The government should not recapitalise the state banks even if they continue to suffer from soaring defaults, experts said yesterday.

People who are politically connected have taken significant amount of loans from the state-run banks, and the majority of them have become defaults, said AB Mirza Azizul Islam, a former adviser to the caretaker government.

“They took the loans for one purpose and then used the funds for something else, violating the regulations.”

Islam's comments came at the International Conference for Bankers and Academics 2016, jointly organised by the Bangladesh Institute of Bank Management and the Australian Academy of Business and Social Science.

The two-day event, which was attended by local and global experts, ended yesterday.

The loans given to big borrowers usually end up as defaults, so the banks should focus more on small borrowers, he said.

“The banks favoured selected clients to restructure the loans -- they should now recover the loans under the legal procedure.”  A large number of cases are now pending with the court, he said.

Islam also touched upon the interest spread rate: he said it should be decreased to 3 percent from existing 5 percent.

The banks should also bring down the transaction costs for receiving remittances to less than 3 percent, in line with sustainable development goals of the United Nations, he said. Steps must also be taken to curb illicit financial flows and recover the funds laundered to Swiss banks from Bangladesh.

The banks should not finance businesses that: dump hazardous chemicals in water bodies, use forced or child labour and do not ensure a safe working environment for workers, Islam added.

In another session, Zahid Hussain, lead economist of the World Bank's Dhaka office, presented a keynote paper styled 'Financial Inclusion: A Global Perspective'.

“Default loans have become the cancer for the banking sector.”

He said the country has no proper bankruptcy act, so the poorly-performing banks have no scope to wind up their operations.

“Such acts and rules are important to manage the financial sector.”

Adequate private sector credit is not enough to boost economic growth if infrastructural facilities like roads, ports and electricity connection are not there.

Bangladesh has made steady progress in financial inclusion over the last decade. The ratio of bank deposit accounts in the adult population has steadily increased as have mobile money account, bank branches and ATMs, Hussain added.