Plan to merge some state-run banks | 2017-09-07

Bad Loans, Capital Shortfall

Plan to merge some state-run banks

Jannatul Islam

7 September, 2017 12:00 AM printer

Plan to merge some state-run banks

The government is planning to merge some of the state-run banks as they are struggling with massive non-performing loans and capital shortfall.


Senior bankers and economists see the boards of directors of the state-owned banks as a barrier to good governance in the institutions as appointments to the boards are made mostly on political consideration.


They recommend strengthening the role of Bangladesh Bank as the main regulatory body of the banking sector since overlapping jurisdictions of the central bank and the finance ministry often create tangles.


According to Department of Financial Institutions (DFI) of Ministry of Finance, at least 20 loan defaulters account for one-third of the state banks’ default loans in the first half of 2017.


Finance Minister AMA Muhith had said the government might merge some banks which are experiencing capital shortfall caused mainly by a huge pile of default loans.  


Of the eight state-run banks, BASIC Bank and Bangladesh Development Bank have been struggling with a huge capital shortfall in recent years.


In a recent meeting, a former joint secretary of banking division proposed the finance minister to merge Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank as an agriculture-focused bank. He also suggested combining Basic bank and BDBL into a single entity.


The finance minister said the merger would happen by next year for bringing good governance in some state-run banks.


He said the relevent law will be amended as it doesn’t allow such merger.


Over the last four years, the government injected Tk 9,639 crore into the cash-starved state banks.


Another Tk 2,000 crore has been earmarked in this fiscal year’s budget for this purpose.


The capital adequacy ratio of the state-run commercial banks is 6.99 percent, which is far below the regulatory requirement of 10 percent.


The Finance Minister blamed the bankers for the increasing default loans, saying that they do not release funds to clients as per schedule, which in turn leads to the projects’ failure.


Regarding the ‘merger issue’ and the capital shortfall of the state-run banks, bankers and economists have pointed the finger to the boards of directors.


“The government has to give the ‘ultimate authority’ to Bangladesh Bank for bringing good governance to the banking sector, especially at state-run banks.


The parallel authority of the ministry and central bank in forming the boards and removing someone from the board is creating more problems,” an economist told the daily sun on condition of anonymity.


The economist also observed that there is no legal barrier to merge or reconstruct any financial institute as the central bank has been given the authority to do the needful for serving the national interest in the banking sector.


Referring to the ‘irregularities’ in the appointment of directors for state-run banks by the ministry, the economist said, “Many directors enter the governing body of the banks using political reference and serving their interest by forwarding big loans to their own people.”


As of June, the defaulters owed Tk 11,579 crore to Sonali, Janata, Agrani, Rupali, BASIC and Bangladesh Development Bank (BDBL). The amount is 33.48 percent of the lenders’ total default loans, according to the finance ministry data.


BDBL’s 52.5 percent default loans were held by the top 20 defaulters, followed by 51.3 percent for Rupali and 49 percent for Janata.


Regarding the merger issue of the state-run banks, Agrani Bank Chairman Zaid Bakht said, “The merger issue depends on the policy. The finance minister recently pointed out that the government will try to bring good governance in the state-owned banks by strengthening the policy.”