Retiring after ten consecutive years of being the finance chief, AMA Muhith today feels that many of his decisions on the banking system should have been different. Decisions such as giving a new lifeline to Farmers Bank, or the way he had allowed large loan rescheduling on liberal terms, or the benefits he gave to bank directors.
Muhith recently gave a long interview to The Business Standard and touched upon many aspects of the economy. He also gave his view on the recent policies of his successor AHM Mustafa Kamal. The full interview will be published later.
"I realise that it was not the right decision to save Farmers Bank," Muhith told this newspaper. "I should not have allowed it to live. I should have allowed it to die."
Then he explained why he could not do what he now feels he should have done.
He said he had to act on Farmers Bank because of political pressure.
"But when it was done (steps taken to save Farmers), I thought it will die eventually," the former finance minister said.
"The bank was set up by Mohiuddin Khan Alamgir, and he left it in good time. But (by that time) whatever had happened had happened. The bank was subjected to looting. It was finished," said Muhith.
There is no need to rename it Padma Bank – instead it should be merged with another bank, he said.
The bank, which was established in 2013, collapsed less than three years later because of financial irregularities.
More than Tk3,500 crore was siphoned out from the bank, according to Bangladesh Bank.
Ruling Awami League lawmaker Mohiuddin Khan Alamgir, and Md Mahabubul Haque Chisty, the then board chairman and chairman of the audit committee respectively, were forced to resign.
The bank fell into a severe liquidity crisis because of deposit withdrawal pressure.
Muhith decided to bail out the bank by injecting more than Tk700 crore through four state banks and the Investment Corporation of Bangladesh (ICB).
Later in January this year, the bank was renamed Padma Bank to recover public confidence.
However, the bank is still struggling to survive despite offering high interest, above 12 percent, to depositors.
Bangladesh Bank data reveals that as of September, the bank's default loans were 71.62 percent.
BASIC Bank: Bacchu is still a problem
Reflecting on what has happened to BASIC Bank, once a healthy state-owned bank and now just a pale existence because of uncontrolled plundering, Muhith said that the scam has left a negative impact on the banking sector as a whole.
"Sheikh Abdul Hye Bacchu (former chairman of the BASIC Bank) is an incredibly evil person. He has destroyed a good bank," the former finance minister said.
'But he (Bacchu) could not be punished because of a strong culture of impunity," he said. "It is not difficult to explain (why action was not taken against Bacchu), but I don't want to explain it."
The inaction on Bacchu has left a negative impact on the banking sector, he said.
"I expected him to be accused in the Anti-Corruption Commission's investigation," Muhith said. "It is very important to see what the ACC does in the end."
"The ACC has certain political constraints which are not discussable. But the ACC is now in very good hands, and it could take action. It has enough evidence, so we have to wait and see."
In the four years between 2009 and 2013, Tk4,500 crore was swindled out of BASIC, once a healthy public bank. Bangladesh Bank's investigation found that Bacchu was involved in it, but he still could not be touched.
Muhith faced huge criticism over the BASIC Bank issue after he made a comment saying that Tk4,000 crore was not a big amount.
Regarding loan scams, Muhith said that Sonali's situation is the worst. Janata is very good. It was better before, but it's health deteriorated from 2009 to 2015. Then chairman at that time disbursed bogus loans of Tk 400 crore during this period, he said.
Loan scam means putting money in a bad basket, he said.
In 2012, a Bangladesh Bank investigation revealed Hallmark's loan scam involving Tk 3,500 crore at Sonali bank.
Merger is the only solution
Muhith, who had given licenses to nine new banks in 2013, now thinks that there are too many banks.
There are now 57 banks in the country.
The former finance minister said, "The number of banks is high, but it is usual when monetisation increases in a country. Look at the United States in the 1930s when there were more than 4,000 banks there. Now America has only five banks."
"In Bangladesh, the banking sector grew fast, and now is the time to merge them," said Muhith.
"I made the law for merger and bankruptcy. We made the law following the American style," he added.
Muhith thinks it is prime time for banks to merge. Bankers know it very well and they also want to do it. The government should take the initiative to merge banks.
"The government is very eager to save banks. If we were less eager, there would have been liquidation, and control over banks would be a little better," he said.
On loan rescheduling
Muhith said that the new loan rescheduling policy is very liberal.
"I was thinking (as finance minister) that banks should be told that they cannot operate if their default loans cross a certain limit," he explained. "The limit has to be fixed through a guideline. It can be 10 percent or 11 percent (of total portfolio), but whatever it is, it has to be in line with international standards and those in neighbouring countries."
A commission should be formed to implement such a policy, he said. The commission should be formed for a short period – a year or two.
"After this idea came to my mind, I could not make the commission. I left it to my successor to proceed with," said Muhith.
He admitted that he could not set any such guidelines for banks, and no target limit was set in the policy to bring down default loans through rescheduling.
In January 2015, when Muhith was in the chair, Bangladesh Bank offered special packages for large loan restructuring which was widely criticised then.
At that time, large borrowers with loans above Tk500 crore were allowed to reschedule their loans for a long period at a compromised 2 percent down payment.
Although that one-time policy reduced default loans temporarily, it finally failed because not a single client who took the facility continued paying installments according to the conditions set in the policy.
Muhith left the banking sector with default loans at 10 percent plus when his tenure ended.
Soon after taking charge in January this year, Muhith's successor AHM Mustafa Kamal announced that default loans will not increase further, even by a single penny.
To keep his word, Bangladesh Bank in May issued a circular allowing defaulters to reschedule classified loans for 10 years with a 2 percent down payment instead of the regular 10 to 15 percent.
This policy is also apparently not helping the banking sector reduce default loans, as it surged to 12 percent in September this year, which is the highest in the last 12 years.
Admitting his failure to reduce default loans, Muhith said, "I could not do it because there was no guideline to reduce default loans in the large-loan restructuring policy."
"Discipline in the banking sector will break down if no measure is taken to recover default loans and repeated rescheduling facility is allowed," said Muhith.
"Governance is the main problem in the banking sector. A director of a bank is a borrower of another bank. Directors are doing this mutually."
"During my tenure, bank directors were given many facilities by amending the Bank Company Act."
He admits that bank directors were given too much liberty this way.
Last year, the Bank Company Act was amended by increasing the tenure of a private bank's board of directors to nine years from six years, and allowing four members of a family – in place of two – in the board.
This amendment increased the family grip on the board of directors of banks, and weakened the governance in the board.
Another compromise by Muhith of reducing CRR (Cash Reserve Requirement) in the face of pressure from bank directors was hugely criticised.
On April 1 last year, Muhith sat with directors of private banks at the Pan Pacific Sonargaon Hotel and decided to cut the CRR by one percentage point to 5.5 percent.
The move was widely criticised because the CRR is a core monetary tool and only Bangladesh Bank has the authority to take a decision on it.
However, in the interview, Muhith said that the government does not interfere with the Bangladesh Bank too much.
"Bankers unnecessarily say that the central bank is dictated by the government," he opined.
Banking Commission formation:
Muhith said that the current default loan situation is not alarming. Currently, default loan in Bangladesh is 12 percent, when in India it is 11.2 percent, in Pakistan 8.8 percent and in Sri Lanka 3.4 percent.
He said, "Default loans are dangerous in the public sector where the rate is above 30 percent. That is why I wanted to form a banking commission. The idea of forming a commission is not traditional; it is very different. The commission will do a study and then prescribe bank-wise solutions. Without a commission, treatment of the banking sector will not be perfect."
He said the planning commission prepared a draft for the plan. Recently, the prime minister held a meeting on it.