Caught in a black hole, Bangladesh's banking sector is grappling with a staggering Tk 6,75,000 crore discrepancy —enough to fund 13.5 Dhaka Metro systems or 22.5 Padma Bridges, reflecting dire financial mismanagement.
White Paper Committee on the State of Bangladesh Economy, led by Dr Debapriya Bhattacharya, revealed the shocking findings about the country’s economy during a press conference at the NEC conference room in the capital on Monday.
It says the interim government has inherited a deeply distressed financial sector, particularly the banks and stock markets, which are fundamentally undercapitalised and lack public trust.
The White Paper revealed how the banking sector, once a cornerstone of Bangladesh’s development, is now plagued by loan defaults, fraud, scams, and unethical practices. Policy reversals, regulatory capture, and financial repression have eroded safeguards, allowing cronyism to flourish.
Scheduled banks, the backbone of Bangladesh’s financial intermediation, reported total assets of Tk 25,462.60 billion by the end of June 2024 (47% of GDP). Loans and advances constitute 66% of these assets, while the rest are allocated to government securities and cash holdings.
Total deposits, excluding inter-bank deposits, reached Tk 18,412.38 billion, equivalent to 34% of GDP.
White Paper prepared through inclusive, consultative process: Debapriya
Private credit growth has played an increasingly critical role, with its coefficient to GDP growth nearly doubling between 2001 and 2019. Financial deepening measures, such as broad money-to-GDP and private credit-to-GDP ratios, have surged, supporting private investment, foreign trade, and GDP per capita growth.
A flexible, market-based interest rate regime introduced in the early 1990s initially delivered promising results.
However, progress faltered over the past decade. The correlation between credit impulse and real economic activity weakened, indicating increased resource misallocation.
Abrupt and ad hoc financial repression policies since the mid-2010s created regulatory uncertainty. Directed credit expansion, followed by targeted regulatory easing and a 9% lending rate cap imposed in April 2020, further compounded the crisis.
The central bank’s shift to a de jure market-determined system in May 2024, following a brief experiment with a crawling interest rate regime, has proved largely symbolic. Moral suasion kept retail rates artificially low, and real lending and policy rates have remained negative for an extended period, the white paper findings said.
Solvency and Liquidity Challenges
The banking industry faces significant solvency and liquidity challenges. The capital adequacy ratio stood at 10.64% in June 2024, barely exceeding the regulatory minimum. State-owned banks (SOBs), specialised development banks (SDBs), and several private commercial banks (PCBs) remain highly vulnerable.
White Paper: Debapriya focuses on 2-year economic plan
The aggregate capital conservation buffer (CCB) also falls short of requirements, said the findinds.
Recognised non-performing loans (NPLs) surged to over 12% by June 2024, with SOBs and Islamic PCBs being the most affected. Liquidity across the sector has declined, with Islamic PCBs experiencing acute shortfalls. Several private banks operate as “zombie” institutions, heavily window-dressing their net worth and liquidity.
The Depth of Distress
Distressed assets, including recognised NPLs, rescheduled loans, restructured loans, written-off loans, special mention accounts, and loans under court stay orders, now exceed Tk 6.75 trillion. This highlights the severity of the crisis and the system’s inadequate provisioning to absorb such losses.
Non-bank financial institutions (NBFIs) face similar issues, with high-profile scandals involving institutions like People’s Leasing and Financial Services and International Leasing and Financial Services.
The banking sector’s black hole amounted to Tk 6,75,000 crores at the end of FY24. This figure is equivalent to the cost of constructing 13.5 Dhaka Metro systems or 22.5 Padma Bridges. The crisis cannot be attributed to a few bad actors or idiosyncratic factors alone.
A fragmented regulatory system has provided multiple avenues for wrongdoing. The provisioning shortfall stood at a mere Tk 19,261 crores at the end of June 2024, far below what is required to address the recognised bad loans (BLs) of Tk 1,67,889 crores.
Stock Market Turmoil
The same heavyweights have demolished confidence in the share market. Market rigging is endemic. Several powerful investors and institutions artificially inflate share prices through a series of trades violating securities laws.
The book-building process is manipulated to the extent that it no longer effectively determines the true valuation of a company’s shares. Anomalies in IPO valuations (mostly underpricing) give sponsors an upper hand over general investors in the secondary market.
Trillions of takas have been embezzled from the stock market through fraud, manipulation, placement shares, and deceit in the IPO process. A major manipulation network involving influential entrepreneurs, issue managers, auditors, and a certain class of investors has emerged.
Tk trillions embezzled from stock market alone: White Paper
Stock market intermediaries suffered bankruptcy with negative equity of Tk 13,000 crores. Of this, merchant bankers accounted for Tk 7,000 crores, and brokerage houses accounted for Tk 6,000 crores.
Regulatory Failures and Malpractices
Collusion between insiders at Bangladesh Bank and influential outsiders has compromised regulatory safeguards. The Bank Company (Amendment) Act 2023 weakened corporate governance standards, enabling related-party lending. Lax enforcement and politicised licensing processes have exacerbated the situation.
Embezzlement and fraud have proliferated, with powerful groups siphoning off large sums and directors engaging in extensive related-party lending.
Deep Determinants of Stress
The growth of NPLs in sectors like manufacturing, RMG, textiles, shipbuilding, and shipbreaking reflects loan concentration and the dominance of specific business interests. Regulatory capture and weakened safeguards have enabled malpractices, undermining the system’s integrity.
The stock market has also suffered from manipulation, market rigging, and fraudulent IPO processes, inflicting significant losses on intermediaries.
A Dhaka Consensus
A broad consensus exists on the dire state of the banking system, which suffers from undercapitalisation, illiquidity, and widespread malfeasance. The crisis stems from economic factors, regulatory failures, and political interference. Urgent reforms are needed to mitigate systemic risk and restore public trust.
Mitigating Systemic Risk
The White Paper outlines opportunities for the interim government to implement significant reforms. Strengthening regulatory oversight, improving corporate governance, enhancing transparency, and pursuing legal action against fraud and corruption are critical steps. Decisive actions can restore confidence in the banking system and lay the foundation for sustainable economic growth.
Excess capacity payments to exceed Tk 36,000 cr in 15 years: White Paper
Following the fall of the Hasina regime on August 5, amid a mass uprising, the interim government decided on August 21 to publish a White Paper highlighting the current economic situation.
A committee led by economist Dr Debapriya Bhattacharya prepared the report and submitted it to Chief Adviser Prof Muhammad Yunus on Sunday at the Chief Adviser’s Tejgaon office.
The report covers key areas such as public finance management (domestic resources, public expenditure, budget deficit financing); inflation and food management (production, procurement, distribution); external balance (export, import, remittances, FDI, foreign exchange reserves); energy and power (demand, supply, pricing); private investment (credit access, electricity, connectivity); and employment (formal and informal sectors, youth employment).
Distinguished Fellow of CPD Prof Mustafizur Rahman, Professor of Economics at the University of Dhaka Dr Selim Raihan, former World Bank Lead Economist Dr Zahid Hussain, CEO of BUILD Ferdaus Ara Begum, and Professor at BUET Dr M Tamim were among the committee members.