Too many banks crowd the economy

Too many banks crowd the economy

Bangladesh economy is perhaps having more banks than it needs. Some banks have already run out of their capital. They lost their capital owing to bad loans. Of the capital-deficient banks, some asked for capital infusion from the government. And to the utter dissatisfaction of the taxpayers, the government provided them with fresh capital. But the situation in these banks hardly shows any improvement; rather their NPLs (non-performing loans) are found to be increasing.

The irony is that, the government is the owner of most of the capital-deficient banks but did not take any serious step to bring appropriate changes to the management of the banks. Not a single year passes without an increase in the non-performing loans (NPL) of these banks. But the managements of these banks claime that they are managing the banks well! Had the state-owned banks belonged to the private sector, these banks would have gone red long time ago. More alarmingly, the disease of bad loan has spread to some of the private banks. Some private banks are also on the verge of collapse; they are still distributing profits among the shareholders only with special permission from the Bangladesh Bank, in most cases stock dividends.

The government allowed nine new banks in 2013. Financial experts criticised the move. Of those nine banks, two faced serious capital shortages soon after launching. Their capital, as usual, was found to be eaten up by bad loans. There is little prospect of a turnaround for these two banks. The Bangladesh Bank allowed them more than usual time for improvement, and has now asked state-owned banks to supply one of them with capital.

The business of banks is based on the trust of depositors and other stakeholders. When a bank gets stuck with bad loans, it also faces liquidity shortage, and then the stakeholders' trust is eroded further. In such a situation, the bank finds no other option but to close down its business. But in Bangladesh, banks have found an easy saviour in the form of Bangladesh Bank or the government itself.

Under such circumstances, nobody with a sane mind and proper knowledge of banking and finance will support the entry of any new bank in the economy. But, unfortunately, the government is said to have taken a decision to permit three more banks. This time also, as was the case in 2013, the government says that it is going to take such a decision on political consideration. Nowhere in the world are businesses like banking permitted on political considerations; but it happens here in Bangladesh! Also, some banks find it easy to ask for fresh capital from the government when they go red. The problem in the economy is not the shortage of banks, but just the opposite. Too many banks are competing for the same business, and some banks are forgetting cost-benefit of such sourcing in doing business.

Some people, who theoretically are also the owners of banks, are using these banks as cash-cows for making their own fortunes.  The government can also ask the aspirants for new banks to buy the non-performing banks. Mergers & acquisitions are common in other economies, but here in Bangladesh, they seldom happen. Even if the government still wants to permit three more banks, it should ask for more equity capital from sponsors of the new banks so that the owners behave responsibly.

Also, a better way of handling the non-performing banks is to ask them to merge with the performing banks. Unless the sponsors of the banks are made to pay for their failures by the Bangladesh Bank, we see no hope of the banking industry in Bangladesh adhering to normal rules of business. At present some people, including the sponsors of the banks, are using the banking industry to siphon off people's money in a very clever way. They give out money in the name of doing business through credits, but they do not bring back the loaned-out money to the banks. When banks lose capital, they ask for the same from the government who also obliges them! Nowhere in the world is banking done in this way!

Abu Ahmed is Professor of Economics, University of Dhaka.

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