Ex-governor forced banks not to classify S Alam default loans, White Paper body finds

Infographic: TBS

Despite significant loan defaults by influential industries like S Alam Group, the then-governor of Bangladesh Bank, Abdur Rouf Talukder, prevented these defaults from being classified, according to a member of the White Paper committee.

Such intervention enabled S Alam Group and its associated institutions to secure huge amounts of loans under questionable circumstances, the committee member told The Business Standard on condition of anonymity.

The committee, which is in the process of finalising a comprehensive White Paper on Bangladesh's economy, has also uncovered that the ousted Awami League government disclosed a much lower figure on overall loan defaults and distressed assets in the banking sector.

The committee is expected to submit its report to the chief adviser on Sunday, said Debapriya Bhattacharya, head of the committee, at an event yesterday. The full report will be released at a press conference the next day.

Debapriya told TBS, "We will provide recommendations because donors seek continuity and predictability in their relationship with Bangladesh."

He added that their report will address a series of economic challenges, particularly the state of the banking sector and the alarming level of capital flight during the last 15 years of Awami League rule.

He further added that the government should consider holding meetings at the start of the next year with four key international stakeholders: development financiers, countries that provide market access for exports, foreign investors, and donor agencies, to build confidence among these groups.

Distressed assets

According to data from Bangladesh Bank, distressed assets in the banking sector stood at Tk5.5 lakh crore by December 2023. 

However, internal estimates from the committee suggest that by June 2024, this figure could rise to around Tk8 lakh crore, the committee member told TBS.  

The member said their report also sheds light on the weaknesses and irregularities within the banking sector, particularly due to a lack of corporate governance and the weakness of the regulatory authorities. 

It identified a dual regulatory system, in which both Bangladesh Bank and the Financial Institutions Division (FID) of the Ministry of Finance oversee financial institutions. This overlap in regulatory functions has contributed to the inefficiencies and lack of accountability within the sector.

The committee has recommended that the current dual regulatory system be dismantled and that the Bangladesh Bank should be made the sole regulatory authority overseeing the banking sector. The FID should be restricted to overseeing state-owned banks and financial institutions.

Meanwhile, as of September 2024, non-performing loans in the banking sector amounted to Tk2.85 lakh crore, up from Tk2.11 lakh crore in June 2024. 

Capital flight

One of the most critical sections of the report deals with the issue of capital flight, said the  committee member.

According to their findings, Bangladesh has witnessed a substantial outflow of funds over the past 15 years, with illicit capital flight increasing in line with the country's expanding economy. 

The committee also highlights the need for swift and decisive action from the government to address this issue and prevent further capital outflows.

The Global Financial Integrity (GFI) has reported that in 2015 alone, approximately Tk98,000 crore was siphoned out of the country. 

Tax exemptions

Another committee member told TBS that their report also addresses the issue of tax exemptions, which were reportedly given to a select group of individuals and businesses under the previous government.

The committee has raised concerns about the fairness and transparency of these exemptions, noting that while tax revenue to GDP is a meager 7.5%, the rate of tax exemptions is alarmingly high at 6%. 

The report questions why automation in tax revenue collection has not been implemented, given the growing revenue needs of the country.

In addition, the committee points out that despite the government's clear mandate to establish a separate body for revenue policy formulation in 2008, the law to do so has never been enforced. 

This delay in implementing essential reforms has hampered the efficiency of the revenue collection system, leading to a significant shortfall in the country's tax revenue.

Data manipulation 

The report has also raised concerns about statistical manipulation during the previous administration. The reports mention that political interference distorted key economic data, including GDP growth and inflation figures, undermining the credibility of national statistics.

The committee has recommended that the Bangladesh Bureau of Statistics (BBS) be restructured as an independent body free from political influence to ensure the accuracy and reliability of economic data in the future.

However, this will be a challenging task, said the committee member, explaining that while there was initially only a statistics bureau, its authority was later expanded by establishing a separate statistics division under the Ministry of Planning.

As part of its recommendations, the committee has also called for greater transparency in the process of issuing tax exemptions, as well as for stronger oversight of foreign investments.