The proposed Bank Company (Amendment) Act-2023 still falls short in some crucial ways necessary to establish accountability and good governance in the banking sector, according to experts.
The draft of the amended act includes a ‘wilful defaulter’ clause, which economists welcome. Under the clause, such wilful defaulters can be subjected to various penalties. But how a wilful defaulter will be dealt with still leaves some scope for ambiguity and fails to meet international standards, according to the experts.
The draft of the act also fails to adequately address the influence over decisionmaking enjoyed by sponsor-directors of a bank or their families, they said. Thus the draft of the amended act that has been approved by the cabinet and now awaits passage in parliament does not inspire confidence that it could lead to a significant turnaround in the state of the banking sector.
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Single-family directors would still be able to control a bank through reciprocal understanding over time, precluding the bank’s board of directors from performing its three main functions of protecting the interests of depositors, minimising loan defaults, and investing in ventures with good rate of returns through the loan approval and disbursement process.
They urged the government to define how wilful loan defaulters would be dealt with in accordance with international standards, and to reduce the number of single-family members allowed on the board to two with a maximum tenure of six years each, from the existing four with a maximum tenure of nine years each.
The draft proposes to bring it down to just three, while keeping the maximum length of their tenures unchanged at nine years.
Economist Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue told UNB: "I think allowing two members of a family in the board of directors would be correct - I don’t understand why it has been kept at three (in the draft act)."
When a bank is run by several members of the same family - there is virtually no obstacle in decision making by the director whose family dominates. Keeping this in mind, earlier the Bank Act of 1991 allowed just two directors from one family and banks were run better, she said.
"Basically, it was to ensure the internal good governance of the banks. The Banking Company (Amendment) Act-2023 may fail to deliver good governance due to a lack of desired reform,” she said.
According to CPD, the amount of defaulted loans in the country’s banking sector has more than tripled in the last ten years, from Tk 42,725 crore in 2012 to Tk 134,396 crore in the current fiscal, and is increasing gradually.
In any bank, approval of large scale loans comes from the board of directors. Managers are apprehensive about opposing their decisions as paid officials. The scope for opposing fraudulent loans is increased when families dominate the board.
The trust of ordinary depositors will be restored in banks through reducing family authority in decision-making and exemplary punishment for defaulters and those who facilitated money laundering through forged loans.
Bank officials say that one of the major reasons for non-payment of defaulted loans is the approval of large-scale loans to the private sector without adequate verification of documents.
One of the main reasons behind the increase has been loans obtained through forged documents, often in the name of companies that don’t exist.
Former IMF economist and executive director of the Policy Research Institute (PRI) Dr. Ahsan H Mansur told UNB how wilful or habitual defaulters would be dealt with should be brought up to international standards.
In the draft of the amended act, an individual will be considered a wilful defaulter if he or she does not repay a loan taken in their name or their company's name despite having the means to pay it back. In addition, any person will be treated as a habitual defaulter if he or she takes loans under the name of a non-existent company.
The persons who are deemed as wilful or habitual defaulters by the confirmation committee of banks can appeal to the central bank within 30 days from the submission date of their names.
The central bank will make the final decision on whether the aggrieved persons will be enlisted in the list of habitual defaulters, and this leaves scope for influence-peddling, it is felt.
“The risk can be understood by looking at the amount of defaulted loans of a country. Risk cannot be understood by defining it through your own chosen method instead of international standards. This will lead to a crisis of international acceptance for the banking sector,” Dr Mansur, also the chairman of Brac Bank, added.
He thinks that there is still scope to amend the Act if the government wishes. The law should be made of international standard as Bangladesh’s involvement is growing in international trade, Mansur said.
Former Governor of Bangladesh Bank Dr Salehuddin Ahmad said, "Different areas (of the bank) are controlled by the family and those who are in the management of the bank are also afraid of them (family members)."
If there are multiple board members of the same family, then there is no transparency and accountability in making decisions, he said.
Besides, if there is more than one bank under the ownership of the same family, the case of one bank taking benefits from another bank is also seen in Bangladesh, he pointed out.
"The directors of this bank will take favours from another bank, that bank will take favours again from another bank. This needs to be addressed," the ex-governor said.