The government has adopted a set of plans to reform the country's banking sector with a determination to uphold the autonomy of the Bangladesh Bank, which is being undermined in many ways.
The reform targets set in the government's 8th Five-Year Plan (8FYP) for 2021-2025 include improving supervision over the banking sector, special measures for monitoring non-bank financial institutions (NBFISs), improving loan recovery and effectiveness of banking courts, proper management of the interest rate policy and stringent criteria for re-capitalisation of public banks.
Shamsul Alam, member of the General Economics Division of the Planning Commission, addressed issues relating to the banking sector while briefing a virtual consultation meeting on the sector-based chapters 1, 2 and 3 of the 8th Plan held on Wednesday.
Government interference in the Bangladesh Bank's autonomy came in for serious criticism in various platforms after the central bank was forced to cut down Cash Reserve Ratio (CRR) in April 2018.
The then finance minister AMA Muhith held a meeting with bank owners and instructed the central bank to cut the CRR – a core money management tool that only the Bangladesh Bank can change.
Implementation of the single-digit interest rate is another instance of how the government compels the central bank to impose its decisions on banks.
Soon after assuming office, Finance Minister AHM Mustafa Kamal announced a reduction of defaulted loans by implementing a single-digit lending rate, which goes against the spirit of a free market economy.
The Bangladesh Bank itself was against the enforcement of the single-digit lending rate. In its opinion sent to the finance ministry, the central bank said implementation of this decision would squeeze the lending capacity of banks.
But, eventually, the central bank had to comply with the finance ministry's decision and issued a circular to implement the single-digit lending rate from 1 April 2020.
Even though the Bangladesh Bank is now empowered to take decisions with regard to issuing licences to new banks, its decisions are often influenced by the government.
However, the government has finally realised the importance of the central bank's independence in establishing an efficient financial market.
Under the 8th Five-Year Plan, the government will carefully review the state of the regulatory autonomy of the Bangladesh Bank and initiate reforms and measures that can sufficiently empower the central bank to effectively execute its responsibilities.
International evidence suggests that an independent central bank is necessary for a country to attain an upper middle-income and higher-income status, the government says in the draft 8th FYP.
As a result, the government will facilitate increased recruitment of quality staff in the Bangladesh Bank, provide adequate resources to procure the technology required to strengthen its effectiveness, and implement prudential norms.
The government acknowledges that an effective autonomous central bank is necessary to ensure a sound monetary policy management and exercise utmost prudence in matters such as the licencing of new banks, bank consolidation, bank supervision and loan recoveries, according to the draft.
During his presentation, Shamsul Alam said the banking industry has now become an oligopoly which will result in investment interruption. He, therefore, emphasised controlling this oligopolistic banking system.
Farhad Hossain, minister of state for public administration, said the banking sector is now ailing due to increasing defaulted loans.
Pointing out that borrowers are taking out loans in hundreds of crores of taka from banks but are not returning them, he said the government should take necessary steps to recover the loans. He also asked for strengthening the Money Laundering Act to bring back the money that has been laundered abroad.
Dr Ahsan H Mansur, executive director of Policy Research Institute, said reforms in the banking sector have been long overdue.
Stressing the need for proper implementation of government plans, he said,"It is easy to document plans but implementation of those is difficult. The government always adopts good plans with a good intention but often fails to implement them."
He recommended that the government form a high-powered task force for every plan it wants to implement.
Proper management of interest rate policy
Under the 8FYP, the government will assist the Bangladesh Bank to prudently manage its interest rate policy in order to strengthen financial intermediation as well as to keep interest rates low to promote economic activities, according to the draft 8FYP.
Any instability or weakness in the management of interest rates can hinder a stable momentum of growth and weaken the banking sector by reducing the rate of growth of bank deposits, it reads.
A slow-growing deposit base in the face of rising NPLs could create serious liquidity and profitability problems for the banks, possibly leading to financial disintermediation, it continues. The positive real interest rate for deposit mobilisation can be reconciled with low real interest rates for lending by lowering NPLs and improving bank competition.
The government has realised that the deterioration in the portfolio quality of the state-owned commercial banks is a serious threat to the soundness of the banking sector.
The government in the draft 8FYP says it will take necessary measures to improve the performance of the banking sector.
The entire banking sector – state-owned, private and foreign commercial banks, and non-bank financial institutions – will be brought under a single regulator, the Bangladesh Bank, says the draft, adding that the government will enable the central bank to act quickly to reduce NPLs in the banking sector and ensure that capital adequacy ratios comply with Basel III requirements.
Stringent criteria for re-capitalisation of public banks
Recapitalisation from the national budget to under-performing state-owned banks will be linked to stringent performance criteria which require the recipient banks to reform their operations and become sustainably solvent, failing which they should be penalised as a first step.
If non-performance continues beyond an agreed timeframe, deeper reform measures to reduce the size of their operations, foreign management contracts, mergers, etc, will be considered, according to the draft 8FYP.
Improving loan recovery and effectiveness of banking courts
The government says it will improve the effectiveness of the Artha Rin Adalat under the 8FYP to make loan recovery attain the desired benchmark.
Moreover, steps will be taken to implement the Artha Rin Adalat Ain 2003 along with other related acts effectively so that defaulters get no loopholes to avoid and delay loan repayment.
Special measures for monitoring NBFIs
Under the 8th Plan, the government will take measures for proper monitoring and supervision of NBFIs. The Bangladesh Bank will be advised and supported in classifying them into categories, such as those that are performing well and those that may be salvaged through stringent central bank supervision and liquidity support.