because he is backed by the government."

In September 2015, the Anti-Corruption Commission had filed a total of 56 cases over the Tk 4,500 crore graft at BASIC -- but Bacchu was none of the accused.

Although the ACC quizzed Bacchu earlier this month, Khaled doubts anything will happen to the former BASIC Bank chairman.

"Such incidents prove that the government began corruption in the public banks and that has now started to infect the private sector banks," said the septuagenarian.

Some four or five private banks, including Farmers, have now become involved in financial irregularities on a large scale.

"It is good that the Farmers Bank chairman has been forced to quit. The central bank's move was delayed but it is good that at least action was taken."

Farmers Bank chairman Muhiuddin Khan Alamgir and its audit committee chairman Md Mahabubul Haque Chisty were forced to step down on November 27, when the four-year-old bank was knee-deep in liquidity crisis. On the same day, the BB restructured the board too.

Khaled said the regulatory body should play a proactive role in case of the other private banks that are involved in corruption.

"The finance ministry could never remove even one managing director or chairman for their irregularities. Even Bacchu was not removed for his huge corruption. Rather, he was given the chance to quit."

The lack of good governance is another reason for the deterioration of the banking sector's health.

"Good governance always circulates from the top down. If the government itself practises bad governance, then how will there be good governance at the bottom level?"

He, however, spoke well of the current managing directors of state banks BASIC, Agrani and Sonali.

"But, they need the government's support to come out from the system of corruption that has been established."

Khaled, who is now a professor at the Bangladesh Institute of Bank Management, said the interference of politically influential people is getting worse by the day.

"Only the prime minister's intervention can bring discipline here."

He also touched upon the government's move to award licences to new banks at a time when the sector is struggling. "This is totally illogical."

The finance minister is defending the government's plan by saying that the existing 56 banks cannot cover all the people across the country; the new banks will bring all people under the banking umbrella.

"This is totally wrong because the new banks can never give service in the villages due to high costs," he said, adding that the existing banks could have extended their branch network to achieve the same goal.

Moreover, the BB is the only authority for giving licences for banks, but the finance ministry is exercising its power by sending recommendations for new banks.

Typically, when the need for a new bank arises, the BB in its capacity as the banking regulator publishes advertisements in newspapers seeking applications from interested parties.

It followed this process in case of the fourth generation banks, floating advertisements in 2011. But this time, the BB is yet to make such proclamation and it received four unsolicited applications for new banks.

"A recommendation from the government is kind of an order to a body like Bangladesh Bank. So such activities are making the central bank weak, which is ultimately impacting the banking sector negatively."

At present, the central bank is thick in the preparations for issuing new licences for Bangla Bank, People's Islami Bank and Police Bank -- against its judgement. It is also under pressure to issue another licence for Citizen Bank.

"If the control of the banking sector is totally in the central bank's hands, it will be run professionally," Khaled added.