Highlights: 

• Bangladesh Bank loses control over banks
• It lacks capacity, transparency and accountability
• Meddling of some business groups in the banking sector
• Changes in rules and regulations under political consideration
• International practice not followed in appointment of governor, deputy governor
• TIB prescribes an initiative to form a banking commission
• It suggests amending law to identify intentional defaulters, publish their names and break-up of family system

The Bangladesh Bank's lack of leadership under political pressure and some business groups' interference have contributed to massive irregularities and corruption in the banking sector, said a report by the Transparency International Bangladesh (TIB).

The report titled "Role of Bangladesh Bank in regulating defaulted loans: Governance challenges and way forward" addressed two reasons for the deterioration in Bangladesh Bank's control over the banking sector.

The first reason is: the government's lack of political will and changes in rules and regulations under political considerations and also in favour of businessmen, allowing them to freely enter and control the banking sector.

The second one is Bangladesh Bank's lack of capacity, transparency and accountability.

The central bank has now turned into a carrier of orders of vested interests instead of being a controller, according to the TIB report.

Addressing the issue of the appointment of a governor, the report said he was appointed within a two-hour notice despite not having adequate knowledge about banking. Instead of following the international practice of government appointment, he was appointed only because of his close relations with the then finance minister, it elaborated.

The government has recently reappointed Bangladesh Bank governor Fazle Kabir, changing the age bar under the Bank Company Act.

The report also mentioned that international practice is not being followed even in the appointment of deputy governors.

The report noted that the poor control exercised by the Bangladesh Bank created the scope for depositors' money to be looted on the pretext of loans by some business groups.

Citing instances, the report said a business group holds 28% stake of a bank in the name of 14 organisations and 14% share of another bank in the name of seven organisations.

This business group has control over nine private banks, the report said.

After taking control of banks, some business groups put their own people on the boards and subsequently take out large amounts of loans.

The chairman of a private commercial bank took out a loan of Tk8,000 crore from different banks in the name of his various business entities. Of the loan amount, Tk5,000 crore was defaulted and restructured several times, but turned default again, the report noted.

Dr Iftekharuzzaman, executive director of TIB, said, "So-called bank owners, regulators and the government – these three parties jointly create the scope for depositors' money to be looted.

"It is the government's duty to provide security for people's money. But what is happening is quite the opposite of that. The government has been made hostage by loan defaulters."

TIB Director (Research and Policy) Mohammad Rafiqul Hasan presented a research paper at the webinar.

The paper found out several reasons behind increasing default loans, including the central bank's weak regulatory framework, caused by the limitations of the banking sector law, a lack of political will and pressure from influential quarters.

In the last 10 years, default loans increased by 417% to Tk116,288 crore in September 2019 from Tk22,481 crore in 2009, according to the report.

Every year, the average increase in default loans is Tk9,380 crore.

Although default loans declined to Tk92,510 crore in March this year, riding on a relaxed rescheduling facility with 2% down payment, it increased further to Tk96,117 crore in June.

The TIB also presented a 10-point recommendation at the webinar.

It said big changes should be made in the Bangladesh Bank's board of directors – in the positions of both the governor and deputy governors.

The TIB research paper also prescribed an initiative to form a banking commission, which has been under discussion for a long time.

It recommended an amendment to the law to identify intentional defaulters, publish a list of their names and details, and break up the family system in the banking sector.

Refuting TIB's observations, Sirajul Islam, executive director of the Bangladesh Bank, told The Business Standard, "The central bank does not face any political pressure and it has full control over all banks. And it has been working with full freedom."