Hook the looters before banks run broke
Draft Deposit Protection Act draws criticism
Special Correspondent :
The draft Deposit Protection Act, 2017 has sparked criticism from various circles as the proposed Act offers a lower amount of compensation to depositors if a bank or non-bank financial institution (NBFI) goes for liquidation.
"A depositor will get up to Tk 1,00,000 from the 'Deposit Protection Trust Fund' under the proposed law, if a bank or NBFI winds up, a section in the draft said, adding, "Whatever deposit a depositor has in one or more accounts, s/he will only get Tk 1,00,000 after winding up."
The amount to be paid first is too little to compensate the depositors, observed economists and former bankers who urged the authorities to bring revision in that section suggesting a higher compensation for the depositors in case of liquidation of any bank or non-bank financial institution.
The Bangladesh Bank (BB) has prepared the draft of the law that, if adopted by parliament, would replace the existing Bank Deposit Insurance Act 2000. According to the law, the banks and the NBFIs will have to bring the deposits of their clients under insurance coverage with the central bank's 'Deposit Protection Trust Fund.'
BB, however, will determine the portion of deposit for the insurance coverage and the rate of premium through official gazette from time to time.
"Like the existing Act, a depositor will get up to Tk 1,00,000 from the fund under the proposed law, if a bank or NBFI winds up," said former BB Deputy Governor Dr Khandoker Ibrahim Khaled.
He said the amount would be provided to a depositor only as 'compensation' in case of a bank's liquidation. But the actual amount held by depositors would be returned after auction of assets of the liquidated bank or financial institution. But the truth is that ultimately the winding of bank would produce another kind of looting.
Currently, there are 57 scheduled banks and 34 NBFIs operating in the country.
"The proposed deposit insurance limit is not rational if we consider the risks of depositors. If the Act passes without any revision it would erode depositors' confidence," former BB Governor Dr. Salehuddin Ahmed told The New Nation.
He said the debacle of Farmers Bank (now renamed as Padma Bank) and People's Leasing and Financial Services (PLFS) set the example that depositors are not safe in Bangladesh. Besides lessons should also be learnt from global financial meltdown, which hit the large European, and US banks in 2008. The US authorities raised deposit insurance limit massively following the unprecedented banking crisis in America that led to failure of big banks like Bear Stearns and Lehman Brothers.
Considering the amplified risk of bank failure, the US Federal Deposit Insurance Corporation (FDIC) introduced the Transaction Guarantee Account programme in October 2008, which raised the maximum deposit insurance limit from $100,000 to $250,000, he noted.
"Risks are also in Bangladesh when too many banks are operating here adopting reckless lending practice. So, it is high time to fix a higher insurance limit to protect the interest of depositors because today, it's common for most account holders to have a deposit more than Tk 1 lakh. The government has to build all safeguards to protect the interest of the depositors by way of higher insurance coverage," said Dr. Salehuddin Ahmed.
He added the Act should also incorporate necessary measures and provisions so that the depositors can get back their money within the shortest possible time in case of winding up any bank or financial institution.
"Depositors money will be looted by other means if there is a 'loophole' in the Act. In this case, nothing will be left for the depositors, " he feared.
Apart from depositors' protection schemes, Dr. Salehuddin Ahmed said the central bank should act properly so that no bank can go bust in Bangladesh. Bangladesh Bank is to secure money in banks and financial institutions.
"Helping bank robbers cannot be the responsibility of Bangladesh Bank, which is to keep watch over all the banks and financial institutions," he added.
Dr Salehuddin Ahmed also mentioned that many banks, including public ones, and financial institutors have already become vulnerable owing to alarming rise in non-performing loans (NPLs) and big loan scams.
The banking sector has experienced scams of Tk 22,000 crore in the last 10 years, according to Center for Policy Dialogue (CPD).
Referring to the latest edition of financial scam, Dr. Salehuddin Ahmed said one PK Halder alone took away Tk 3,500 crore from several banks and financial institutions and fled abroad. "How a single person can swindle such a big amount and what the central bank did is now a big question," he added.
Dr Salehuddin Ahmed said financial crimes are spreading like contagious disease in the country and the offenders go unpunished.
"The government should take stern action against these crimes," he said, adding, "Otherwise, the country's financial sector would be collapsed soon."
He also observed that a growing number of high-profile economic offenders continue to flee the country to escape prosecution. "The authorities should work sincerely with foreign governments to bring back those fugitives and plug the remaining loopholes in the system so that none can leave the country after looting depositors money."
Financial analysts also suggested for incorporating stringent provisions in the Act so that depositors' interest get well protected.
"In case of winding of a bank or non-bank financial institution, the properties of the Directors must seized and sold first. The central bank governor will be suit for negligence of duty," said an analyst adding, "Right now these are the public demands."
Analysts also mentioned that the financial condition of a number of local banks, including state-owned BASIC and Janata, and financial institutions have already been worse mainly due to loan irregularities, bad governance and lax monitoring and supervision by the central bank. "So, the authorities should catch the looters and corrupt bank officials first before they go for winding up," they added.