Failure begets failure

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In an extraordinary admission, Finance Minister AMA Muhith last week expressed his unhappiness over Bangladesh Bank's move to approve a slew of new banks, revealing the decision to do so was informed by political considerations.

“I am very unhappy about it, because I visualise that very soon these banks will start merging,” he told reporters at his secretariat office. Muhith said the approvals were being given despite there being no need for new banks now. “These [licences for new banks] are being given on political grounds.”

The finance minister’s comments came after Bangladesh Bank at a meeting gave its final nod to a commercial bank and asked three others to produce documents required to obtain licences, thereby setting in motion the process for their approval. Community Bank Bangladesh, proposed to be set up by Bangladesh Police Welfare Trust, is the one that got the nod at the central bank board meeting, and is now set to commence operations as the 59th bank in the country.

The BB board also asked Bengal Bank, People's Bank and Citizen Bank to submit their proper documents to the central bank. At least two of these banks had earlier had their proposals turned down by the central bank. Bengal Bank is initiated by Bengal Group of Industries, a local manufacturer of plastic goods. Awami League lawmaker Morshed Alam is the chairman of the Group, and his younger brother Jashim Uddin is the chairman of the proposed bank.

The chairman of the proposed People's Bank, MA Kashem, is an AL leader in the US. Jahanara Huq, mother of Law Minister Anisul Haque, is the chairman of proposed Citizen Bank. Asked about the poor state of Farmer’s Bank, one of the newer banks that started operating in 2015 chaired by former minister MK Alamgir, before he was removed as the bank nearly went bust, Muhith said, “That's true … many ministers have involvement in banks”.

The finance minister’s disgruntlement at the apparent slide into crony capitalism stands in stark contrast to his attitude towards the issue just one year ago, when it was the central bank reportedly coming under pressure from the Finance Ministry to issue licenses for new banks.

Back then, rejecting the notion of a messy situation in the banking sector riddled with irregularities and lacking good governance, the octogenarian minister said banks failing to operate properly will go for merger.

"There is a provision in the banking law for merger. So, if any one fails, it will go to merger," he said in November 2017. Defending the government's move for allowing more banks, Muhith said there was still a huge market for banks as a good portion of people still remained unbanked.

This was amid reports that the central bank had rejected proposals for setting up three new commercial banks on the grounds that the deteriorating financial health of many banks, especially the nine that were last set up, does not allow any new banks in business. These are the same three banks that now look set to be awarded the coveted license.

In January 2018, it was reported that the Financial Institutions Division of the Finance Ministry had recommended the Bangladesh Bank to review a petition for licence for Citizen Bank Limited despite a central bank veto amid intense lobbying for licences for new banks.

Officials said that Mohammed Iqbal, owner of export oriented BHIS Apparels Limited, applied to the central bank for the licence on November 8, 2017 and persuaded the Finance Ministry to get the proposal approved at the earliest.

On November 14, 2017, Muhith asked the division to get central bank’s opinion about the proposal. The Bangladesh Bank on December 18 replied that giving licence for yet another private bank would not be helpful for keeping discipline in the already undisciplined banking sector. It pointed out that two of the nine new banks established after 2013 — Farmers Bank and NRB Commercial Bank — were at risk (one of them has since been rescued at great cost) because of scams. Besides, the other new banks — Meghna Bank, Midland Bank, Modhumoti Bank, NRB Bank, NRB Global Bank, South Bangla Agriculture and Commerce Bank and Union Bank — could not comply with the licensing conditions like placing initial public offering or maintaining certain ratio of agricultural loan disbursement.

In the second week of January, the Financial Institutions Division again asked Bangladesh Bank to review the proposal. Subsequently the central bank revealed that they were preparing to award the two new licences to establish People’s Bank Limited and Bengal Bank Limited following recommendations by the Finance Ministry.

Although the finance minister may grumble now, his role in all this can hardly be concealed.  Within days of his approving comments on the need for new banks last year (see above), Mohiuddin Khan Alamgir, chairman, and Md Mahabubul Haque Chisty, chairman of the audit committee, were forced to resign from the trouble-hit Farmers Bank Limited's board of directors, due to their alleged involvement in financial scams. The government has since had to intervene to save the bank from sinking altogether, with 4 state-owned commercial banks and one state-owned financial institution injecting a whopping Tk 715 crore into its coffers to help it stay afloat. Maybe the troubles at FBL served to open Muhith’s eyes. Yet for someone in his position, disgruntled resignation is far short of what the public may rightfully expect.

Out in the open

In February, global credit rating agency Standard and Poor’s placed Bangladesh’s banking sector in a high risk category amid rising non-performing loans, supervision gaps, overcapacity of banks and other irregularities.

The S&P report placed the country’s banking sector in group ‘8’ on a scale of 1 (lowest risk) to 10 (highest risk) under its Banking Industry Country Risk Assessment (BICRA) report. Some banks in Bangladesh will continue to face asset quality challenges, with sizable reported non-performing loans, in addition to a high level of restructured loans, the report said.

 “Bangladesh is in the process of implementing international regulatory standards. However, we believe supervision has gaps and imposes limited market discipline. Also, the banking system has overcapacity and market distortions,” it said. Almost everything pointed out in the report speaks against the need for any new entrants. However, a supportive core customer deposit base and low reliance on external funding were said to temper the weaknesses.

The agency expected Bangladesh Bank to continue addressing the banking industry’s legacy stressed assets and gaps in governance. The report also observed that Bangladesh’s economic risk trend was stable and its growth prospects remain steady, supported by good performance in the export-focused manufacturing sector. The country’s industry risk trend is also stable.

 “We consider that banks operating in Bangladesh face substantial credit risks, with weak foreclosure laws and underwriting standards, weak governance at some banks, and client concentration leading to sizable stressed assets,” it stated. The country’s low-income economy, heavy development needs, and fiscal constraints were said to limit its economic resilience.

On the other hand Bangladesh has healthy growth prospects and moderate economic imbalances with credit growing in line with nominal GDP, moderate inflation, and a satisfactory current account position, it said. According to the report, in economic risk and industry risk Bangladesh, or specifically its banking sector, scored 8 on a scale of 1-10 in the BICRA. On the other hand, it scored 5 in economic resilience, 2 in economic imbalances, 6 in credit risk in the economy, 6 in institutional framework, 5 in competitive dynamics and 3 in system wide funding on a scale of 1 (lowest risk) to 6 (highest risk).

The report also used the term ‘uncertain’ on the issue of government support. S&P’s bank criteria uses BICRA economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating. The anchor for banks operating only in Bangladesh is ‘bb-‘. Only a rating committee may determine a rating action and the report did not constitute a rating action, it said.

A number of economists in interviews and op-eds at the time echoed the observations of the report, acknowledging the banking sector was rife with risk. “Everyday different types of irregularities both in state-owned and private banks are being exposed, the amount of NPLs is rising and the quality of assets is deteriorating day by day,” ex-governor of Bangladesh Bank Salehuddin Ahmed said in the wake of the S&P report.

Anyone can bank

Bangladesh Bank conducted a study in 2011 to assess the need for new banks in the country. The study found that the number of banks was too many compared to the size of the Bangladesh economy. Despite this finding, the central bank was forced to issue licenses for the 9 new banks that were issued in 2013 under pressure from the government. None of them have been able to fulfil the conditions on which they were awarded the license, rather they have lobbied the government to have the conditions relaxed.

Two of the banks, the aforementioned Farmer’s Bank and NRB Commercial Bank, forced Bangladesh Bank to intervene at the eleventh hour to prevent them from going under (taking depositors’ cash with them). The boards of directors of both these banks have been reshuffled and MDs have been removed. According to a report of the Finance Ministry, the situation at Farmer’s Bank had reached such a stage that the bank had no more capacity to repay its liabilities to depositors even. Prior to the whole thing blowing up in front of the public’s eyes in November 2017,  the bank had even been failing to maintain the required Cash Reserve Ratio (CRR) since the previous April. Like Farmer’s Bank, NRB Commercial Bank was also beset by crises due to “anomalies in disbursing loans and lack of internal control system”.

In recent years, several banks have been launched supposedly dedicated to people in specific professions. Apart from the army’s Trust Bank Ltd, none of the others could be said to have performed strongly. Despite this, the Bangladesh Police Welfare Trust’s application for a banking license was approved at the Bangladesh Bank meeting on October 29.  According to a list of applications for bank licences submitted to the central bank, Bangladesh Air Force and Bangladesh Navy also want their own separate banks. In addition, government employees too are lining up to open a bank of their own.

Noted economist and ex-adviser AB Mirza Azizul Islam said it is “totally pointless” to give permission to open banks dedicated to people from certain professions. “If the practice continues, we would hear that all 19 cadres of Bangladesh Civil Service are demanding separate banks. This practice should stop right now,” he said. It’s safe to say his exhortation fell on deaf ears.

IOUs piling up

According to Bangladesh Bank data released in September, banks' non-performing loans rose by an eye-watering 20.23 percent, or Tk 15,037 crore, in the space of just six months to June this year, owing to poor lending practices and absence of corporate governance. The amount of toxic loans then stood at Tk 89,340 crore, or 10.4 percent of the total loans in the banking sector. The ratio of non-performing loans in Bangladesh is the highest in the region.

The six state-banks' total default loans stood at Tk 42,852 crore, up 14.8 percent from six months ago. It is generally accepted that the state banks are mainly responsible for the scams that later spilled over into the entire banking sector. But in continuation of a recent trend, the amount of NPLs in private banks rose faster in the first six months of the year, soaring by almost a third (32.6 percent) to Tk 38,975 crore. They are certainly catching up fast.

Meanwhile more than half the banks listed on the country’s stock exchange saw their profitability tumble in the third quarter (Q3, July to September) because of higher provisioning requirement against default loans, lower interest rates and slow credit growth. Of the 30 banks listed, 18 saw their earnings per share (EPS) plummet in Q3. EPS is the portion of a company's profit allocated to each share of common stock, and is taken to be an indicator of profitability.

Despite that, the clamour for banking licenses is enough to tell us those who get to own banks also consider it to be a good investment. Bangladeshis have always known, in the form of urban legends, that owning a bank seemingly lets you access an endless trove of money. Yet those tales didn’t sync with banking regulations that put limits on or outright disallowed the directors from borrowing from their own banks. Earlier this year, Bangladesh Bank released a set of data that finally shed some light on the matter. It revealed how industrialists and businesspeople in the country become shareholders and directors of banks, and then borrow money from each other's banks. According to the data, till March this year, bank directors borrowed Tk 107,695 crore from each other's privately-owned banks, which was 13.3 percent of the total outstanding loans of Tk 810,011 crore in the sector. Most economists and bankers are in agreement that these individuals enjoy disproportionate advantages when it comes to rescheduling of loans, besides escaping the due diligence when they take out loans in the first place. 

Considering that the 40 private banks have around 600 directors between them, it goes a long way towards demonstrating whether the sector is working to the benefit of the many or the very, very few.

  • Failure begets failure
  • Issue 18
  • Vol 35
  • DhakaCourier

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