Fundamentals in regulating banks

Former Bangladesh Bank bosses and economists at an economic conference on Wednesday sounded the alarm with regards to ensuring compliance in the overall financial sector, including the banking industry. They pointed out that the regulations of the central bank are of global standards, although their implementations do not meet the required standards to regulate the financial sector. Soaring bad loans, undue influence of bank directors, and the latest amendment to the Bank Companies Act have been playing havoc in the financial sector. Sometimes, the Bangladesh Bank appears to be indifferent towards reigning in large-scale banking frauds in the economy. The financial sector is not compliant enough, as the central bank is not strict enough in ensuring compliance.

The country’s banking sector recorded default loans amounting to Tk 1,01,150 crore at the end of September this year, and of that figure, Tk 47,632 crore are from the eight state-owned banks. This is an increase from Tk 47,520 crore in default loans recorded last June. The picture is alarming as far as the staggering amount of default loans in the banking sector are concerned. The dual authority of the central bank and the finance ministry is one of the reasons that helped slide the financial health of public sector banks. Prime Minister’s Economic Affairs Advisor Dr Mashiur Rahman at the conference said the non-performing loans have now gone out of control.

Former BB governor Salehuddin Ahmed while delivering his speech at the conference, said the regulations and norms in the financial sector are of international standards but there is no compliance. He said the central bank should ensure compliance with the norms and regulations but noted that over-regulation and over-relaxation are not good for the financial sector. Mohammed Farashuddin, another former central bank governor, said that BB would have to take immediate steps after receiving fraud allegations and suggested not to shelve investigation reports on financial corruption. Prominent economist Wahiduddin Mahmud said the country had many achievements and there had been many reforms in the financial sector. Expressing his amazement, Mahmud said that people did not know what regulation was needed to run a private bank and the necessary framework when licenses had been given to them.

“The financial sector is the heart of the economy. Therefore, the Bangladesh Bank has a large role as a guardian of the financial sector in the country's economic development,” said the economist, as reported in this daily on Thursday.

The observations made by the noted personalities on the Bangladesh Bank and the financial sector are not new altogether. The rising bad loans, banking frauds, and state patronisation of banks directors are well known to all. Fixing the grave problems needs political commitments and firmness from the central bank. The latest amendment to the Bank-Company Act helped bring irregularities in the banking industry. The amendment allowed up to four members of a family to become directors of any bank and the directors to hold their posts for nine years consecutively. The earlier provisions were two directors and their four-year tenure.

Hence, we want to reiterate that Bangladesh Bank must be strong and uncompromising towards ensuring compliance in the financial sector. But, only the role of the central bank is not enough to restore discipline and lessen banking frauds in the sector. The political intention towards strong regulations of banks and other financial institutions is of paramount importance, as the acts and regulations are enacted by the lawmakers, not by Bangladesh Bank. The central bank must be manned with senior and efficient bankers so that forged and concocted bookkeeping by some banks is stopped, forgeries are not repeated, and good governance prevails. Holding nearly 50 per cent of total bad loans by state-owned banks demonstrates that those banks lack accountability and good governance. Bangladesh Bank must not hesitate to pound on those public sector banks, no matter who owns them.