It is a distress signal about the state of the country's banking sector. That is the impression that one does invariably get from the recent reports in a large segment of the media. The extent of objectivity of all such reports -- in terms of both conceptual and contextual aspects of all the relevant issues -- is however not beyond question. But this does in no way dispute the fact that the country's overall banking sector is in a poor shape. The recent directives by the monetary watchdog - the central bank - to the banks to take firm measures for controlling the unabated growth of their non-performing loans (NPLs), do largely corroborate this. The banking sector, embracing both state-owned entities and private ones, thus remains risk-prone, particularly on account of their distressed assets. This is certainly a worrisome situation, though the performance of banks in some other South Asian economies, particularly that of India, the biggest one in the region, is no better, if not worse, than that of Bangladesh. Yet it provides no good reason to be complacent. Each country must ensure the functioning of its banking sector on a sound footing. This can help leverage its economic growth at an accelerated pace, with banks playing their role as efficient intermediaries in the process of development.
Viewed from this perspective, the banks in Bangladesh that are now hamstrung because of a growing volume of NPLs, do need to undergo a process of rigorous scrutiny. Only then their ailment can be properly diagnosed. Here the efforts of the banks will have to be guided well by the central bank that should look at their problems, more from a pragmatic, case-to-case specific angle than from any foolhardy, inflexible theoretical or textbook-type approach. This guidance must also be backed by fool-proof monitoring, inspection, vigilance and evaluation mechanisms, being free from all sorts of extraneous considerations and influence-peddling by the vested interests. Otherwise, the very purpose of the central bank's watchdog role will be compromised. Skill, quality, competence and, above all, integrity of its relevant personnel are matters of prime importance here.
Furthermore, the respective board of directors of each individual bank has to be much more pro-active about giving policy guidelines and decisions on all matters of consequence to the management personnel. The bank executives also need to perform their best through exercise of due diligence and unceasing pursuit of the norms and practices of banking under a well-functioning system of delegated authorities and responsibilities. The boards of directors of banks are not meant to choose or select individual clients directly to lend out loans or credits and to decide about what amount of money to be given to such clients under normal circumstances. They are neither expected to exercise any sort of overt or covert clout over day-to-day operational activities of the banks.
All such things, as noted above, are already laid out clearly. But these are easier said than done or practised. There lies the root of the problem about the swelling level of NPLs of the banks. That is precisely the reason why the obvious facts are recounted here. Banks or, to be exact, bankers must identify their clients, going by their track-record and taking overall borrowings of the latter from the banking system as well as their performance about loan servicing, into consideration.
Furthermore, another critical aspect about loan operations merits attention here. Such operations involve not only sanctioning or disbursements of loans but also monitoring the uses of funds and loan servicing as soon as it becomes due. This is all the more important, considering the fact that the NPLs now continue to rise, despite the cuts in lending rates. This only shows that loan repayment or servicing has little connection, in the given particular context of Bangladesh, with lending rate. This runs counter to arguments by different quarters about high lending rate being the prime factor for inability of borrowers to service their credits.
Two more issues -- heavy concentration of loans among a very small number of business groups and also in too few areas as well as the growing practice of buying of assets of large 'borrowers' by one bank from another -- provide strong causes for concerns so far as the growth of NPLs is concerned. There must be a holistic approach to deal with this moot problem facing the banking sector. Otherwise, there will hardly be any change in the situation in the foreseeable future.
