The Centre for Policy Dialogue today said a few individuals and groups are holding the banks hostage making the banking sector 'frighteningly fragile'.
It wants a banking commission, the idea of which has been swirling in the air now, to be time-bound and free from political influence for a quick recovery from the quagmire.
"We, the helpless and frightened citizens, are staring at a dangerous and fragile situation in the banking sector," Dr Debapriya Bhattacharya, distinguished fellow of the CPD, said in a reaction on the probable formation of the commission.
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"Despite numerous commitments, bad loan continues to rise. There are other hidden stories. The banking sector now lacks public confidence, has problem with interest rate cap, shortage of funds and lack of transparency and reliable data," Debapriya said.
The independent think-tank, CPD, held a press briefing today as its immediate reaction to a news that the government is going to form a banking commission.
The CPD painted an unsettling picture of the country's ailing banking industry – rising nonperforming loans, frequent loan rescheduling, capping of interest rate, relaxation of rules and banks held hostage by a few individuals and groups.
He pointed out that many guidelines of the Bangladesh Bank are being clearly violated. In some instances, the violations turn into illegal activities.
Debapriya also pointed out that the Bangladesh Bank cannot wield its power due to political interferences.
"That's why the banking commission is needed and political will is needed to make it effective," he stated.
He said CPD has been pressing for formation of a commission for the last eight years since the Hallmark loan scam was unearthed in 2012.
He cited the recent licensing of three new banks is an example of how the authority of the Bangladesh Bank is being overridden.
The board of the central bank had decided not to issue licences to any more banks, but the central bank was forced to give licences to three new banks, he said.
He also criticised the central bank's poor capacity and leadership.
He said employee efficiency and use of modern technology in the central bank did not improve in line with the rise in the number of banks. This weakness was reflected in the reserve heist in which close to US$1 billion was stolen from the bank by hackers.
The formation of a banking commission was first demanded by the CPD and on Thursday a Bangla newspaper quoted Finance Minister AHM Mustafa Kamal as saying that he would form a banking commission.
Earlier on February 13, the High Court asked the government and the Bangladesh Bank to explain why they would not be directed to form an independent commission to identify loan defaulters and money launderers.
In the budget speech for FY16, then finance minister AMA Muhith for the first time talked about formation of such a commission, that he kept repeating in every budget speech until he retired after the budget of FY19.
Bangladesh has had experience of having banking commissions. In 1984, a National Commission on Money, Banking and Credit was formed.
In 1996, a Banks Reform committee led by Prof Wahiduddin Mahmud was formed with Debapriya as a member.
Dr Fahmida Khatun, executive director of the CPD, said such a commission will be able to play effective role to recover the banking sector from the crisis only if it is formed without political exigency.
She demanded that the commission should make public its recommendations in phases and the CPD will monitor the commission's activities closely and give its opinion.
She stressed the fact that problems of the banking sector that were earlier confined to state-owned banks have now spread to private banks too, which, she said, should raise red flags.
Dr Fahmida pointed out that of the total non-performing loans, 51 percent lies with the government banks and 47 percent with the private banks.
The commission should come up with its report within three to four months so the government can start taking actions soon after the next budget.
Prof Mustafizur Rahman, distinguished fellow of the CPD, said, "We support the formation of the banking commission but on the condition that it should be an independent body."
Debapriya said the first and foremost act of the commission should be to assess the extent of the current banking crisis because there is a big question about the authenticity of data. The International Monetary Fund has already claimed that the true figure of default loan is double the figure that the central bank shows.
The commission will have to give its opinion on the effectiveness of the measures that the government has so far taken for the banking sector.
Finally, the commission will have to submit an interim report before the next budget, addressing the urgent problems that needed to be addressed.
If some necessary measures are not taken immediately, the crisis will deepen further, said Debapriya.
The crisis in the banking sector was laid glaringly bare when the total default loan surged to Tk116,000 crore in September last year which was 12 percent of the total loans given by the banks.
However, through a controversial loan rescheduling policy at a low 2 percent down payment, the default loan amount was made to come down by Tk 22,000 crore in just three months from October to December last year.
Further scrutiny revealed that to achieve that feat, some Tk50,000 crore loans were rescheduled to push down the default loan to 9.32 percent in December. If the rescheduled amount is taken into account, the default loan amount would shoot above 17 percent.
The government is implementing a single-digit lending rate policy from April which bankers and economists say will likely cause another chaos in the banking sector.
In such cases depositors usually move away from parking their funds in banks to elsewhere. Banks are also shy to lend at 9 percent and it is reflected in the sharp fall in private sector credit growth in December last year.
The unresolved banking scams of around Tk22,000 crore in the last one decade by organisations and banks such as Hallmark, Bismillah Group, BASIC Bank, Farmers Bank, AnonTex and Crescent have also left a weakened banking sector in the country.