A recent central bank report revealed that the Sonali Bank - the largest government-owned bank of Bangladesh - is at operational risk.
There are continued irregularities in the bank, including misappropriation during loan disbursements, concealment of default loans, indifference in recovering loans etc.
In the report, two things stood out for me: first, the amount of Sonali Bank's rescheduled loans and second, the bank's Interest Coverage Ratio (ICR).
Sonali Bank's rescheduled loan is Tk1,874 crore. Its Interest Coverage Ratio stood at 0.05, and without the deferral facilities of Bangladesh Bank, the number is -1.15, which is astonishingly low. The standard Interest Coverage Ratio is 1.5.
The ICR number shows that the bank is in loss or in dire straits.
Debt or loan rescheduling means restructuring the terms of the already taken loan. It is not problematic in itself and is a regular phenomenon in the banking sector.
But there are some rules, terms and conditions that must be followed when rescheduling. A loan can be rescheduled in two ways: first, by extending the payment period and increasing the number of installments; and second, pausing or reducing the payment amount for a certain period.
A loan may be rescheduled for various reasons; while some are justified, others are not.
For example, if a borrower faces hardship, economic crisis or any other unanticipated events (accident, natural disaster etc), rescheduling is justified. In such cases, the borrower collaborates with the bank and makes some changes to the terms of the loan.
It becomes problematic when constant rescheduling facilities are provided and thus lower amounts of default loans are shown in the banks' records. In that case, the bank is resorting to rescheduling and restructuring only to show a low rate.
The loans are often not recovered owing to a lack of supervision and accountability. Indifference to collecting loans is one issue, but concealment of important information, and other illegal facilities to the borrowers are severe irregularities.
Approximately Tk11,200 crore or 20 percent of Sonali Bank's total loans is defaulted.
Furthermore, the bank does not regularly upload credit data to the database of Credit Information Bureau (CIB). Suspicion of mismanagement or mishandling cannot be ruled out.
These problems are not exclusive to the Sonali Bank. I am sure other government owned banks face similar issues.
The government always goes easy on defaulters. Some companies do not even bother to reschedule and banks in Bangladesh rarely file lawsuits against them.
As there is red tape in the courts, it entails extra expenses. It is ironic that defaulters grow rich with loans from the banks and then use this money to fight the bank in the court.
In developed countries, banks report to the police if someone becomes a defaulter. Their financial courts are very strong and active. The responsibility to deal with the defaulters lies with the law enforcement.
But this is not the case in Bangladesh. More importantly, banks here cannot compete with big goons. They are mostly big businessmen who are actively involved in politics or have good relationships with the ruling party.
I am not pointing fingers at any particular party, but over the years this has been true about whichever party is in power.
All these tell a tale of the miserable situation of the banks. Bangladesh Bank's inspection report also echoes this reality.
The financial health of Sonali Bank is very unstable and risky. The board and the management are to blame and should be held responsible.
The central bank should take strict disciplinary measures to stop similar occurrences from happening repeatedly. Lack of examples of punishments will only encourage the frauds, and it also damages the financial sector's image.
If firm measures are not taken, issues such as money embezzlement, forgeries, and loan defaults will continue to soar.
The central Bank has to play the biggest role if this situation is to be fixed. It actually possesses considerable authority but its power is not utilised.
If we look at the US, UK or India, we will see that their central banks are very strong and do not bow down to the whims of the governments.
The following strong steps have to be taken: create good corporate governance in the banking sector; political support for the defaulters must be stopped, and in this regard, political willingness must be shown beforehand; top posts such as managing director, chairperson and board members must be free from any political association. Only experienced persons should be in such positions.
There are many meritorious, skillful and honest people in the banking sector who can be governors of the central bank. Allowing bureaucrats in the central bank is not always a good idea. Bureaucrats cannot think independently, they are not innovative either.
Professor Mujahidul Islam is a professor of the Department of Banking and Insurance at the University of Dhaka.