Written by The Banking Post
There is little reason for optimism nowadays when it comes to the banking sector. With declining income, rising expenses and a facade of stability that masks its weaknesses, the industry has been in poor health for quite some time. Most alarming is the sharp rise in non-performing loans over the past year under the interim government. These bad loans ballooned from Tk 2.11 trillion in June last year to Tk 5.30 trillion this June. That’s Tk 3.19 trillion in new bad debt piling up in just twelve months.
Trouble with banks had been brewing on the horizon for a long time. Under the previous administration, while banks were already in poor financial health, a series of mechanisms allowed them to avoid recognising bad debts. Relaxed loan classification rules and concessions for loan rescheduling were common. Ahead of elections, politically connected candidates who would otherwise have been barred for defaulting were allowed to regularise their loans on paper, bypassing disqualification rules. Even during financial crises, overdue loans were allowed to escape non-performing status through special measures that further distorted the true picture.
But the most egregious abuses have occurred in Sharia-based banks operating under Islamic principles. The boards of these banks were first taken over by political actors which opened the floodgates for politically motivated lending. Hundreds of billions of taka in loans were disbursed without proper procedures, after which the borrowed funds were laundered abroad through manipulated LC transactions. The LC system was originally designed to prevent money laundering, but sadly it has become a conduit for it. With their wealth safely moved overseas, the perpetrators left the banks to bear the losses. Many bank employees were aware of these misdeeds but had to turn a blind eye to protect their jobs. This was the state of affairs until Awami League’s fall on August 5 last year.
Banks as institutions are inherently unstable. They take deposits that can be withdrawn at any time while holding long-term, illiquid assets such as mortgages and business loans. This mismatch means that even well-managed institutions can be exposed if questionable practices creep into their operations. Following July uprising, when authorities restructured Sharia-based bank boards and stopped pressuring them to hide bad loans, the true NPL figures have surfaced. Adding to the problem, businessmen closely tied to the former regime are struggling under the changed political climate, thus increasing the NPL burden. Estimates suggest these bad loans now account for over 24 per cent of all loans in the system.
In these precarious circumstances the central bank is once again offering loan restructuring opportunities to 280 institutions while another thousand applications are awaiting decision. Alarmingly, some recipients of these opportunities are accused of past loan irregularities. Although officials claim these facilities are now granted for legitimate reasons, they evoke memories of the country’s history with lenient rescheduling policies that shielded defaulters and concealed the true extent of bad loans. Naturally, banks prefer restructuring over writing off loans as it lets them avoid higher provisions that strain their balance sheets. But the central banks must heed the dangers of overextending support to chronic loan defaulters. It is well remembered that many of the existing bad loans were originally taken with the intent to swindle banks. Once these borrowers have their loans regularised, they can resume dealings with banks and request fresh credit. What assurance exists that those who defaulted repeatedly in the past despite multiple rescheduling will honour new terms? If they receive more loans now, what will prevent them from once again delaying repayment in the expectation of future leniency?
During the tenure of the fallen government, struggling banks were routinely propped up with generous liquidity support. The current interim administration, while acknowledging that the sector was left in “ICU” by its predecessor, has followed the same path. Since last September, the total support extended to weak banks through money printing, guarantees and special facilities has reportedly exceeded Tk 530 billion. Notably, five troubled banks that lacked conventional collateral even got loans backed by Demand Promissory (DP) notes which is nothing more than promises to repay, meaning the central bank effectively created money out of thin air.
Central banks serve as lenders of last resort, but what purpose does it serve to aid institutions where NPLs comprise 80-90 per cent of their portfolios? Providing abundant liquidity to such terminally ill institutions does not fix the underlying insolvency. It only wastes taxpayers’ money.
Not only that, the government is set to begin merging five of these weak banks which are recipients of liquidity support and providing them with fresh capital. Much like the four state-owned banks that have become de facto government-funded entities with their losses covered by the state, the new bank born from this merger appears destined for the same fate even before it comes into existence. As public money is poured into keeping these failing banks afloat, one must question the rationale behind it. Why persist with this costly lifeline for institutions that clearly can’t survive on their own?
In a crisis, central banks can lend freely against solid collateral and at high interest rates. But if it goes ahead with backing failing banks through mergers and bailouts without stringent conditions, it risks setting a dangerous precedent. The central bank has admitted many times that political meddling ruined the sector. Attempting to solve the banks’ issues without creating mechanisms to block such interference would be like treating the symptoms rather than the disease.
SYED MUHAMMED SHOWAIB
