Introduction to the Banking Crisis
The banking sector is facing a severe crisis, with declining income, rising expenses, and a facade of stability that hides its weaknesses. The most alarming issue is the sharp rise in non-performing loans, which increased from Tk 2.11 trillion in June last year to Tk 5.30 trillion this June. This represents a staggering Tk 3.19 trillion in new bad debt accumulated in just twelve months.
History of Banking Troubles
The problems in the banking sector have been brewing for a long time. Under the previous administration, banks were allowed to avoid recognizing bad debts through relaxed loan classification rules and concessions for loan rescheduling. Politically connected candidates who would have been barred for defaulting were allowed to regularize their loans on paper, bypassing disqualification rules. Even during financial crises, overdue loans were allowed to escape non-performing status through special measures that distorted the true picture.
Abuses in Sharia-Based Banks
The most egregious abuses have occurred in Sharia-based banks operating under Islamic principles. The boards of these banks were taken over by political actors, which led to politically motivated lending. Hundreds of billions of taka in loans were disbursed without proper procedures, and the borrowed funds were laundered abroad through manipulated LC transactions. Many bank employees were aware of these misdeeds but had to turn a blind eye to protect their jobs.
The True Extent of the Crisis
Banks as institutions are inherently unstable, taking deposits that can be withdrawn at any time while holding long-term, illiquid assets such as mortgages and business loans. This mismatch means that even well-managed institutions can be exposed if questionable practices creep into their operations. Following the recent upheaval, the true extent of non-performing loans has surfaced, with estimates suggesting they now account for over 24% of all loans in the system.
The Central Bank’s Response
The central bank is offering loan restructuring opportunities to 280 institutions, with another thousand applications awaiting decision. Some recipients of these opportunities are accused of past loan irregularities, which evokes memories of the country’s history with lenient rescheduling policies that shielded defaulters and concealed the true extent of bad loans. The central bank must heed the dangers of overextending support to chronic loan defaulters, as many of the existing bad loans were originally taken with the intent to swindle banks.
The Cost of Bailouts
The current interim administration has followed the same path as its predecessor, propping up struggling banks with generous liquidity support. Since last September, the total support extended to weak banks through money printing, guarantees, and special facilities has reportedly exceeded Tk 530 billion. Notably, five troubled banks that lacked conventional collateral even got loans backed by Demand Promissory (DP) notes, which is essentially creating money out of thin air.
The Rationale Behind Bailouts
The government is set to begin merging five weak banks, which are recipients of liquidity support, and providing them with fresh capital. This raises questions about the rationale behind pouring public money into keeping these failing banks afloat. Why persist with this costly lifeline for institutions that clearly can’t survive on their own? The central bank has admitted many times that political meddling ruined the sector, and attempting to solve the banks’ issues without creating mechanisms to block such interference would be like treating the symptoms rather than the disease.
Conclusion
In conclusion, the banking sector is facing a severe crisis, with a sharp rise in non-performing loans and a history of questionable practices. The central bank’s response, including loan restructuring opportunities and generous liquidity support, may provide temporary relief but does not address the underlying issues. The government must re-examine its approach to bailouts and consider the long-term consequences of propping up failing institutions. Ultimately, the goal should be to create a stable and sustainable banking sector that serves the needs of the economy and the people, rather than perpetuating a system that benefits only a select few.
