Dr. Atiur Rahman
Governor, Bangladesh Bank :
(From previous issue)
Eventual cash flow difficulties of businesses and households force to use financing of shorter than needed tenors create overdues and asset quality impairments in the books of lenders. The paucity of longer term financing arises from paucity of longer term savings. The entire aggregate of equity, reserves and subordinated debt stocks of banks is barely enough to cover the long term funding gap.
Redressing the longer term funding gap will require policy and market reforms to bring in new long term savings and to create alternative liquidity augmenting mechanism at the long term end. Life insurers and pension/provident funds carrying long term liabilities are the main sources of long term funds, as they need long term assets to match the liabilities.
Life insurance penetration remains very thin in Bangladesh; deepening life insurance penetration comes up therefore as an item in action agenda for augmenting long term savings. Pension/provident fund schemes in the public sector are mostly unfunded and run on pay as you go basis, in the small organized private sector such schemes are not in very widespread use, and none exists at all for the broader population including professionals and self-employed others. Widening of provident/pension fund coverage comes up hence as another item in action agenda for augmenting long term savings. The only fiscal liabilities involved in defined contribution pension/provident fund schemes are firstly the income tax waiver on such savings, and secondly in running a pension/provident fund regulator’s office. It is high time for Bangladesh to go for earliest possible introduction of defined contribution pension/provident fund schemes for the general adult population.
The broad demand base of pension/provident funds, life insurers, merchant banks and other institutional investors needed for debt issuance and loan securitization to thrive hasn’t developed yet in Bangladesh, and capital market intermediaries lack familiarity with their various roles as issue managers, underwriters, trustees, market makers etc involved in primary securitization and secondary trading. Prospective debt securities issuers also find the steps in issue process costlier in fees and expenses than for bank borrowings.
The action agenda for enhancing longer term funding availability need therefore promotion of loan securitization by concerted BB-BSEC initiative of streamlining the issue processes and paring down the issue costs. Access to long term housing finance will be hugely facilitated by activation of market in mortgage backed securities; the government owned HBFC can conveniently be utilized for this purpose; mandating it to assume roles of underwriter and market maker in issuance and trading of securities backed by mortgage loans extended by other primary lenders, instead of its present role as a primary mortgage lender itself.
Absence of a well functioning mechanism for debt restructuring and resolution comes next as a major shortcoming, leaving distressed businesses starved of financing needed for recovery and tying up lending resources in irrecoverable overdues. Banks and NBFIs in Bangladesh are barred by law from fresh lending to defaulting borrowers regardless of circumstances. BB’s guidelines for loan rescheduling permit waivers from interest dues but none from the principal. Court supervised settlements in the alternative dispute resolution route under the Money Loan Courts Act can be of same use with downsized claims on principal, but this route remain very little used.
Bankruptcy court processes of debt resolution through the insolvency route by court appointed administrators likewise also remain virtually unused. Availability of private equity and other hybrid bridge financing options that could help out debt distressed businesses is as yet insignificant and rudimentary in the local markets. The market failure in helping distressed businesses recover entails significant loss to the economy, not only in lost output and employment in the stricken businesses, but also in competitiveness erosion of other businesses that face higher cost of borrowing from lenders burdened with overdues from the debt distressed businesses in limbo.
Redressing the shortcomings and their negative consequences outlined above will require careful rethinking and revision of current legal and regulatory provisions on handling of debt defaults, in light of practices in neighboring countries and elsewhere, to enable prompt resolution of debt distress of troubled businesses that have realistic possibility of turnaround and recovery; and prompt dissolution of the others through effective use of the insolvency route under the Bankruptcy Act.
The judiciary may also think of allowing a separate bench at the High Court just for finance related disputes. Financing options available to businesses also need widening, with policy steps promoting private equity and other debt-equity hybrid financing transactions by intermediaries at the capital market-financial market interface. A good start in this respect could be the restructuring of the government financed small Equity and Entrepreneurship Fund (EEF) for startups in a few specific sectors into a broader hybrid financing platform to support needed restructuring of ongoing businesses in all sectors, enlarging the fund with both increase in government’s contribution and induction of private sector investment and management participation. Even foreign financing from multi-lateral organization like IFC can be welcomed in this equity fund.
Besides the major shortcomings enumerated in the preceding few paragraphs, limited diversity of available risk management products is another significant concern, particularly following transition to market based flexible Taka interest and exchange rates.
Apart from plain vanilla forward exchange rate covers and swap transactions, more complex derivative transactions like options, credit default swaps etc. are as yet largely absent in the local markets. Cautiousness in widening external openness of the economy is largely the reason why the needs and responding products have remained slower to arise in the local markets; and BB permits banks and their clients to access external markets on occasional needs of such products. However, this market deficiency is also indicative of slow pace of adoption of a proactive forward looking risk management culture in financial intermediaries, urgency of which will heighten as the economy’s openness widen further.
BB has accorded high priority to addressing this deficiency by steps of phasing in Basel II and III risk based capital adequacy and forward looking liquidity management disciplines in banks and financial institutions; alongside prescribing guidelines laying down requisite minimum standards managing the various risks along lines of international best practices. At the same time, steps for firmly instilling a risk based financial sector supervision culture in BB have also been prioritized. BB is well aware that even though the Basel III is yet to be implemented in full pace, Basel IV is on the way to emerge requiring banks to maintain higher capital, liquidity and disclosure requirements for cushioning systemic risk buffer.
BB is looking forward to steadily increasing openness and integration of our financial markets with the global financial system, for widening cost effective access to investment resources from the global savings pool. Hastening adoption of international best practice standards in corporate governance, risk management, internal controls and financial disclosures will facilitate strengthening of correspondent relationships with reputable banks abroad.
Increasing external openness will bring in heightened exposure to volatility in global financial markets; risk management capacities in banks will therefore need to be upgraded and bolstered continually. Correspondent banks in advanced markets abroad are often useful sources of knowhow about new service and risk management approaches.
To summarize the overview of track record thus far, the banking sector has performed fairly well overall in supporting steady, stable and inclusive growth in the real economy, upholding its own systemic stability through episodes of domestic and external shocks, including the global financial crisis.
As I mentioned in the beginning, BB is active in spearheading initiatives of putting in place and upgrading countrywide connectivity backbone for the interbank settlements infrastructure; individual banks will need to be correspondingly proactive in installing and upgrading their own IT platforms in line with rapidly growing and evolving needs.
However, various shortcomings in market development and debt distress resolution practices, coupled with governance weaknesses arising from encroachments on operational independence of regulators are holding financial sector performance stuck at sub optimal levels below the sectors potentials. Appropriate corrective steps including those suggested in the relevant foregoing paragraphs brook no delay if the financial sector is to rise up to its call of supporting realization of the nation’s inclusive sustainable growth vision of attaining upper middle income country group per capita GNI level by 2030.
The movement towards sustainable banking including financial inclusion ethos with green banking and mobile banking initiatives will continue further; I will also welcome you to come forward with innovative new products to meet the appetite of future digital customers nourishing our future vision of full-blown financial digitization.
(Concluded)
