Against the backdrop of looting banks by former fascist government which made as many as ten banks ‘clinically dead’, ever-mounting liquidity crunch, provision shortfall, pricking NPL rise, erosion of depositors’ trust and assets worth of Tk 17-lakh crore laundered from the country
Abdul Hai Sarker, Chairman of the Bangladesh Association of Banks (BAB), discusses the banks’ malpractice of producing window-dressing reports, central bank’s impractical policy of a wait and see. To mitigate the unnerving current challenges in the financial sector, the veteran
entrepreneur who is also chairman of the Dhaka Bank, shared candidly his thoughts and tips necessary healing the wounds in an exclusive interview with Muhid Hasan of The New Nation.
The New Nation: How can the current liquidity crisis in the banking sector be resolved effectively?
Abdul Hai Sarker: To address the liquidity crisis sustainably, we need to explore both internal and external financing options. The situation is far more critical than it appears, and an immediate and mid-term strategy is essential to resolve it. Along with liquidity support from the central bank, it’s crucial to seek external funding from sources like the World Bank, Asian Development Bank (ADB), Islamic Development Bank (IDB), and other foreign investors.
The New Nation: How serious is the liquidity crisis?
Abdul Hai Sarker: The liquidity crisis has been worsening for the last two and a half years. Several banks, particularly Sharia-based ones, are increasingly dependent on the call money market and borrowing from the central bank to manage liquidity. On September 23, it was reported that the current account deficit of nine private banks exceeded Tk 18,000 crore. Earlier, National Bank, Islami Bank Bangladesh, and Social Islami Bank applied to Bangladesh Bank for a Tk 6,800 crore liquidity guarantee in the inter-bank money market for three months.
The New Nation: What other challenges do banks face?
Abdul Hai Sarker: Besides the liquidity crisis, the sector is grappling with increasing non-performing loans (NPLs), provision shortfalls, and a loss of depositor trust. The official figure for NPLs, reported at Tk 211,391 crore as of June 2024, significantly understates the problem. The real figure is more than double that, accounting for more than one-fourth of total loans disbursed. International standards typically cap acceptable default loans at 3%, but we are far beyond that.
The New Nation: What are the implications of this high level of NPLs?
Abdul Hai Sarker: The NPLs pose a grave risk to the banking sector. Provision shortfalls will worsen if we account for the real volume of defaulted loans. Banks are supposed to maintain provisions of 0.5% to 5% of their deposits, but this can rise to 20% to 100% depending on loan classifications. The more NPLs, the greater the strain on capital adequacy.
The New Nation: What are your thoughts on loans tied to large conglomerates like the S Alam Group?
Abdul Hai Sarker: Over Tk 1 lakh crore in loans have been issued by Sharia-based banks controlled by the S Alam Group. Many of these loans are expected to default in the coming months, further deepening the capital and provision deficits in the banking sector.
The New Nation: What about “willful defaulters”?
Abdul Hai Sarker: About 80% of current defaulters can be classified as “willful defaulters”—those who took out loans using crony mechanisms. These individuals exploit legal loopholes, making it difficult for banks to recover the money. However, I believe that we could easily recover 70% of defaulted loans with strengthened legal instruments and more robust oversight from the central bank.
The New Nation: How can legal issues surrounding defaulters be addressed?
Abdul Hai Sarker: The legal system needs reform to prevent defaulters from exploiting loopholes. For example, the sale of defaulting borrowers’ properties in money loan courts is often hindered. We need stronger legal measures to address these challenges.
The New Nation: Do you believe financial crimes are adequately addressed?
Abdul Hai Sarker: Those involved in financial crimes should face strict punishment. The integrity of the banking sector depends on accountability and transparency, and we must ensure that those who misuse the system are held responsible.
The New Nation: What is your view on the idea of bank mergers as a solution?
Abdul Hai Sarker: Mergers are not a relevant solution for the current volatility in the banking sector. While mergers are neither new nor uncommon, they should always be voluntary. Forced mergers will not solve the deeper structural problems we are facing in the sector.
The New Nation: Thank you for your insights, Mr. Sarker.
Abdul Hai Sarker: My pleasure.