Elimination of the Bangladesh Bank-FID (Financial Institution Division) diarchy in the banking sector is among major reforms being suggested by experts for tidying the industry as a remake of the law is underway.
In this context, economists and bankers unanimously say banks' reputation, profitability, and some key indicators, including nonperforming loans (NPLs), are the main issues to check while assessing banks' health in times of risks.
In talks with The Financial Express they said the central bank is the main custodian of the banking industry to check its overall health. They suggested immediate amendment of the Bank Company Act 1991 for better regulation in the industry.
The economists and bankers feel that the central bank's governor should be one who has adequate understanding both of banking and economy.
On government intervention in the policymaking by the central bank, the experts called for abolishing the financial institutions division (FID) at the Ministry of Finance, as the central bank is autonomous and it has the manpower for performing independently.
They are all for the formation of a banking commission with adequate terms of reference.
Rewriting the code of conduct of the central bank is also stressed to stop some of the central bankers from taking "undue benefit" from private banks in exchange for favour.
Dr Ahsan H. Mansur, executive director at the Policy Research Institute of Bangladesh (PRI), finds a confidence gap created through misdealing in some cases in the banking sector. "Clients should look at the bank's reputation and its profitability before making transactions with it," he said.
Dr Mansur likens depositing money in the banking system to making investment in the capital market. "How do people invest in the market? They do it cautiously by studying or assessing details of the listed companies. If anyone invests in a bad company, he loses money."
On tighter regulatory monitoring to keep banking operations on track he said: "The main task of the central bank - Bangladesh Bank-is to keep banking health sound and vibrant through inspection and regulation. When it is lapsed, then banks become weaker financially."
Bangladesh Securities and Exchange Commission (BSEC), the governing body of security market in the country, is also a regulator. The central bank of Bangladesh has much more responsibility than the BSEC to ensure proper health of the banking industry.
"Globally, the banking industry is the highly regulated one. Here in Bangladesh the central bank has not been doing its due role or cannot enforce its due role in terms of monitoring and inspecting …, the economist says, adding that there is no denying that amending the act is imperative.
Currently, the definitions of wilful defaulter and non-wilful defaulter, and merger and acquisition are being considered to be interpolated into the act. And Dr Mansur endorses the changes.
He points out that through the previous amendments the act has given unlimited tenure for members of a family on the board. He stressed measures for improving governance of the industry.
Dr Mansur feels the urgency of a banking commission to be in place with a competent person as its head.
"The formation of such commission with bureaucrats or some people who are incompetent will do nothing for the industry."
He opposed the formation of panel of governors, as many developed and some developing economies do, in Bangladesh. The government will pick its people as the governor so the panel will do nothing.
"In Bangladesh, even in India, such practice of picking governor is there. Government selects its governor," the policy researcher observed.
The capacity for running administration is also another issue to be considered while choosing for the position of Governor of the Bangladesh Bank, apart from knowledge of banking and economy.
Dr Toufic Ahmad Choudhury, former director-general of the Bangladesh Institute of Bank Management or BIBM, a central-bank subsidiary, told the FE that the health of the banking industry depends on some internationally recognized indicators. "Capital maintenance and liquidity are two core indicators."
Dr Choudhury, now DG at the Bangladesh Academy for Securities Market (BASM), an academic wing of the BSEC, mentioned that quality management is another indicator for the commercial banks. "The first line of defence is quality management."
He was critical of how classified loans can be regular after rescheduling. "Classified is always classified unless fully repaid. But here in Bangladesh after payment of one instalment, such loan becomes regular and allows them to borrow from others."
The experts are, however, divided over the issue of banking commission which is many times advocated by thinks-tanks and others. Finance Minister AHM Mustafa Kamal also pledged in his budget speech earlier but now refrained from commenting on the matter.
Dr Choudhury unequivocally stands for this institution. "This is needed on an urgent and immediate basis," he told the FE, adding that Bangladesh makes a move to do something after the occurring of accidents.
When asked, the banking expert also said one who is equipped with the knowledge of macro-economy as well some banking knowledge should grace the position of central-bank governor. Also the capability of administering the industry efficiently is also important.
Incumbent Governor Mr. Abdur Rouf Talukder is a bureaucrat. So far, the country has seen 12 governors, and seven of them are bureaucrats. The first Governor, A.N. Hamidullah, and second A.K.N. Ahmed were bankers. Mr. Hamidullah worked as managing director at the Eastern Banking Corporation which is now Uttara Bank and Mr. Ahmed was executive director at the State Bank of Pakistan, the central bank of Pakistan.
According to the Bangladesh Bank (Amendment) Act 2020, the government appoints a governor for a term of four years and the governor can serve until the age of 67.
BASM DG Dr Choudhury said, "The Governor should be one who is purely an economist."
Dr M. Masrur Reaz, chairman of the Policy Exchange of Bangladesh, told the FE that statistics relating to banks' health are very much important while assessing banking health. People keep their hard-earned money in banks and that's because of confidence. Confidence erodes when the risk indicators downgrade.
"Non-performing loans and other risk-related indicators are very much important to assess a bank's health," he said.
Dr Masrur, who had worked as economist at the private-sector arm of the World Bank, said the financial statements should be prepared keeping in mind its "quality". He stressed proper and due role of the FRC (Financial Reporting Council).
Dr Masrur said audit reports both for banks and financial institutions should be prepared properly. "Such financial statements should be on regular basis and be published on their respective websites."
He mentioned that there are many international institutions, for example, the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB) who conduct investigative studies on the financial institutions.
He recalled in the past such investigations were made in Bangladesh but at in the recent period, there is no such investigation.
"We can allow such institutions to check the health of the banking industry," Dr Masrur said.
He said commission should be in place if it works independently. "If a commission is formed for eyewash, should not be formed."
There is a need for clear-cut terms of reference and how to execute those before the formation of the commission. "We have seen many commissions or committees in the past, we got just reports. No action was taken in the past," Dr Masrur said.
He suggests the governor should have adequate qualifications on economic management. "Actually I mean applied economic management for being Governor."
The governor should know how to formulate effective and efficient policies for the economy and the money market.
Stressing a recast of the code of conduct for central bankers, he said if someone dictates who should be given a loan is "very much unfortunate" for the industry.
Especially the state-owned banks are involved in handing out such directives, leading to higher NPLs there.
Dr Zahid Hussain, former lead economist at the World Bank Dhaka office, thinks banks' reputation and profitability are very much important while assessing their health. He said clients should enquire about the members of the board of banks before making deposit or transaction.
"Monitoring some basic operating metrics of a bank can give you a fair idea of its health-ranking, and signs of troubles."
Some experts and bankers said gross non-performing assets (NPAs) indicate how much of a bank's loans are in danger of not being repaid. If interest is not received for three months, a loan turns into NPA.
A very high gross NPA ratio means the bank's asset quality is in very poor shape, Dr Hussain said. The provisioning-coverage ratio is also important.
Banker Syed Mahbubur Rahman thinks governance issues are important for measuring banking health. People can know better by studying the bank in the market.
"How a bank is performing and such types of opinions are available in the market. So the market can give a picture of the health of the banks," says Mr. Rahman, who is the managing director and CEO of Mutual Trust Bank (MTB).
When asked about the amendments of the Banking Company Act of 1991 for better regulation of the industry, many of the reputed analysts said the amendments were still on the anvil and so the time is not ripe to make comment.
The Financial Institutions Division of the Ministry of Finance has made the move to amend the vital financial-market act. It has almost finalized the remake of the law.
MTB CEO Mr. Rahman said political commitment is a must for the formation and execution of the recommendations of the commission. "Commission should be credible and political commitment on its part is a must".
The senior banker also feels that banking knowledge and familiarity with the macro-economy are perquisites to be governor of a central bank.
An allegation is in the air that central bankers are taking undue benefits from the private commercial banks in terms of favouring them.
The economists and bankers told the FE that there are some allegations that are true.
On this score, banker Mr. Rahman said accountability should be in place for the central bankers.
He made a point here that many bankers had so far been punished but such examples were comparatively lower for the central bankers.
The analysts said state-owned banks are usually regulated by the FID (Financial Institutions Divisions of the Ministry of Finance) so there are "two regulators on the financial market".
