Wahidul Islam and Muhid Hasan :
Delays in liquidity support, driven by policy confusion within Bangladesh Bank, have worsened the already dire situation of the country’s banking sector, particularly for weak institutions.
The central bank’s procrastination in responding to requests for financial injections, submitted by ailing banks last month, has left these banks unable to fulfill even minimal withdrawal requests, such as Tk 5000 for depositors. This has resulted in growing tensions between customers and bankers.
SCUFFLE AT FIRST SECURITY ISLAMI BANK (FSIBL)
Tensions reached a boiling point on Wednesday at the Dilkusha branch of First Security Islami Bank PLC (FSIBL), a Shariah-based lender, when a cash shortage led to a scuffle between customers and employees.
The confrontation, reportedly fueled by frustration over the cash crisis, was diffused through the intervention of senior bank officials and cooperative customers.
Though no major injuries were reported, one customer, Tabassum Hussain Tanuza, a dental surgeon, alleged that she was physically assaulted by bank staff while trying to mediate between another customer and bank employees.
LATE LIQUIDITY SUPPORT FOR STRUGGLING BANKS
In an attempt to stabilize the sector, on Wednesday the five banks – City Bank PLC, Mutual Trust Bank PLC (MTBL), Dutch-Bangla Bank PLC, Bengal Commercial Bank Ltd, and Eastern Bank PLC- have been approved to provide a total of Tk945 liquidity support to four weak banks – First Security Islami Bank, Social Islami Bank PLC, National Bank Ltd and Global Islami Bank PLC.
On September 22, Bangladesh Bank introduced a special initiative encouraging stronger banks to offer limited-period loans to their struggling peers as part of a deposit placement strategy. Although participation in the scheme is voluntary, the central bank’s guarantee to repay the loans has incentivized stronger banks to participate in this much-needed liquidity support.
According to the latest data of the Bangladesh Bank, the current account deficit of nine private sector banks in the country has exceeded Tk 18,000 crore.
Of the banks, National Bank has a current account deficit of over Tk 2,342 crore, Fast SecurityIslami Bank Tk 7,269 crore, Social Islami Bank Tk 3,394 crore, Union Bank Tk 2,209 crore,Commerce Bank Tk 380 crore, Global Islami Bank Tk 39 crore, Islami Bank Tk 2,201 crore,Padma Bank Tk 234 crore and ICB Islami Bank Tk 95 crore.
A DECADE OF MISMANAGEMENT ERODES THE BANKING SECTOR
The deep-rooted problems plaguing Bangladesh’s banking sector are primarily due to years of mismanagement, cronyism, and embezzlement. These issues have created a fragile sector burdened by provision shortfalls, current account deficits, and an alarming rise in non-performing loans (NPLs).
Under the previous Sheikh Hasina-led government, the banking sector was heavily exploited by a small group of financial oligarchs, contributing to its current collapse.
Experts said that several banks, once thriving, are now considered “clinically dead” after being taken over by crony capitalists.
One notable example is the deterioration of Islamic banks after the ownership change of Islamic Bank in December 2016. Before the change, Shariah-based banks had excess liquidity of Tk 10,112 crore, but after the takeover, these banks reported a liquidity shortfall of Tk 2,218 crore by January 2023.
The extent of damage done by the past regime to the banking sector is so deep that even initiating some steps banking industry’s frailties still continue, they added.
PROVISION SHORTFALL AND RISING NPLS
The damage to the banking sector runs deep, with ten banks reporting a provision shortfall of Tk 31,549 crore by June 2024, according to Bangladesh Bank. This includes both state-owned and private banks such as Agrani Bank, Bangladesh Development Bank Ltd (BDBL), BASIC Bank, Rupali Bank, National Bank, Dhaka Bank, and others.
The overall provision requirement for the banking sector now exceeds Tk 1.14 lakh crore. Banks are required to set aside a portion of their operating profits as provisions—ranging from 0.5 percent to 5 percent for general loans, 20 percent for substandard loans, 50 percent for doubtful loans, and 100 percent against bad loans.
Compounding this issue is the surge in NPLs, which have increased tenfold in the last 15 years, reaching a record high of Tk 211,391 crore in June 2024. In 2009, when the Awami League first won power, NPLs stood at just Tk 22,000 crore. Today, they account for 12.56 percent of all outstanding loans, the highest level in Bangladesh’s banking history.
The burden of classified loans is particularly heavy on state-owned banks, where NPLs constitute 32.77 percent of outstanding loans. Specialized banks report an NPL rate of 13.11 percent , private commercial banks 7.94 percent , and foreign banks 4.74 percent.
REAL DEFAULT FIGURES MUCH HIGHER
Prominent economist and academician Professor Muinul Islam has challenged the official NPL data, suggesting that actual defaulted loans exceed Tk 5 lakh crore. According to Islam, nearly half of these loans are tied up in legal battles, preventing them from being classified as defaults on bank balance sheets.
CENTRAL BANK’S TRADE-OFF BETWEEN TAMING INFLATION AND QUICK STABILITY
In the face of this ongoing crisis regarding liquidity shortage , Bangladesh Bank Governor Ahsan H Mansur has ruled out printing money or selling foreign reserves to solve the financial sector’s problems. He stated that if the money supply doubles, prices will eventually double as well. This relationship exists because rising aggregate demand is a result of increased money supply.
Meanwhile, general inflation in the country is still hovering around over 9 percent, reflecting persistent high prices since March 2023.
Correspondingly, food inflation is still above 10 percent. Although it has come down from the previous month.
To tame inflation, the central bank is focused on redistributing funds from solvent banks to those in need rejecting the idea of injecting the fresh money in the market.
Mansur observed that using printed money to keep struggling banks afloat would not lead to a sustainable solution to the crisis.
The central bank under the previous regime had provided more than Tk 14,000 crore to six banks controlled by S Alam Group by generating money.
Regarding inflation, Mansur stated that the current monetary policy was effective and would be tightened further, albeit moderately. He hoped that inflation would go down over the next seven to eight months, eventually falling to 5-6 per cent.
However, critics argue that the central bank’s “wait-and-see” approach is worsening the situation. Abdul Awal Mintoo, prominent businessman and newly installed chairman of National Bank Limited (NBL), emphasized that while loan guarantees are helpful, they are insufficient to resolve the deepening crisis. Mintoo suggests that liquidity support of at least Tk 1,000 crore per struggling bank is necessary to stabilize the sector.
WHAT EXPERT OPINES
Dr. Zahid Hussain, who served as a Lead Economist in the Macro, Trade and Investment Global Practice of the World Bank, trashed the suggestion of printing money to inject in the weak banks and termed it ‘laughable’.
He said, “He (Mintoo) can suggest Bangladesh Bank but he can’t dictate what should be the policy regarding liquidity support.”
“Because printing money has its set consequences and if the policy of printing money is adopted, his bank (NBL) will also suffer,” he opined.
The economist supported the stance of the BB as the process of giving money to weak banks taking loan from strong ones has a multi-tier accountability because the central bank works here as a guarantor in between the lender and the borrower banks.