After a long period of faulty medical treatment, when a patient is sent to the ICU, doctors then have a limited scope for any aggressive treatment, and the chance of recovery becomes faint. A similar situation has unfolded in the banking sector. Over many years of severe and continuous mismanagement, some banks have been pushed to a position from which recovery is almost impossible. A process has been launched to merge five banks out of the reportedly 14 that are financially weak.
This crisis in the banking sector did not happen in a day, nor did it begin after August 5, 2024. It is the result of longstanding governance failures that include a lack of internal controls, poor accountability and board-level interference that have undermined professionalism. Other factors that have contributed to the decline include the syphoning of funds, weak business conditions linked to the foreign currency crisis, and withdrawals from weak banks to stronger ones due to depositor panic over the last few years. Undue interference by the central bank, the impact of Covid-19 and other pressures have added to the strain. Political pressure has also played a role, with loan approvals and write-offs often influenced by politically connected groups rather than sound credit assessments.
Loan default culture is not new, but it has deteriorated alarmingly over the past two decades. Chronic non-performing loans (NPLs) caused by habitual defaulters and lenient enforcement of recovery laws remain major problems. Regulatory weaknesses, including inconsistent supervision, delayed interventions by the Bangladesh Bank and limited penalties for non-compliance, have compounded the crisis. Corruption and fraud, such as embezzlement, insider lending and falsified collateral, have come to the surface, damaging trust and eroding capital. Over-banking and weak risk management, with too many banks operating in a small market and aggressive lending without proper due diligence, cannot be ignored. Judicial delays and inefficient legal processes have slowed loan recovery, while weak bankruptcy systems have held back effective resolution. More recently, macroeconomic factors such as inflation, dollar shortages, liquidity pressures and declining confidence have contributed further to the problem.
Valuation and restructuring of capital, including fresh capital infusion, are essential elements of the current effort. Full implementation of IFRS 9 may not be feasible at the moment, but relevant BRPD circulars should be applied alongside the valuation of securities and collateral to determine a fair value for the banks. Provisions already made and interest suspense should also be taken into account.
There is an expectation that foreign investors may be approached for new funding. The question is why investors, foreign or local, would be interested when there is little prospect of a good rate of return or capital gain in the foreseeable future.
Conversion of deposits into share capital is one possible measure to ease liquidity pressure, but it requires further discussion. Such a move should be voluntary for depositors and may yield better results if the outlook for the merged entity is strong in the long run.
Penalising sponsors, directors and senior management, especially those who benefited from these episodes, is vital to restore public confidence. Banks have become distressed either through normal business failings or through deliberate and planned syphoning of funds. The creation of false loan accounts for this purpose is a criminal offence, and beneficiaries should face strict penalties.
Fraud examinations generally focus on three key questions: what the process lapses were, who approved and processed them, and who ultimately benefited. Action should be taken under existing laws and, if necessary, new laws should be introduced to protect the public interest.
Temporary government funding for restructured banks may be necessary, but public money must be safeguarded in the long term.
It is now important to see what reform or rehabilitation proposals come from the authorities working in this area.
The writer is a senior partner of Hoda Vasi Chowdhury & Co, and a past president of ICAB