Why is the banking sector crisis so deep?

The crisis currently facing the Bangladesh banking sector is not simply a confluence of problems related solely to banking, monetary, financial, accounting or management aspects. The sector is a victim of political extortion and a rent-seeking culture. The irregularities in the remaining five institutions of the previous regime can be mainly attributed to the current situation of the banking sector. These institutions include: i) the Ministry of Finance; ii) capital market; iii) parliamentarians and legislators associated with banks; iv) top bank borrowers and bank directors; and finally v) financial justice.

Moral risks, such as taking out large loans and defaulting on them, were not limited to the banking sector. This culture of extorting money from people is an integral part of large companies, strongly supported by corrupt politicians in power. The crisis in the banking sector is therefore deep. The amount of loans outstanding as a percentage of total loans earned 12.56 percent in June 2024 from 8.96 percent in June 2022. At the end of September, the number of outstanding loans had increased to almost Tk 2.85 lakh crorewhich is 16.93 percent. total outstanding loans. In December 2023, the International Monetary Fund (IMF) estimated that the non-performing loan (NPL) rate was 25% of outstanding loans.

The tumultuous July-September quarter saw an unprecedented increase in outstanding loans of nearly Rs 74,000 crore, confirming that the sector is indeed in crisis, whether the government is downplaying it or not. The crisis was man-made because the default culture was largely intentional, with the previous regime indulging in the monetary benefits of corrupt politicians and money laundering tycoons who received general support for all their wrongdoings.

The share of delinquent loans rose from nine to 13 percent over the past two years, when GDP growth averaged around six percent, suggesting that the default culture was largely willful. Worryingly, the default rate shown in the data is the tip of the iceberg, as the definition of default was perversely loosened by a former finance minister from 2019 to 2024 and two central bank governors over the same period in order to energize the bank robber sector. This deepened the crisis.

Defaulters could have their loans as low as five percent adjusted to get rid of the “stigma” of default. The previous Awami League regime allowed many loose definitions allowing some notorious tycoons to participate in national elections and create flawed laws in their favor. There is another way to see that the default culture was intentional and was clearly not a macroeconomy-wide problem. The wide variation in NPL ratios across different owners reveals a history of how state-owned banks were exposed to higher degrees of plunder, while private or foreign banks were able to maintain much lower NPL ratios.

AND Bangladesh Bank Report shows that at the end of June 2021, NPL ratios were 3.9% in foreign and private banks, respectively. and 5.4 percent, and in state banks as much as 20.6 percent. The numbers are much higher than what we see here because these rates were calculated based on loose definitions of default. One thing is clear: the looting was state-sponsored for religious reasons and orchestrated with passion by ruling politicians. And that is why the crisis is difficult to reverse.

Corrupt politicians indulged three groups of culprits – tax evaders, loan defaulters and money launderers – who formed a diabolical triangle of cronyism and often belonged to the same group of robbers with deep ties to the previous regime. If you can show a loss on your income return through sleazy accounting art, you can be excused as a defaulter and can avoid paying taxes. However, you do not want to keep the fund in the country and therefore both tax evaders and defaulters turn out to be money launderers at the same time.

The current Governor of Bangladesh Bank, Dr. Ahsan H. Mansur, he said last month that over 15 years of the Awami League regime, $17 billion was laundered from the country; allegedly just one Chattogram family laundered $10 billion. He also said that Rs 4 lakh crore is currently de facto outstanding loans, which constitute 25 per cent of the total advances. And 2 lakh crore went to just a few families. This mafia group has looted the banking sector of Bangladesh, pushing it into an incurable crisis. Much to the frustration of the public, some of them became members of parliament and even ministers, and some became advisers to the former prime minister at ministerial level. Parliament has turned into a paradise for financial hooligans. The crisis will never end if people see the return of the same political practice of cultivating the support of tycoons in exchange for allowing them to plunder the banking sector.

More family banks were allowed to develop in the name of increasing competition, while the Chattogram-based family was encouraged to outshine as many as seven banks operating alone under the services of intelligence agencies when needed. Any charges or court cases against the family were deemed “unfounded” as a result of influencing the justice system. Most default cases have been mired in a quagmire of court delays over the years, worsening the fortunes of loan collections.

Thus, regime-sponsored immorality designed to protect or coddle financial gangsters not only undermined the future of the banking sector, but also made the wound too difficult to heal. Since the crisis in the banking sector is not just an internal problem, we need to correct these five institutions or their related regulations before we can expect a healthy recovery of the sector. Reforms need to address these areas before encouraging the sector to progress smoothly.

The text draws largely from the keynote address delivered at the BDI International Conference on Bangladesh, held at the University of California, Berkeley on November 8–9, 2024.

Doctor Birupaksha Paul is a professor of economics at the State University of New York in Cortland, USA.

The views expressed in this article are those of the author.

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