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Of late, the attention of economists has been attracted to several actions Bangladesh Bank (BB) has undertaken. The central bank has thoughtfully initiated a logical monetary policy statement, keeping on increasing policy rates one after another to tame the inflation. Now it has embarked on a Herculean task and that is none other than the declaration of a roadmap for bringing down non-performing loan (NPL) below 8 percent.
The initiative encompasses 11 corrective and 6 good governance measures, including writing off classified loans on the expiry of 2 years in place of 3, setting up of a unit in every bank to recover the written-off loans with incentives, establishing Asset Management Companies, Alternative Dispute Resolution (ADR) and Prompt Corrective Actions (PCAs).
The timeframe for realising the target is June 2026. At present, the rates of NPLs in state-owned commercial and private banks are 21.7 percent and 7.04 percent respectively. BB’s target is to cut down the rates of public and private banks to 10 percent and 5 percent respectively. When the International Monetary Fund (IMF) approved the bailout loan of $4.7 billion for the country, one of its conditions was to bring down the NPLs below 10 percent.
The the country’s economists were clamouring to bring it down for long, but all fell flat. Now it started all of a sudden. What prompted the Governor to undertake this onerous job, whether the urge to get the 3rd tranche of the IMF loan or impetus for upgrading himself from the derogatory D grade, which he earned last year, is only known to him. But if he can accomplish the target at any rate, he himself will be crowned with accolades, and the nation will have a new lease of life.
At present, the percentage of unrecoverable amounts is estimated to be around 25% of the total outstanding loan, if written-off loans, NPLs and stressed loans are compiled together. Many banks suffer from liquidity crises as a big chunk of their resources are trapped in bad-and-loss loans. In order to survive, they are now approaching the BB for money. Although belatedly started practicing contractionary monetary policy to rein in inflation, BB is allegedly minting money defying its avowed policy to supply them with liquidity. The fact that BB itself is partially responsible for this gargantuan buildup of NPL is not being admitted now by them, but their insinuation is that during COVID-19, certain flexible policies and moratoriums were put in place. But these extraordinary facilities have no longer been in vogue since December 2023.
Now each and every loan is being treated as a regular one. At present, the number of pending court cases of banks in the country’s Ortho Rin Adalot is 72,543 and money involved therein is Tk 1.78 trillion. In this backdrop, the importance of the crash programme chalked out by the BB to downsize the NPL can hardly be overemphasised.
Attempts to decimate the bad and loss loans are nothing new in Bangladesh; these had been tried with dexterity in the 1990s. The extent of NPLs was 26.09 percent in 1990, but that jumped to as high as 41.11 percent in 1999. Thereafter, as a result of the crash programme, it went down to 31.49 percent in 2000.
The percentage further declined to 22.10 and 13.55 in the years 2003 and 2005 respectively.
The jumping reductions of bad loans two decades ago were mainly attributable to writing off bad and loss loans, provisioning and tapering of the new accretions. In Thailand, crash programmes were successful in lighting up the menacing burden; in 10 years’ time, it came down to 2.7 percent in 2011 from 47.7 percent. So, the possibility of success in this field is not an incredible idea.
But many in the concerned circles are doubtful about its success, as deeds are often not in consonance with the words and good governance practices are compromised off and on. Dr. Wahiduddin Mahmud, an eminent economist of the country who had been a part of two banking sector reform commissions in the nineties of the last century, the other day spoke a few words in a function organised at the National Press Club which are relevant in this connection. He categorically argued that the way BB is providing support to weak banks, the people and country will suffer.
He said the earlier commissions had formulated so many rules and regulations, including limiting the number of sponsor directors from a family and their tenure on the board, internationally recognised definitions of classified loans and defaulters etc. These were once made effective and had not just gone; influential people and vested quarters have played their roles in removing those for their own interests.
Consequently, these rules and regulations could not make their way in The Bank Company (Amendment) Act, 2023. But now we talk about tougher definitions and the number of directors & their tenure.
While referring to the mismanagement in the banking sector, one of the former governors of Bangladesh Bank, Dr. Saleh Uddin, mentioned that during his time, the number of sponsor directors from a family was 2 and tenure 3 years. Afterwards, it was changed to make the number 4 and tenure 6 years. Now the new law provides for the number to be 3 and tenure up to 12 years. The rescheduling requirement, at first, was 10 percent of the total outstanding loans. Next, it was raised to 20 percent to make it tougher. To make it further tougher the provision was raised to 30 percent. Now, it has dropped to a paltry 2 percent only.
Blowing hot and cold in the same vein by the governor makes many scholars skeptic about the success of his initiative. To them, the roadmap, though seemingly rough and tough, may not meet with success under the propulsion of the current CEO of the central bank, as the latest rescheduling perks for the defaulters (2 percent rescheduling provision) were given away just within a week of his assumption of office, thus exposing his frailty to the vested and influential quarters he is now up against.
But my opinion differs from theirs. I think at first, he took to the carrot and stick policy; giving the defaulters an easy way of offloading their burden. Now that the majority of them have proved themselves recalcitrant, he has come up with the sticks. Definitely, his disenchantment in the aftermath must have enhanced his astuteness as well as stubbornness, which must be equal to the task this time. In this backdrop, it is very likely that he would come out successful.
An incident in the USA about a century ago may be relevant in this connection. At that time, the great depression of the thirties had already engulfed Uncle Sam's economy. At the beginning of the twentieth century, under substandard criterion and relaxed overseeing of the Fed, banks and financial institutions had started growing like mushrooms. Then, in the 3rd decade, most of these institutions had been crippling due to liquidity crises in their day-to-day operations; many had already put their branches under lock and key. National income had turned out to have been less than half of what was four short years ago.
Nearly thirteen million Americans—about one-quarter of the labour force—were desperately seeking jobs. The machinery for sheltering and feeding the unemployed was breaking down everywhere under the growing burden (The COMING of the NEW DEAL by Arthur M. Schlesinger, Jr.). As a result of waning confidence in the banking system, people in droves had been withdrawing their deposits and jewellery and started keeping these under their pillows.
In this somber backdrop, on March 4, 1933, the 32nd president of the USA, Franklin Delano Roosevelt, better known as FDR, put his footsteps into the White House. Paralytic and wheelchaired as he was, he had been voted to power to rescue the decadent economy. He understood it rightly that the banking sector is the lifeblood of the economy and the cornerstone of the banking system is the confidence of people. So, on the first very day, he declared, “This nation asks for action and action now... We must act, and act quickly.”
To protect the banking system from crumbling, he that very day declared a bank holiday, including The Fed, the target being buying some time for enacting The Emergency Banking Act, 1933, in the special session of the congress for empowerment to fix liquidity crises. The Fed was then following the gold standard, which stood in the way of an additional money supply. The new law empowered 12 Federal Reserve banks to issue money on the basis of assets in the banks and not only gold. After the law was enacted on March 12, the President declared, “I can assure you that it is safer to keep money in a reopened bank than under the mattress.” Then, with enough liquidity at hand, The Fed, clearing houses and banks across the country reopened their doors on 13th, 14th and 15th March respectively. The startling fact here was that the whole exercise of enactment, from the first introduction to the final signature, had taken less than 8 hours. As a result, the confidence of people was restored in the banking system. Next, the president embarked on the nitty-gritty of his New Deal.
Considering the power structure Bangladesh at present is being steered forward under, there is every possibility that the governor’s arduous task will meet with success, provided he is blessed with congenial working conditions and unmixed political commitment. FDR, though a workhorse, was not above reproach, but thanks to his dexterous captainship in the tumultuous sea of American economy and politics at that time, he was the only president who got elected for the fourth term, surpassing the usual two. I dare not compare our governor with FDR, but I find a subtle similarity between our governor’s ‘PCA’ and FDR’s ‘act quickly’. If the governor can traverse steadily along the roadmap of his own creation, the ‘s economy will immensely be benefited and people at large will remember him for long. We wish him success.
The writer, a former Director General of the Directorate of Foods, is a columnist.
He can be reached at [email protected]
Messenger/Disha
