All efforts fail to reduce NPLs at state banks

In the late nineties, the key financial indicators of the state-owned commercial banks deteriorated alarmingly. Non-performing loans (NPLs) rose to 45.6 per cent because of poor corporate governance.

This prompted the Bangladesh Bank to sign memoranda of understanding with the banks in 2003 to put them on the right track.

It inked a separate MoU with BASIC Bank in 2013 to closely monitor its activities after huge loan irregularities committed by Abdul Hye Bacchu, the then chairman of the bank, made the once sound lender into a problem one within 3-4 years.

The MoUs were revised in 2013 to make them time-befitting, incorporating many qualitative changes. Subsequently, the state banks drew up polices on credit risk management, internal control and compliance, loan review, and liquidity management.

The central bank sits with the managing directors of four state lenders – Sonali, Janata, Agrani and Rupali – every quarter.

But all efforts in the last two decades have little effect on the actual condition of the banks.

NPLs in the state lenders stood at 21.6 per cent of their total outstanding loans of Tk 188,876 crore as of June, down from 31.23 per cent a year ago.

But this is not the actual picture as the lenders regularised defaulted loans to the tune of Tk 15,286 crore last year using the relaxed rescheduling facility introduced by the central bank.

The BB has been asking them to contain defaulted loans since signing the agreement nearly two decades ago, with no result in sight. In reality, the meeting has become a routine affair for the central bank.

On October 8, the central bank again sat with the four banks and asked them to bolster their audit function to strengthen internal control and compliance.

"The central bank does not have any control on the state-run lenders as their genuine regulator is the finance ministry's banking division," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, a think tank.

"The central bank advises them but they are not compelled to follow the suggestions."

The worrisome situation has emerged from the dual regulatory system in the banking sector, putting an adverse impact on the central bank's MoU with the state lenders, said Mansur, also a former high official of the International Monetary Fund.

"The banking division has to be abolished if we want to protect the financial health of the state lenders in the true sense," he said.

Some financial indicators of the banks slightly improved soon after the MoUs were introduced as the central bank capped the credit ceiling at 5 per cent per year based on their outstanding loans of the previous year, he said.

But the central bank later backtracked, allowing them to go on lending spree. This has played a major role in creating a wide range of financial corruptions in the banking sector, he said.

The BB now sets separate credit ceilings for the banks based on their strength.

"The MoU between the central bank and the state lenders is a good thing, but many problems are standing in the way of implementing the conditions of the agreement," said Khondkar Ibrahim Khaled, a former deputy governor of the BB.

The central bank can't bypass its responsibility for the ineffectiveness of the MoU as it frequently relaxes the rules to permit delinquent borrowers to enjoy undue facilities from banks, he said.

An influential group has been controlling the central bank for long so that they can siphon off money from the state lenders, he said.

"The government appoints managing directors and board members to the state-owned banks, creating an impediment to materialising the instructions given by the central bank through the MoU," said Salehuddin Ahmed, a former governor of the BB.

The managing directors of the banks attend the meeting but the central bank should also summon the board members and ask for an explanation why the financial health of the banks does not improve, he said.

"The central bank is making all-out efforts to improve the banks' performance, but the NPL has become a massive challenge to achieve the result," said Md Serajul Islam, a spokesperson and an executive director of the central bank.

He blamed the defaulted loans for the capital shortfall, a large number of loss-making branches and lower net profit at the state lenders.

"The banks will have to come out of the vicious cycle of NPLs, or else we will not get the desired success," he said, adding that the relaxed rescheduling facility has helped the lenders bring down their NPLs.