Bangladesh's banking sector is under stress with non-performing loans rising in big leaps. Around the same time, private banks are experiencing a fall in deposits.
Bangladesh's overall balance of payment deficits has risen to $3.44 billion thanks to declining remittance growth, coupled with the high cost of imports.
Given the condition of the country's external sector and dwindling foreign reserves, the IMF has agreed to disburse a $4.5 billion loan to Bangladesh, given certain conditionalities.
However, IMF conditionalities or reform proposals also ask the government and/or the central bank to redefine non-performing loans, lift the lending caps, depreciate the currency and ensure the autonomy of Bangladesh Bank in pursuing an independent monetary policy.
The Business Standard reached out to Dr Birupaksha Paul, Former Chief Economist of Bangladesh Bank (BB) to discuss the country's financial sector and the pressure on its balance of payments.
The banks are experiencing a fall in deposits. Does this have to do with interest rates or are other factors at play here?
Since the state-owned banks are backed by guarantees from the government, to the extent that the ordinary depositors are aware of this fact, they should not be withdrawing deposits from state-owned banks. However, in terms of private banks, if the public is convinced or at least fearful that the banks may collapse, that can and may have led to their recent withdrawal of deposits. Recent developments and irresponsible comments from policymakers may have induced this behaviour among the depositors.
Recent BB governors had served in some previous role directly under the Minister of Finance (typically as the Secretary of Finance). Can this stand in the way of them making independent decisions?
Bangladesh ranks very low on the Global Knowledge Index. Among the 28 countries listed in the Asia Pacific region, it only outranks one or two countries like Myanmar and Afghanistan. Policymakers in Bangladesh value obedience over merit. Meritorious people are less likely to oblige to the whims of the power that be and therefore, are often kept away from positions of power.
Developed countries like the United States or the United Kingdom usually appoint central bank leaders from the pool of economists who had prior experience with central banks or had published research on relevant matters. In fact, Mark Carney, before being appointed as the Governor of the Bank of England, had five years of experience as the Governor of the Bank of Canada.
Central bank governors or chairpersons should only be accountable to the parliament or the congress for their actions and no individual; neither the President nor the Minister of Finance should be able to influence their decision. Jerome Powell, the Chair of the US Federal Reserve was once asked if he would step down had the President asked him to, and he replied that he only answered to Congress.
In Bangladesh, however, BB needs the stamp of approval from the Ministry of Finance before introducing new policies. The Ministry likes to practice a British-style control of the central bank. Every Minister of Finance, once elected, begins discussing non-performing loans and the banking sector, which ideally falls outside the purview of the Finance Division.
To further subdue the influence of BB, they have apparently created a banking division within the Finance Division, which is absolutely unnecessary. This is only being done to protect certain interest groups.
Islami Bank Bangladesh Ltd, once one of the more trusted banks, is facing serious financial difficulties at present. What impact will this have on confidence in the banking sector in general?
Whether you talk about the Tk7,246 crore disbursed by Islami Bank Bangladesh Ltd or the total outstanding non-performing loans of about Tk1,34,000 crore, it only represents the tip of the iceberg.
When the current Minister of Finance assumed office, he promised that non-performing loans would go down even though that was not his job. He should rather focus on the embarrassing fiscal incapacity of the government, which is well-documented and hinders meaningful economic development.
Then he went on to adopt a very accommodating definition of non-performing loans, so the number of default loans looks manageable. In the meantime, the auditory process at the central bank has been suppressed, loans have been approved under the supervision of the Finance Division, while lending rates remained low against rising inflation. All of this made loanable funds cheaper for the rich and the powerful, while the SME owners scraped the bottom of the barrel.
Banks have essentially become political gofers for the plunderers and looters of Bangladesh's financial system. It's at least encouraging to see that the current governor is trying to make the system more dynamic and market-determined.
Despite the 2.5% incentive on remittances, remittances seem to have taken a nosedive in the past three months from $2 billion in August and September to less than $1.6 in the recent two months. Exchange rates have also been depreciated within these months to bridge the gap with the kerb market. What is the reason for this trend? How can remittances be raised?
Migrants are less likely to be moved by the 2.5% incentive given by the central bank. Juxtaposed against the straightforward process in the Hundi channel, which still promises Tk4-5 more than the bank rate, the ordinary citizens neither have the time nor the interest to calculate a 2.5% incentive on the Tk107 guaranteed by the government.
Moreover, even a Tk2 difference per USD makes a huge difference to remitters. So when a Hundi agent offers one or two Taka more, given that the remitter finds the agent reliable, they are more likely to use that channel.
Moreover, I am yet to understand the economic reasoning behind the 2.5% incentive, like many BB policies in recent times. Did the central bank or the Finance Division conduct any study whatsoever before implementing this policy? What were the outcomes of this policy? Did remittances rise significantly because of it or are we simply putting strain on an already shrinking fiscal space of the government?
The same could be said about the 9% lending cap. Yes, the original intention was good and it probably did make loanable funds cheaper for the private sector. But only the plunderers could take advantage of the availability of cheap funds, as I mentioned earlier.
Then comes the issue of the National Savings Certificate (NSC), which mostly benefits millionaires. 65% of all NSC are held by these people and they enjoy virtually the same interest rates as the vulnerable who the NSC is designed to protect. There is no interest rate segregation and the well-off with idle or inherited funds purchase saving certificates with it and simply live on the high interests accrued from said certificates.
Going back to remittances, the remittance inflow in August-September rose because of the sharp depreciation of the Taka against the dollar. But the real effective exchange rate still remains overvalued and there's an opportunity to further depreciate. So, the central bank should withdraw these nonsensical incentives from remittances and let the market determine the exchange rates to attract remittance inflow.
Despite criticism and IMF conditionalities, BB stands firm and has not raised the lending cap. Why are they reluctant to raise policy rates?
I like to call this policy arrogance. It seems as though the leaders and policymakers know and observe the criticisms of the policies they have taken, but these criticisms, regardless, fall on deaf ears. They have no evidence to suggest that the 2.5% incentive on remittances or the 9% lending cap on loanable funds have significantly improved either the remittance inflow or the private sector investment, respectively. Still, the central bank and the Finance Division refuse to adjust the rates or let them be market-determined, out of sheer arrogance.
The studies conducted under the Department of Research & Development at the central bank are not honoured and the findings can be suppressed if the truth is inconvenient for the government.