Policy Research Institute - PRI Bangladesh

The Policy Research Institute of Bangladesh (PRI) is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of the Bangladesh economy, its key policy challenges, domestically, and in a rapidly integrating global marketplace.

BB autonomy should be on top of reforms: PRI

News Published: Sunday, Apr 28, 2013

BB autonomy should be on top of reforms: PRI
'Large non-performing loans in public banks pose fiscal risks'

Published : Sunday, 28 April 2013

FE_image_textFE Report

The Policy Research Institute (PRI), a leading think-tank, Saturday said autonomy of the Bangladesh Bank (BB) should remain on top of reforms.

The suggestion came from a keynote paper on Banking Sector in Bangladesh: Progress, Challenges and Agenda for Reforms, prepared by PRI vice chairman Dr Sadiq Ahmed.

The PRI said the autonomy for the central bank is critical for sound management of monetary policy, staying away from government-directed credits, ensuring sound supervision of banks and prudence in granting new bank licenses.

Dr Mashiur Rahman, Advisor to the Prime Minister on Economic Affairs, attended the function as chief guest.

The PRI organised the programme at its office to unveil its fourth quarterly policy briefs on the Bangladesh economy which was presided over by Chairman of Centre for Policy Dialogue (CPD) Professor Rehman Sobhan.

Former BB Governor Dr Salehuddin Ahmed, Director General of Bangladesh Institute of Development Studies Mustafa K Mujeri, BB Chief Economist Dr Hassan Zaman and Managing Director of AIMS of Bangladesh Yawer Sayeed were discussants.

However, the keynote paper said a number of serious concerns remain in the country's banking sector including large non-performing loans in public banks.

"Large non-performing loans in public banks pose serious fiscal risks," said Mr Sadiq.

PRI chairman Dr Zaidi Sattar, however, presented the paper at the programme in absence of the author.

The paper noted inadequate reporting standards substantially understate the portfolio problems of public banks.

It observed that public banks are not within the purview of the supervision of the central bank.

The policy brief said there are important issues relating to the corporate governance of banks.

It said the capacity and flexibility of the central bank to supervise the banking sector and implement prudential measures are often constrained by political interventions.

It said public banks must be brought under the regulatory supervision of the central bank and should be required to comply with all prudential norms, including certification of the boards and senior management as per the fit and proper test.

It said the government must understand that it cannot both be a producer of banking services and also a regulator of these services.

The PRI said over the longer term, the government should also re-assess whether it really needs be in the business of providing banking services.

It said there is plenty of international evidence that publicly-owned banks do not perform well in an environment of weak governance.

"The first best option is to privatise the state-owned banks," it noted.

In another paper on Post-correction Stock Market: Market Development and Policy Issues, Dr Ahsan H Mansur underscored the need for upgrading accounting and auditing standards to enhance market confidence.

He called for establishing an Independent Financial Reporting Council to adopt and monitor international accounting and auditing standards as well as license accountants and auditors.

Mr Mansur said developing an organised investors' base through a robust mutual fund industry will require going beyond what has been done so far and will require monitoring how the sector responds to the steps already taken.

He argued for completing demutualisation of stock exchanges to segregate ownerships, management and trading rights of members.

He said improved governance structure will help develop the market and attract new investors.

He said the government should issue treasury bills and bonds at market rates and thereby develop a liquid market.

Mr Mansur, in his paper, said the government should stop the annual ritual of allowing black money into the stock market.

"Stock market should not be painted as the playing ground for legalising illegally earned money," Mr Mansur said.

While speaking as the chief guest Dr Mashiur Rahman said Bangladesh Bank is independent in terms of its core functions. He said the government does not intervene in its core functions.

He said: "I'm not sure whether issuance of new bank license is a core function of the central bank or not."

He said issuing such licences is the job of the state authorities in the USA.

He said this is (issuing licences) not the core function of the central bank.

Mr Mashiur said approving or removing directors in public banks is a complicated issue.

While responding to a demand for forming a special tribunal for corporate governance issues, he said local lawyers are much conversant with human rights law and criminal laws. "They are not well conversant with corporate laws. Even most of them have little knowledge about the corporate law, accounting and basic economics."

Mr Mashiur said public banks mostly invest in industries while the private commercial and foreign banks are involved in providing services in export-imports and normal trades.

Dr Osman Faruk, former Education Minister, said there is a need for effective and real autonomy of the central bank.

Dr Faruk said: "There is a need for empowering the central bank more to regulate the banking sector."

"Autonomy must be free from the purview of the Ministry of Finance," he said.

He advocated for upgrading the status of the Governor saying that the post should be upgraded to the rank and status of a minister."

"We need a qualified Governor with a status of not less than a minister to prepare independent monetary and fiscal policies."

"Such a status of Governor will help supervise banks efficiently," said Dr Faruk, who is also an advisor to opposition leader Begum Khaleda Zia.

Dr Faruk was critical of the performance of the state-owned banks. "Do we really need such type of state-owned banks in our country?"

On stock market, he said: "The manipulators are yet to be punished."

Former Finance Minister M Syeduzzaman said the BB should probe the banking reports with noticeably higher non-performing loans (NPLS).

Mr Syeduzzaman was critical of the rating agencies. "There are many cases of inflated ratings …."

He observed that there are inconsistencies in regulations between the central bank and Bangladesh Securities and Exchange Commission. This leads to poor performance in the stock market.

Former Bangladesh Bank Governor Dr Salehuddin Ahmed opposed the privatisation of public banks.

He said theoretically all norms are quite okay. He said: "There is a problem of implementation of those norms."

"There is a weak governance in the banking sector," he noted.

" I think supervision and governance failed, leading to the current state of banking sector."

Mr Salehuddin stressed the need for efficiency. "Efficiency is the most important issue."

The former central bank chief, however, said the BB enjoys the highest independence among all regulators in the country.

He said there is still a lack of competitiveness among the banks.

He also said Bangladesh has not yet developed its liquidity management.

BIDS Director General Mustafa K Mujeri said an uneven development has taken place in the financial sector.

Quoting a research finding, Mr Mujeri said 77 per cent population has access to the financial sector.

"Of this, only 33 per cent population has access to the formal financial banking sector. The remaining segment has access to micro financial institutions," he added.

He observed there is a discrepancy in providing banking services to the poor and the non-poor people.

"The poor are largely excluded from the banking services," Mr Mujeri added.

He noted that there is a lack of ethics in the banking sector in the country.

BB Chief Economist Hassan Zaman said the banking services have improved much in the last 15 years.

He said the non-performing loans (NPLs) have now stood at 10 per cent (provisional figures).

Mr Zaman said the BB enjoys independence over preparing and executing its monetary policy and exchange rates.

Mr Yawer Sayeed said buyers of stocks need trust on trade.

"Our price/earning ratio is too low now, but buyers are not investing and this is simply because of lack of trust or confidence," Mr Sayeed added.

Mr Sayeed noted that a group of manipulators is still active in the capital market who want to manipulate the market artificially during the last 15/20 minutes of each trading.