BB needs operational independence

Operational independence is needed for Bangladesh Bank to take supervisory actions and stop the government’s interference in the banking sector, said the World Bank.

The WB’s review under the Financial Sector Assessment Programme (FSAP) said Bangladesh has made progress in adopting international regulation but important shortcomings remain in the regulatory and supervisory framework.

Operational independence of the BB is not prescribed in the law and it is compromised by the BB’s lack of full discretion to take supervisory actions as well as by interference stemming from the government’s broad mandate in financial sector issues.

“In addition, corrective actions against banks, especially against state-run commercial banks, are not properly taken. There are no sanctions to directors. And there is extensive forbearance regarding prudential standards.”

The BB has no legal basis for consolidated supervision of banking groups, said the report, which was sent to the BB and the finance ministry recently.

The FSAP, a joint programme of the International Monetary Fund and the WB, provides a comprehensive framework through which assessors and authorities in participating countries can identify financial system vulnerabilities and develop appropriate policy responses.

The review came after the BB eased the loan classification rule last month, moving away from international practice and AHM Mustafa Kamal’s assertion after becoming finance minister in January that the total non-performing loan (NPL) will not increase by even a penny.

Moreover, the central bank is working to relax the rescheduling policy as instructed by the finance ministry.

“Bangladesh is burdened with high NPLs and even higher levels of problem assets,” the WB said, adding that officially recognised NPLs account for about 10 percent of the total loans.

According to the report, the root causes behind weak asset quality are largely unrelated to macroeconomic conditions and reflect shortcomings in corporate governance; weak credit and legal infrastructure, which limits recovery of defaulted loans; intense competition in an overbanked market, which puts pressure on margins; and widespread regulatory forbearance and weak enforcement.

The report recommended setting up a high-level independent working group to draft a national NPL resolution strategy.

State-owned banks are the centre of the NPL problem, said the report. Despite frequent public capital injections over the past years, state banks remained undercapitalised, posing risk to financial stability.

“The authorities should immediately conduct an asset quality review to know the extent of the NPL problem in the state banks.”

At the same time, the number of state banks should be reduced and transformed them into development banks, according to the report.

The report suggested suspension of licencing new banks and introduction of merger strategy in order to reduce overcapacity in the banking system.

Currently, 57 commercial banks are operating in Bangladesh. The government awarded licence to nine banks in 2013 under political consideration. The new generation banks are struggling to survive in the oversaturated market.

Under these circumstances, three more banks – Bengal Bank, People’s Bank, and Citizen Bank – received nod from the BB in February.

The WB report emphasised on integration of banks, suggesting introduction of relevant legal definitions and prudential standards for consolidated supervision. It recommended incentivising the integration.

The WB lauded Bangladesh’s impressive economic growth and social development.

Strong economic growth has gained Bangladesh lower middle-income status, but a sounder and stronger financial sector is needed to address the development challenges lying ahead, it said.

“Strengthening bank regulation and supervision should be a priority if Bangladesh aspires to move to the next level of prosperity.”