Money laundering linked to default loans: Rehman Sobhan
He said, “Many businessmen doing well with their businesses are also not repaying their loans. Meanwhile, many businesses cannot repay the loan as they are not doing well.”
Money laundering in the country is connected with default loans, said Rehman Sobhan, chairman of the Centre for Policy Dialogue (CPD).
At a discussion on the theme "Bangladesh Banking Sector Crisis: Problems and Solutions," organised by the Social Research Centre on Sunday night, the eminent economist provided examples of the relationship between money laundering and default loans.
"Many people take a loan of Tk50 crore and import equipment worth Tk40 crore. The remaining Tk10 crore is laundered," he said, adding that, "If the loan is smuggled out of the country this way, the ability of the borrower to repay the loan also decreases."
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He further said, "Many businessmen doing well with their businesses are also not repaying their loans. Meanwhile, many businesses cannot repay the loan as they are not doing well."
The discussions centred on the problem of defaulted loans in private sector banks, the background of the bank merger policy, and the consequences of the government taking large loans from the banking sector to meet the budget deficit.
Among others who spoke on the occasion were MM Akash, chairman of the Economic Research Bureau at Dhaka University; Biru Paksha Paul, professor of economics at the State University of New York at Cortland, USA; and Selim Raihan, professor in the Department of Economics at Dhaka University and executive director of the South Asian Network on Economic Modeling (Sanem).
The speakers emphasised the need for political will to reduce defaulted loans.
On the involvement of loan defaulters in politics, Rehman Sobhan said, "Defaulters are not allowed to take part in elections. However, former finance minister Saifur Rahman made the rule easier. Loan rescheduling to participate in an election and not repaying the loan is a crime."
Mentioning the fact that when more time is needed to pay back loans, the effective interest rate also decreases, the CPD chairman said, "The effective rate of interest becomes lower when someone takes out a loan for 2-5 years and is paying it back after 10-15 years."
"Banks are taking deposits for the short term and lending them for the long term. This is not the right policy," he added.
On the problem of default loans in private banks, MM Akash said, "Write-off loans are like sweeping dirt under the carpet. The actual amount of defaulted loans is much higher than reported. According to the central bank, the defaulted amount is Tk1.82 lakh crore. Including write-off loans, it is like Tk4 lakh crore. As such, classified loans will be around 25%."
He added, "It is believed that bank owners have taken loans from their banks. Political influence has spread in the banking sector. Money is laundered through under-invoicing and over-invoicing."
He recommended making the governor of the Bangladesh Bank a constitutional post and publicly disclosing the names of big loan defaulters as part of the financial sector reforms.
Economist Biru Paksha Paul said, "One of the reasons for the reserve crisis we are seeing is the 9%-6% interest rate cap. Today's inflation is largely due to long-term interest rate caps. These caps have not helped boost private investment."
"Smart rates were announced by lifting the interest rate cap, but within a few months, it was left to the market. This proves that there is no consistency in central bank policy," he added.
Biru Paksha Paul, who is a former chief economist of the central bank, focused on the consequences of the government taking a huge amount of loans from the banking sector, stating, "When the government borrows money, deposit mobility decreases. As a result, banks may experience liquidity stress."
He recommended making the discussions of the Bangladesh Bank's board public, lifting the ban on the entry of journalists, and enacting the Fiscal Responsibility Act.
On the default loan issue, Sanem Executive Director Selim Raihan said, "Whether the political elites want to give independence to the central bank is an important question. I think they do not want to give freedom. Defaulted loans get stuck in legal issues, which should be solved politically."
"The banks have performed very well in the readymade garments sector. They got loans very easily. However, other sectors did not get loans so easily. As a result, our export products have not expanded much," he added.
Masrur Reaz, chief executive officer of Policy Exchange Bangladesh, said, "We have not seen any steps to develop the capital market. As a result, the pressure of lending on the banking sector is increasing."
"Twenty years ago, when the banking sector was good, we didn't need so many banks. Top-level decision makers see the banks as a vehicle for wealth creation," he added.
Nazrul Islam, visiting professor at the Asian Growth Research Institute, moderated the event. The welcome address was presented by Tajul Islam, dean of the Faculty of Social Sciences at Bangladesh University and president of the Social Research Centre.
