Banking sector under crony capitalist control: CPD

The banking sector of the country is increasingly falling under the sway of crony capitalists, which is worsening issues instead of fostering improvement, warned the Centre for Policy Dialogue (CPD) yesterday.

According to a report by the think tank, since 2008-09, 24 major scams have collectively drained Tk92,261 crore from the banking sector.

This staggering amount, which was calculated using news reports published in some main stream media, equivalent to the cost of three Padma Bridges and nearly four months' revenue collection, underscores the severity of the situation.

The conditions of Shariah-based banks, particularly Islami Bangladesh, have reportedly worsened, especially after changes in ownership. These institutions are grappling with severe liquidity shortages.

The report titled "State of the Bangladesh Economy in FY 2023-24 (First Reading)" was presented during the Independent Review of Bangladesh's Development (IRBD) programme at CPD's office in Dhaka.

The report also extended its critique beyond the banking sector, highlighting alleged control by vested groups over government institutions and policy formulations.

Dr Fahmida Khatun, executive director of the think tank, voiced concerns over the influence wielded by major borrowers on policy decisions, citing instances where significant loans led to policy formulations such as loan rescheduling with minimal down payments of 1% or 2%.

She expressed scepticism about the effectiveness of reforms in such an environment.

"However, there is no alternative but to undertake a comprehensive overhaul of the entire banking system," said Fahmida. 

She stressed establishing a banking commission to meticulously identify the sector's issues, root causes, and appropriate remedies during a briefing with reporters.

Fahmida Khatun also said transparency and accountability must be ensured for some other government institutes like the National Board of Revenue (NBR), Implementation Monitoring and Evaluation Division (IMED) to increase revenue generation and confirm the best value of government money through reducing abuse of public money. 

She said at the event that the economy is going under pressure in terms of revenue mobilisation, government expenditure, reducing international trade, falling trend in forex reserve.

Professor Mustafizur Rahman, distinguished fellow of CPD, said at the event that the economy has now become riskier compared to recent years.

Pointing out that the prices of goods at the consumer level are much higher due to adjustments in the import and production stages, Mustafizur said, "The wealth of the poor is being transferred to the rich due to excessive inflation."

He suggested solving these issues by coordinating interest rates, exchange rates, and other factors.

"In 2010, the income of the top 5% of the earners was 30 times more than the lowest 5%. But this gap has now increased to 80 times," Mustafizur said.

During the discussion, Mustafizur emphasised the importance of direct tax collection to ensure justified resource redistribution and said the government should collect tax from rich and distribute to the poor.

Unfortunately, direct tax is not increasing proportionately with rising per capita income, he added.

The economist also warned the government about debt trap and middle income trap and said the entire revenue of the government is being spent on revenue expenditure, making development entirely dependent on loans.

The situation could lead the economy into a trap if more loans are taken to pay off existing debts.

Instead of taking loans to build new large-scale infrastructures, he advised focusing on advancing current projects and profitably managing existing infrastructures.

Professor Mustafizur Rahman also said Bangladesh is not in a risky position in terms of measurements by the IMF and the World Bank as they measure it by the debt stock as a percentage of the GDP.

However, debt repayment sustainability is degrading over the years and it reached $6 billion at a time when forex reserves were reduced to around $20 billion in a one and half year from $46 billion.

Professor Mustafizur Raman suggested that a portion of the funds drained from the banking sector through embezzlement might be illicitly transferred abroad.

He said non-performing loans surged from Tk22,000 crore in 2008 to Tk1,56,000 crore. Additionally, an average of $7-8 billion exits Bangladesh annually, attributed to loan defaults, tax defaults, and corruption.

Dr Khondaker Golam Moazzem, research director at CPD, said at the event that the economy is growing increasingly fragile with a declining banking sector, persistent inflationary pressures, a paralysed external sector, and stagnation in the labour sector. 

'Role of banking sector diminishes'

CPD Executive Director Dr Fahmida Khatun said the role of the banking sector is diminishing due to its weakened liquidity, increasing non-performing loans, and other concerning indicators. She identified institutional, regulatory, legal, and data-related issues as contributing factors to the emerging risks in the sector. 

She said government banks are experiencing capital deficiencies, and the condition of specialised banks is notably poor. In contrast, foreign banks demonstrate the highest capital adequacy. 

The non-performing loan (NPL) stock has surged by 3.65 times over the last decade, reaching Tk1,56,040 crore from Tk42,725 crore, primarily due to the absence of proper regulations. She said the amount would be significantly higher if loans in special mention accounts, loans with court injunctions, and rescheduled loans were included. 

Additionally, she pointed out that NPLs in private banks have increased, driven by competition with government banks. 

Dr Fahmida also noted a simultaneous increase in provision shortfalls. In the fourth quarter of the last fiscal year, provisioning shortfall was Tk21,460 crore, with Tk10,620 crore in state-owned banks and Tk11,270 crore in private banks.