Dichotomy hurting banking sector

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Offline Rozina Akter

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Dichotomy hurting banking sector
« on: February 26, 2020, 06:18:42 PM »
Instances are many where the government and relevant other institutions themselves have given rise to problems in a number of important areas and then employed both money and time to resolve those, often in vain.

The process is still on. The approval given by the central bank to float yet another private commercial bank and the move to amend the Bank Company Act to facilitate restructuring, merger and liquidation of the troubled banks are glaring examples how the relevant authorities have been making things more complicated in the country's banking sector.

The board of directors of the Bangladesh Bank on February 09 last, approved the floatation of a bank, named, Bengal Commercial Bank Ltd. This approval raises the total number of banks to 60.  The number might go up further soon as the central bank is almost set to approve another bank.

Experts and relevant others have voiced their concern over granting of permission indiscriminately for setting up new banks without taking into cognizance the prevailing situation in the sector. But that could not deter the authorities from giving permission to open more new banks.

There is no denying that those banks and other financial institutions and intermediaries are needed in an economy growing at an impressive rate. But the need cannot be unending or limitless. Moreover, the factors such as performance of the banks already in operation and overall situation prevailing in the financial sector cannot be overlooked while giving permission to set up similar institutions.

Besides, it is important for the relevant regulatory bodies and others to take into account the track record and social standing of the people who are interested in floating new banks or financial institutions where depositors' interests are involved.

In the case of state-owned banks, the depositors are aware that their interests are well-protected. But this is not entirely true in the case of private banks. In the event of any mishap, the depositors stand to lose most part of their money.

Fortunately, no bank has gone bust in Bangladesh until now. The government and the central bank using certain behind-the-scene mechanism have protected depositors' interest in the case of one or two banks. The Oriental Bank (former Al-Baraka Bank and incumbent ICB Islamic Bank) was the first example and the last and the latest one is the Farmers' Bank (now renamed as Padma Bank).

In fact, the process followed to save the two banks has not been identical to the procedures that are in place in most other countries.

In the case of Farmers Bank, the government directed a number of state-owned banks and the Investment Corporation of Bangladesh (ICB) to inject a substantial amount of fund in the form of equity with a view to saving it from going bust. 

The Bangladesh Bank (BB) reportedly has prepared a draft bill that seeks to amend the Bank Companies Act of 1991 enabling it to restructure or merge or liquidate the problem banks. The BB has recommended setting up a permanent unit that would deal with problem banks.

The bill provides for penalties for officials of a 'problem bank' found responsible for creating difficulties for the bank concerned.

The move is most welcome. The need for having a legal mechanism to deal with problem banks or other financial institutions is being felt for long.

What, however, appears more important is exercise of caution while granting permission to float new banks and also about their sponsors. But that is only possible when decisions are taken without any political bias.

Much of the problems do usually surface when politics plays a part in decision making. Many tend to believe that a large part of the existing woes of the banking sector is linked to political connections used in getting permissions for floating new banks, securing loans and rescheduling default loans.

Unless and until the government means business as far as disciplining the banking sector is concerned, it would be foolhardy to expect any result.

That the government is serious about streamlining the banking sector is hard to tell. For, the signals that have come out from high places until now, do not make one much hopeful about any effective change in the situation on the ground.

The reasons behind the apathy of the decision makers towards implementing the suggestion about forming a Banking Commission are also not understandable. The relevant policymakers do know that the banking sector is a very sensitive area. There are some ways to hide the rot. However, it gets exposed at one point of time when fixing the problems turn out to be even more difficult.


Rozina Akter
Assistant Professor
Department Of Business Administration