Not just India: Bangladesh’s banks are also battling loan defaults and experts blame corruption

On February 20, economics professor Muinul Islam will receive Bangladesh’s second-highest civilian award, the Ekushey Padak, for his contributions to the country’s economy. In an exclusive interview with the Dhaka Tribune, the Chittagong University professor and former director general of the Bangladesh Institute of Bank Management discusses how political corruption is the main reason for the dire condition of the country’s banking sector.

The number of non-performing loans in banks in Bangladesh have been rising alarmingly. What do you think are the reasons behind increasing defaulted loans?
Massive capital flight is the prime reason behind increasing defaulted loans. In this case, those who are becoming loan defaulters are becoming so by choice for the sake of siphoning bank credit by over-invoicing and under-invoicing using names of different projects.

Using this money, the defaulters are buying second homes in countries like the US, Malaysia, Australia and Canada and also getting involved in real estate businesses in those countries. So, the rise in defaulted loans is inextricably linked to the increase in money laundering.

Besides this, banks are also involving in aggressive lending which is another reason for increasing NPLs [non-performing loans]. The number of banks has increased greatly and the deposit collection process by banks has been sub par. Moreover, banks are now lending without proper scrutiny of the borrower’s profiles. Taking advantage of this, owners of banks who belong to business groups and people with political affiliations receive commissions during loan disbursement, with most of the loans disbursed this way ending up being defaulted.

However, the number of default loans of the banks that the [Bangladesh] central bank published is not correct, as a huge number of loans have been written off over the last 16 years and Bangladesh Bank did not disclose what the cumulative amount was with interest.

If the total amount of defaulted loans had been disclosed, it would be more than two lakh crore taka, which would be 40% of the total disbursed credit instead of the 10%-11% disclosed by the central bank.

So what has led the banking industry to its present dire state?
Political corruption is definitely the main reason for the terrible condition of the banking sector. There is a crisis of democracy in the country, and corruption and capital plundering have become the prime characteristics of politics in Bangladesh. Democracy has been derailed and a way to return to the right path is nowhere in sight. So, the flow of black money and rampant abuses of power have pushed politics into a pit.

The problems of the banking sector are reflections of the political situation. We can see that the practice of capital plundering in the field of politics has been worked into the banking sector as well. Banks are still disbursing loans to defaulters in order to “recover the old loans”. This is an age-old practice of banks. Legislative changes are important in halting this practice, but the will to take action is absent in the political scene. The present government apparently has no intention of stopping this and neither did the previous governments.

Amid protests from noted bankers and economists, the Bangladesh government recently passed the “controversial” Banking Companies Act, 2018, which increases the tenure of members of board of directors in private banks to nine years from six, and allows four members of a family to sit on a board instead of two. How will this impact the banking sector?
The government has passed such a law at a time when the credit of banks has gradually been concentrated towards a few select businesses and families, and this law will definitely worsen the malpractice. In fact, this is the very purpose of this law being passed. The law will introduce the Bangladeshi version of the “22 families to control banking sector” in erstwhile Pakistan. Here in Bangladesh, this might happen between about 40 families.

There is a rising trend of market monopoly in the Bangladeshi banking sector. What is your opinion of this?
We have to keep in mind that there are about one crore Bangladeshi residents working in foreign countries and they are sending their earnings through either formal or informal channels. This money inevitably winds up in banks as deposits, which have been offsetting the capital crisis of the banks. However, there have been many unscrupulous practices in the country’s banking sector, which have been promoting financial scams while risking the depositors’ money.

One of the bad practices is capital concentration. We have seen that a Chittagong-based business group has taken control over the capital of eight banks. This could be a big disaster to the banking sector as well as the economy.

Although there are already 57 commercial banks in the country, three or four more banks are in the process of getting licences soon. Do you think Bangladesh needs more banks?
It is completely illogical to give licences to new banks. The existing banks are more than enough considering the size of the Bangladeshi economy, and the government should reduce the number rather than increase it. It would be a great mistake to give licences to more banks and the country’s economy is bound to be damaged by it, whether the incumbent government remains in power or not. When family relations, political affiliation, and nepotism are the guiding forces behind giving licences rather than business capacity and other qualities, a disaster is just around the corner.

In this process, some penniless people involved with politics are getting the chance to become millionaires as they do not have to spend any money to get the licence, and they collect the money by selling directorships to the businesses. After this, they practically loot the public deposit. This is the highest misuse of state power.

Can the central bank uphold its role as the regulator of the banking industry in Bangladesh?
The role of Bangladesh Bank in regulating the banking sector has become ineffective. The central bank has not been able to disobey the directives from the offices of the prime minister or the ministry of finance. For example, the central bank gave no consent to the amendment of the recently passed Banking Companies Act, but the government did not pay any heed to the central bank’s decision. Bangladesh Bank also has no interest in giving licences to any new banks, so they have been pressurised into giving licences. The government has intentionally made the central bank weaker, and the body responsible for regulating the banking sector has no power to practice its responsibilities or give independent consent.

How can the anomalies in Bangladesh’s banking sector be resolved?
Financial scams have increased so greatly that the Artha Rin Adalat [Money Loan Court] could not solve the problem because the loan defaulters put on trial before the court know various tricks and/or are too powerful both economically and in terms of political connections. Because of this, there has been no positive output from the Artha Rin Adalat after 26 to 27 years of its journey.

In the late 90s, then President Shahabuddin Ahmed proposed the forming of a special tribunal to bring the top 10 loan defaulters of each bank to trial. However, the contemporary government did not pay any heed to the proposal.

After that, a bankruptcy court was established and the Bankruptcy Act was passed in 1999. This law also failed to curb the defaulting. Soon after the law was passed, former Prime Minister Mizanur Rahman Chowdhury was declared as the first and last bankrupt under the Act, as he had changed his political affiliation by joining the then ruling Awami League from Jatiya Party. Loan defaulters have not been punished in the last 20 years as the bankruptcy court was out of commission.

The solution is to form a tribunal to put the people behind financial scams on trial, with no provisions for appeals against the tribunal’s verdict. If the actual guilty parties behind financial scams are put on trial and given exemplary punishment afterwards, including putting them in the jail and freezing their assets, the defaulting could perhaps be stopped.

In this regard, the assistance and cooperation of powerful members of the government are needed, as most default loans are distributed upon political consideration.

This article first appeared on Dhaka Tribune.