Monday | 7 October 2024 | Reg No- 06
বাংলা
   
Monday | 7 October 2024 | Epaper
BREAKING: ● Four die, 1225 patients hospitalised with dengue      ● 105 children killed in mass uprising      ● Saber Hossain Chowdhury arrested      ● 50,000 people marooned as over 100 villages flooded in Netrokona      ● Preliminary list of 735 martyrs killed in July-Aug mass uprising published      ● Mahmudur Rahman demands banning Chhatra League in a week      ● Israeli strike on mosque in Gaza kills 26      

Structural reform, liquidity support key to banking sector stability

Published : Wednesday, 4 September, 2024 at 12:00 AM  Count : 469
Shamsul Huda
In the wake of significant banking sector scandals, particularly involving a prominent Chattagram-based business conglomerate, the call for structural reforms and bringing discipline in the banking sector has grown louder in the banking sector. 

Md Abdul Mannan, Senior Executive Vice President and head of credit of SBAC Bank emphasized that the current reform efforts led by Bangladesh Bank, mainly focusing on appointment of administrators and independent directors, are insufficient to address the deep-rooted challenges in the sector.

Mannan asserted that the core issue lies in lack of liquidity and capital inadequacy along with huge non-performing bank loans. He pointed out that while independent directors might improve oversight, they do not possess the financial capacity to inject the necessary capital into the system. Without addressing liquidity constraints and bolstering capital-to-risk weighted assets ratio (CRAR), these reforms will remain superficial.

He argued that banking sector needs a more comprehensive approach, particularly focusing on recapitalization. Mannan suggested that Bangladesh Bank should facilitate mergers and acquisitions by financially strong entities. The new owners, capable of injecting fresh equity, would provide the necessary Tier 1 capital, enabling banks to stabilize and recover. 

He further recommended that the central bank should act as a lender of last resort (LOLR) by deploying structured liquidity support programs, such as targeted long-term refinancing operations (TLTROs) or emergency liquidity assistance (ELA). These measures would ensure that banks maintain adequate liquidity coverage ratios (LCR) and prevent systemic failures.

Mannan emphasized that liquidity support must be coupled with good governance practices. However, he acknowledged that the current legal framework for recovering non-performing loans (NPLs) is slow and inadequate. To expedite recovery, he suggested forming a dedicated recovery cell under the Ministry of Finance, supported by fast-track courts capable of resolving disputes swiftly. 

In addition, Mannan proposed that the government consider implementing a bank recapitalization scheme, similar to the Troubled Asset Relief Program (TARP) in the United States, where public funds are injected into distressed banks under strict restructuring conditions.

Addressing the measures taken to liquidate the assets of S Alam Group, Mannan expressed skepticism. He noted that while liquidating these assets might provide some immediate liquidity, it is unlikely to cover the full extent of the liabilities. 

Many of these assets, he argued, are over-leveraged, and the proceeds from their sale would not be sufficient to resolve the banks' liquidity crises. He pointed out that in Islamic banks, asset liquidation might only cover around 25 percent of the total deposits, leaving a significant shortfall.

Mannan also commented on the limited role of independent directors in the restructuring process. He explained that while independent directors can help enforce compliance with prudential norms and corporate governance standards, they lack the financial resources necessary for a meaningful turnaround. 

Ownership transitions to new, financially capable investors are crucial, as these investors would be able to address both capital shortfalls and liquidity imbalances, responsibilities that independent directors are not equipped to handle.

In addition to traditional restructuring methods, Mannan proposed a more innovative approach to dealing with distressed assets. Drawing on social business model developed by Nobel Laureate Professor Muhammad Yunus, he suggested that instead of liquidating distressed assets at a loss, banks could convert them into social businesses. 

This approach would repurpose the assets for community benefit, generating modest but sustainable returns that could gradually restore the banks' balance sheets. Such a strategy, Mannan noted, would require a significant policy shift and active government support but could offer a long-term solution to the sector's challenges.

Mannan underscored the urgency of liquidity support and importance of attracting new ownership as immediate steps Bangladesh Bank must take to stabilize the banking sector. Without these critical interventions, he warned, the sector would remain vulnerable to further financial shocks and long-term instability.



LATEST NEWS
MOST READ
Also read
Top performers in travel, tourism, hospitality sectors honoured
Vietnam economy grows 7.4pc in third quarter
Foxconn beats estimates with record Q3 revenue on AI demand
DSE, CSE fall on selling spree
EBL opens its 23rd priority centre in Rajshahi
ONE Bank appoints Shabbir Ahmed as AMD
FSIB holds managers' conference for Dhaka city branches
Uttara Bank holds business development confce
Editor : Iqbal Sobhan Chowdhury
Published by the Editor on behalf of the Observer Ltd. from Globe Printers, 24/A, New Eskaton Road, Ramna, Dhaka.
Editorial, News and Commercial Offices : Aziz Bhaban (2nd floor), 93, Motijheel C/A, Dhaka-1000.
Phone: PABX- 41053001-06; Online: 41053014; Advertisement: 41053012.
E-mail: info©dailyobserverbd.com, news©dailyobserverbd.com, advertisement©dailyobserverbd.com, For Online Edition: mailobserverbd©gmail.com
🔝