What to do with the 10 ‘technically bankrupt’ banks?

The draft of the White Paper on the State of Bangladesh Economy, submitted to Chief Adviser Dr Yunus on 1 December, mentions special concern about 10 banks, marked as "distressed" by regulators and found to be technically bankrupt. 

These include two state-owned banks, marred by scandals over the last decade, and eight severely underperforming Shariah-based and conventional private banks. These banks collectively hold 33% of total loans and 32% of total deposits in the banking sector.

Despite Bangladesh Bank Governor Ahsan H Mansur's promise that no bank will become insolvent, the crisis within these institutions remains glaring. So much so that he, himself a staunch proponent of not printing money, printed Tk22,500 crore to support the depositors and prevent a bank run. 

"Whether the banks will be around or not comes later; but in every case, we will protect the investors and their deposits. And we have faith in our depositors as well. They will not let down any bank."

Dr Zahid Hussain, former lead economist, World Bank Dhaka office and member of White Paper Committee and baking reform task force

However, this is not sustainable in the long run. So, what to do with these 10 distressed banks? 

The most pressing concern is the significant disparity between the reported and actual financial conditions of these banks. 

Independent assessments reveal that the combined adjusted value of assets for these banks is only half their reported value. This means that these banks are technically bankrupt, with negative net worth and insufficient liquidity. Alarmingly, only two of the 10 banks have moderate liquid assets, while the others are nearly illiquid.

The central bank's decision to inject Tk22,500 crore into six private banks highlights the gravity of the liquidity crisis. 

Many of their assets are tied to delinquent loans, non-performing financial placements, and investments in insolvent entities. For instance, a large bank reported balances with other banks and financial institutions worth Tk6,652 crore at the end of 2023. However, Tk2,000 crore of this amount was deemed unrecoverable, and another Tk584 crore invested in non-bank financial institutions (NBFIs) had an 80% unrecoverable rate.

Similarly, another major bank had Tk10,158 crore stuck with distressed financial institutions, with media reports estimating Tk8,000 crore as unrecoverable. The scenario is comparable across other forms of financial placements, including investments in government securities, shares, and bonds. Despite these being adjusted by only 10%, the lack of mark-to-market valuations due to limited publicly available data complicates the assessment of their true worth.

The most troubling aspect lies in the loan portfolios. A reduction of 64% in the combined loans and advances of these banks is necessary, based on available data and expert judgment. On-site due diligence would provide a more accurate valuation, but the absence of sufficient data hinders this ideal approach.

At the same time, the true extent of the mismanagement and crisis is yet to be precisely determined. Dr Zahid Hussain, the former lead economist of the World Bank's Dhaka office and a member of the White Paper Committee, said, "We need to find out the true condition and asset qualities of these banks by following globally accepted calculations. We have done only a smell-taste.

"Then we can determine what to do with the banks. One of the options is to tell the owners of the banks that there are capital deficits in their banks and they need to invest more. If they do not invest, then the government has to invest to fill the gap," he added. 

"Another option is bank merger. Liquidating the banks which are beyond recovery while securing the interest of the investors can also be an option. What can we do in case that bank has no future, or no one is interested to invest in it or buy its share?" Dr Hussein further said. 

Even though liquidation is an option, both the Finance Advisor Dr Salehuddin Ahmed and Bangladesh Bank Governor Mansur have expressed their firm commitment not to let any bank shut down or go bankrupt. 

Many attempts to regain investors' confidence have been undertaken. And apparently, it is working. 

Due to the fear of economic and political instability, deposits worth Tk70,000 crore were being held outside the banking system, which has significantly strained liquidity. However, Tk30,000 crore has returned to the banks, and the central bank has lifted withdrawal limits for depositors. Such measures aim to rebuild public trust, but the governor has urged patience among customers of the troubled banks.

Former Bangladesh Bank deputy governor Muhammad A Rumee Ali said, "The most important thing to do is to bring back the confidence of the depositors. If the people do not trust the banks, it could lead to a systemic risk in the industry." 

He added, "And then the unfortunate consequences will be equally felt both by the weak banks and the strong banks. Bangladesh Bank is trying to restore the confidence of the people. The governor assured the people a few days ago to withdraw the amount of money they need and not to withdraw more. He has stated that no bank will close down. The whole idea is to prevent systemic risk in the industry." 

Dr Zahid Hussain added, "To figure out the strategy, we need to accurately review the banks' asset quality. We also need some legal reforms. The preparation for the quality assessment is at the last stage; it will start soon. In every case, depositors' interest will be secured." 

To address these deep-rooted issues, Governor Mansur has outlined a reform strategy. Central to this plan is a task force to oversee banking reforms and conduct forensic audits of the distressed banks. This task force is expected to assess the financial health of these banks, implement corrective measures, and provide technical support for long-term improvements.

Both Dr Zahid Hussain and Muhammad A Rumee Ali are members of this taskforce.

Rumee Ali said, "The task force to reform the banking sector is looking into the weak banks.They are trying to find out the true extent of damage that has occurred in individual banks. This information will be needed to take steps to formulate recovery plans and determine the course of action. Figuring out the real conditions of these banks individually is therefore an imperative." 

Dr Zahid Hussain said, "The governor made it clear as well. Whether the bank will be around or not comes later; but in every case, we will protect the investors and their deposits. And we have faith in our depositors as well. They will not let down any bank." 

Rumee Ali further stated that the confidence of depositors and investors is being restored. 

"It has been possible due to the Bangladesh Bank's timely actions and prompt decisions. It has resulted in improved liquidity of some of the banks. It is indeed a good sign for us. There may be mergers, there may be recapitalisation and other 'best practice' steps that can be taken, depending on the situation of each bank. 

"Also, I think that assistance is being sought from international bodies like ADB, IMF, World Bank, EU, combined with our local experts and central bank, so there should be an impressive gathering of expertise and knowledge to chart out the best way forward," Ali said. 

The roots of the crisis extend beyond financial mismanagement to structural weaknesses and political interference. Policies that disproportionately benefited influential individuals have exacerbated the problem. 

Moreover, the absence of effective oversight during the previous government enabled rampant nepotism and corruption. Under former Bangladesh Bank governor Abdur Rouf Talukder, opaque practices, including secretly printing money to bail out struggling banks, allowed oligarchs to launder funds and stash them offshore. 

While the central bank's actions, including printing money against bonds and lifting withdrawal limits, are aimed at preventing immediate collapses, the long-term sustainability of these measures is uncertain. The success depends on the banking sector's capacity to enforce accountability and transparency.

Moreover, efforts to introduce monetary instruments, such as bonds, to mop up excess liquidity face challenges in a poorly developed financial market such as ours. The lack of financial literacy among the general population further limits the effectiveness of such measures. Hence, there was an abundance of misleading information and disinformation regarding the recent liquidity injection. 

Ultimately, the path to recovery requires a delicate balance between immediate stabilisation and structural reforms. Strengthening regulatory oversight, addressing governance issues, and fostering public trust are essential components of this process. Without these, the risk of further destabilisation looms large, threatening not only the banking sector but also the broader economic stability of Bangladesh.