Is cutting funds only way to resolve crisis in NCBs?

Finance Minister AHM Mustafa Kamal has announced that nationalised commercial banks (NCBs) will no longer receive recapitalization funds. However, the question is whether NCBs will become self-reliant enough to operate without government support?

To answer this question, we must first look at the NCBs’ financial health.  In March this year, six nationalised commercial banks had a capital deficit of Tk16,000 crore. Among them, the condition of Janata and Rupali banks was very poor, having a total capital deficit of Tk3,358 crore.

To keep the six NCBs running and to cover their deficit, the government poured Tk18,000 crore of the people’s tax money on these banks in the past ten years, from 2008-09 to 2017-18.

Despite years of recapitalisation these banks have shown no improvement, as no large-scale reform was introduced to curb corruption and embezzlement. NCBs have become ‘bottomless baskets.’

Former governor of the Bangladesh Bank Dr Salehuddin Ahmed believes the crisis originated from issuing large loans without scrutinizing projects. The rate of loan repayment has gone down, while number of loan defaulters went up.

According to data from the central bank, the amount of defaulted loans stood at Tk1,10,873 crore in March this year. More than half of this, or 52.94 percent, is from eight state-owned banks.

The rest of the defaulted loan, 47.06 percent, is from non-government commercial banks.

Research data from Centre for Policy Dialogue (CPD) shows that between 2008 and 2017, a total of Tk22,500 crore has been embezzled from government and non-government banks through various means.

Janata, Basic and Sonali banks were hit the worst by these irregularities.

“The responsibility for this [irregularities] falls first on the bank authorities and second on the board. Unless these two sides are in cahoots, granting loans to non-profitable and fake projects is not possible,” said CDP Executive Director Dr Fahmida Khatun.

“The loan repayment record of some of the influential clients is quite poor, while some of the clients were granted large loans despite not having any ability of repaying it. Many influential businessmen in Bangladesh have strong political connections,” she added.

How to make NCBs self-reliant?

The board has the majority responsibility for a bank’s wellbeing. If a bank makes a profit, praise goes to the board, but if there is embezzlement of funds, the board should also take responsibility for it.

The question is -- how are chairmen and directors appointed to the board?

“Boards for state-owned banks are created from people trusted by the government. So, they seldom refuse to grant loans to businessmen close to the ruling party. The NCB boards also do not scrutinize the projects,” said former governor of the Bangladesh Bank Dr Salehuddin Ahmed.

He believes that the Bangladesh Bank should be granted the responsibility to appoint the board of directors for state-owned banks.

“Through this process, comparatively skilled people will get seats at the board and they will also work towards accountability,” said Dr Salehuddin.

However, former director general of Bangladesh Institute of Bank Management (BIBM) Dr Toufiq Ahmed Chowdhury has a different opinion on how to resolve crisis in NCBs.

“To run on profit, instead of relying on the government exchequer state-owned banks should enlist in the share market. If this can be done, the board will consist of several impartial members instead of just people close to the government,” Dr Toufiq said.

When asked about the benefit of this measure, Dr Toufiq said: “The other directors will participate in arguments at board meetings and voice their support for only good projects. This will gradually cause bad loans to drop.

“Many countries, including India, has followed this process and achieved s success. For this reason, the state-owned banks of India are doing much better and making a profit.”

In conclusion, to make the state owned banks self-reliant, there is no alternative to creating boards with members who are capable, efficient and upright. However, all this depends on the goodwill of Finance Minister AHM Mustafa Kamal.

Will it be possible for him to resolve a crisis brewing for the past 48 years and make the NCBs profitable? What if government policymakers refuse to cooperate?