Banking Environment In Bangladesh
After independence in 1971, all the banks were nationalized. It is interesting to note that India nationalized banks during 1969- 70. Bangladesh and Pakistan simultaneously followed in 1972. At that time, there was strong public demand in favour of nationalization. During 50s and 60s, all the banks were owned by rich families. These banks operated and mobilized deposits in East Pakistan, and invested largely in West Pakistan. Bangladesh was vocal against 21 rich families. Against this backdrop demand for nationalization of banks gained ground.
Paid-up capital of each bank was fixed between Tk. 1 crore and 3 crores. Banks were practically empty. Investments were in West Pakistan. Hence deposits remained unsecured. Non- Bengali officers dominated and they all left for Pakistan on independence. Only bank premises, mostly on rent, remained in Bangladesh.
New Government of Bangladesh was unable to pay even the little amount of capital. Bengali bankers adopted unique system of capital building, which remained as an example for all time to come. Each bank sanctioned a loan to the government equal to its proposed paid-up capital. Government instructed banks to utilize their respective loans as their paid-up capital. These loans were gradually recovered out of profit of each bank.
Nationalized banks quickly spread branches in rural areas and created new service for rural banking. Extending credit for agriculture by commercial banks was prohibited during pre-indenpence time. On independence, agri-credit was declared as priority service. Banks had to learn norms and techniques for agri-credit. Initially, it involved only crop-finance. Gradually it extended to include fishery, poultry and cattle raising. Banks did a great job in developing rural sector finances and consequent development.
After 1975, corruption crept in. Banks faced large scale public criticism for corruption, fraud, forgery and gross negligence in customer service. Lack of good governance was evident. Many people considered it as a conspiracy to create grounds for privatization. Pubali and Uttara bank were de-nationalized and new private sector banks were established. Gradually private banks gained ground and flourished.
Private Banks concentrated their operations mainly in city and urban areas. They were reluctant to go for agri-finance in particular and rural finance in general. Government-owned banks remained dominant in rural banking. This scenario did not change much even today.
Let us observe present day scenario in the banking arena. At present, 60 banks operate in Bangladesh. This is an uncomfortable scenario. Because, present financial position doesÂ not demand so many banks, and new banks find it difficult to sustain against uneven competition from old and strong banks. Moreover, many private banks were issued license on political consideration. A political person is notnecessarily a good professional. Hence, these banks lack professionalism. Instead, biased political considerations erode financial strength of the banks endangering safety of public deposits. Government view is however different. They argue that new banks have been allowed for unbanked areas. This is not factual. Because new Banks generally do not operate in unbanked areas. They are concentrated in the city and urban area. Owners of some banks are corrupt. They go out of the way to swindle public money. Some of the smaller banks are facing critical position because of corruption of chairman and directors. Former â€˜Farmers bankâ€™ is an example. This bank was given license on political consideration. Itâ€™s chairman was a minister and M.P of ruling party. Some directors also belong to ruling party. It has to change its name to earn confidence of people. New name is Padma Bank. The bank is not yet normal. Once Basic Bank was the best Bank with less than 1.5% classified loan. A chairman was appointed by the government on political consideration. He changed the M.D to appoint a man of his choice. Then looting started. Classified loan reached almost 80%. Neither Bangladesh Bank nor the government took any action. The chairman completed his office term and is freely moving. He has not been asked by any authority to explain his position. Suspicion arises about involvement of very important persons in this swindling game.
Question arises about the position of Bangladesh Bank, the central bank of the country. Bangladesh Bank Act an Bank Company Act provide absolute authority to Bangladesh Bank. Sec.7 of Bangladesh Bank allowed the government to consult Bangladesh Bank only on very important matters of public interest. Sec.7was abolished in 2004, restraining govt. to advise Bangladesh Bank. Instead, aco-iodinating committee was designed to deal with matters of mutual interest. Law remained in books. In practice, govt. started dictating terms on even petty matters. Bangladesh Bank has become subservient to government dictations. Co-ordination Committee is defunct. Let us review a few glaring examples. Government changed Bank Company Act allowing four family members to sit in a bankâ€™s board. Previously law allowed only two family members. New law protects family interest against public interest. Later on, Bangladesh Bank was advised by M/ Finance to unclassify sticky loans of even bad borrowers by accepting only 2% down payment. Similar unprofessional decisions were accepted by Bangladesh Bank, under instructions of the government. While Law delegates authority to Bangladesh Bank, the central bank has practically surrendered to the M/ Finance. Bangladesh Bank has little control over the banks. This is one major reason of bad governance in banks.
A comparison between government owned banks and private banks, reveals that percentage of bad loans in govt. banks is much more than that of private banks. This indicates poor governance in government banks. Employment position indicates that number of employees per branch is much higher than that in private banks. Employee per volume of business is also more in govt. banks. Corruption and irregularities in govt. banks, are also much more in comparison to those in private banks. All these factors signify poor governance in government banks. Government bankâ€™s Board of Directors consists of mainly government officials. Board is appointed by the ministry of finance. Board is fully empowered and is accountable to government. But Boardâ€™s accountability is hardly established. Board and executives are unable to restrain political interference.
Private Banks do not have such constraints. But some corrupt owners are responsible for swindling public money. Vast majority of owners are good and non-interfering. Hence most of the private banks are well managed. But a few private banks are worst examples of corruption and mismanagement. This could have been averted by a strong central bank, which is absent at present in Bangladesh. Bringing back sound banking practices for improving health of banks, largely depends on reforming Bangladesh Bank as a strong, autonomous and capable central bank. This does not require new laws. Present laws are good and adequate. But the Laws are recorded only in books. Law is not practiced. Strong forces within and outside the government stand in the way of obeying law. Hence onus lies with the government. The government and its political forces must stop advising the central bank. Towards this end, Banking Division within M/Finance should be abolished to stop parallel administration. Simultaneously, the government must stop interfering with operating of Bangladesh Bank, which should be manned by trained and skilled personnel, capable of avoiding outside interferences and maintain professional independence. All these require political commitment of highest order.
The writer is former Deputy Governor of Bangladesh Bank, former Chairman of Bangladesh Krishi Bank and former Chair Professor of Bangladesh Institute of Bank Management (BIBM).