Dr. Anu Mahmud :
The government is going to allow three more private banks to be added to the already existing 40 commercial banks operating in the country. It has been learnt from observation that private banks are increasingly becoming involved in corruption. With the banking sector already plunged into deep crisis due to the involvement of many private banks in corruption and irregularities, analysts believe that reform of the banking sector is more important at this moment rather than adding more in the row. It is risky.
Banks play pivotal roles in financial inclusion of the people, which is essential for accelerating economic development of the country. But the current situation in the banking sector poses a big challenge to achieving this target. In fact, billion of taka being siphoned off through the channels of the banking system due to the involvement of many private banks in irregularities. And the economy has been suffering from the burden of banking malpractices.
As reported in media, many members of the governing body of private banks, especially those who represent the owners, are found involved in disbursing loans to dubious entities that in many cases fail to repay the loan and become defaulters. As a result, the amount of default loans has become huge and default loan culture has become synonymous with a malignant cancer in the banking sector.
Mobile banking is an essential element of today’s technology-based banking system which has been playing significant roles to reach banking facility to the grassroots level in society. But, this service has been misused and has become risky as well.
It is clear that improving the level of efficiency of banks is more important than increasing their number. Notably, nine banks that got operating licenses the latest are found involved in corruption. And this is a convincing argument in favour of the fact that issuing license for setting up more private banks is likely to deteriorate the situation further.
The government recently has taken praiseworthy steps to terminate high officials of some banks in an effort to curb corruption in the banking sector. It is essential to streamline the banking system with strong hands to get the optimum benefits.
Political Connections For Defaulted Loans:
Defaulted loans in the banking sector are spreading growing concerns about the stability of the country’s bank’s and financial institutions. It recorded a rise of over 191 per cent in the past eight years and a big shoot in recent years, although it started much earlier. The situation is only worsening under political shelter instead of any attempt by the government to improve governance in the banking sector. Bank loan is an easier way now of amassing illegal wealth but it can’t go this way.
That said – it is clear that the deviant rise is directly linked with politically linked loan sanctioning and illegal capital flight as both have marked substantial rise in recent years. What is frustrating is that the Finance Minister at once point blames bad loans destroying the banking sector while on another occasions he takes it lightly saying grabbing of Tk 4000 crore as such from a bank is a small money. He even said, capital flight from the country is not too big which rose by 19 per cent last year to Swiss Bank alone when India was substantially able to reduce it.
Vested interest group have already grabbed almost aii state owned banks and grabbing deposits from private banks now; which they control as family banks. It is clear that ruling party politics and loan sanctioning have direct links. What is at stake is depositors’ money while the country is losing huge resources that could be used for development.
We have requisite laws and law courts as we see to recover bad loans but they are not functioning because they are not allowed to function. Powerful people around the government are not allowing it to function. So defaulted loans are growing and capital flights are soaring. The government is keeping its eye almost shut.
The non-recovered loans now stands at Tk 1,11,347 crore and the point is why the government is failing to stop faulty loan sanctioning and money laundering from banks. Why it is failing to show success in the recovery of defaulted loans. The public has the right to know about it.
Finance Minister has told the Parliament that more than two lakh individuals or companies are defaulters in the country but he had no courage even to name the top 100 although he mentioned about them. We must say mere voicing concern will not serve any purpose unless the government takes strong resolve to recover the bad loans. Its political weakness is deterring it from bringing pressure on powerful people and business houses to repay the loans.
We must say defaulters are by no means loyal friends or supporters of the regime except the fact that they are using political cover to grab money from banks. The government must prove its credibility to the people without sheltering people grabbing banks and financial institution.
Misuse SME Loans Be Checked:
Thirteen banks have exceeded their annual (Small and Medium Enterprises) SME loan disbursement targets in just six months; which seems to be suspicious in the eyes of the central bank. They disbursed 105 per cent to 242 percent of their annual targets in January-June period of this year. It is good that the banks have disbursed a hefty amount of loans to small and medium enterprises but the central bank should keep watch on these banks to see if they showed other credits as SME loans. Moreover many remain skeptical whether such credit is being used as cover to grabbing loans by influential people closer to power corridor.
It needs extra care when default loans in the SME sector have increased by more than eight times in the last seven years. In 2016, Tk 22,494 crore out of the Tk 1,36,176 crore disbursed became defaulted; the amount of such default loans was only Tk 2,644 crore in 2010. The commercial banks should restraint the rise in suspicious banking to arrest the rising trend of default loan in the SME sector. For example, Exim Bank’s disbursement target for the entire year was Tk 5,375 crore but it has already disbursed Tk 5,666 crore or 105 per cent of the target in six months. Meghna Bank disbursed 200 per cent of its annual SME lending target of Tk 265 crore in the period while NCC Bank achieved 242 per cent of its target of Tk 900 crore.
Likewise Trust Bank has disbursed 115 per cent of the target of Tk 600 crore and NRB Commercial Bank achieved 205 per cent of its target of Tk 250 crore. The nine other banks that overshot their SME loan target are Bank Al-Farah, Citibank NA, State Bank of India, Woori Bank, Modhumoti Bank, NRB Bank, City Bank, Bank Asia and Exim Bank.
On the other hand, 19 banks, including eight state-run lenders, could not reach over 50 per cent of their SME loan disbursement targets in the first half of the year. Together, banks and non-bank financial institutions (NBFIs) lent 62 per cent of their yearly SME loan target of Tk 1,33,854 crore in the first six months. The Bangladesh Bank sat with banks and non-bank financial institutions in separate meetings between October 09 and 11 and asked them not to disburse loans excessively in the trading sector. Banks and NBFIs were also asked not to disburse more than 55 per cent of their SME loans to the trading sector in a single year. The central bank will not consider any loans exceeding the 55 per cent threshold as SME credit.
SME financing does not contribute much to banks’ profit but banks will have to concentrate more lending to small and medium enterprises which may grow as big business in future. But more such loans must not go to trading, the focus should be on productivity sector to produce new goods and create more jobs. In our view the central bank must strengthen monitoring to avoid fake loans under the SME cover.
Rise Of NPLs In SME Sector:
Almost everyone wanted the banks to make available more loans to the small and medium enterprises that are seen as keen drivers of the country’s economy. But the current state of loan situation involving banks and SMEs is quite confusing. Some banks have beefed up their SME-loan disbursement in recent years and many others are still lagging far behind. A few banks are found to be hyperactive as they have overshot their respective annual targets as disbursement of SME-loan is concerned. But what has alarmed many is the abnormal rise in the volume of non-performing loans (NPLs) in the SME sector in recent years.
Statistics made available in a paper presented at a seminar in Dhaka showed that the volume of NPLs in the SME sector had increased more than eightfold to Tk 220 billion between 2010 and 2016. In line with the performance of their overall loan operations, the rate of NPLs in areas of SME loans in the case of state-owned banks is very high – 40 per cent for commercial banks and 35 per cent for specialized ones. In case of a few private banks that have expanded their SME loan portfolio aggressively, the NPL situation is also pretty bad, if not critical like that of their public sector counterparts.
The developments surrounding SME loans have given rise to opposing views in the banking industry. Some people do strongly feel that SME financing has caused erosion in the banks’ profitability. But many senior bankers, who support the emergence of a strong SME sector for greater benefit of the national economy, are not ready to accept this proposition. The latter tend to feel that wrong selection of borrowers and failure to take appropriate measures for supervision and recovery of loans by the banks concerned are responsible for the rise in default rates in SME loan operations. That some banks are more interested in meeting SME loan disbursement targets than quality lending is evident from their reported aggressive lending. A total of 13 banks over short their annual SME loan disbursement targets in just six months, between January and June this year.
A couple of banks disbursed SME loans to the tune of over 200 per cent of their respective targets. Allegations have it that a section of banks are resorting to foul play to meet their SME loan targets and diverting funds to trade financing. Such diversion of fund, as many observers are of the view, is responsible for the rise in the NPL rate in the SME loans.
It is the job of the central bank to see that banks follow a standardized model in areas of SME loan disbursement and ensure their proper use through regular and effective supervision. Many banks shy away from SME loan operations because of high cost involved in their management and supervision. But that should not be the case. The saying, ‘small is beautiful’ will come out to be true in the case of SMEs if the banks finance the right kind of small entrepreneurs and help them overcome initial odds and grow smoothly. Most banks do not want to take the pains involved in accomplishing the latter part of the job and turn out to be mechanical.
Then again, there are also limits to banks’ role in doing these, as other government agencies or authorities bear also responsibility to address both economic and non-economic factors that continue to impede sustainable growth and development of the SMEs, including other enterprises. Notwithstanding this, banks on their part should put enough emphasis on both financing and supervising SME operation in order to facilitate emergence of a strong SME sector.
(To be continued)
