CPD calls for closure of unviable banks, NBFIs to reform and rescue financial sector

The Centre for Policy Dialogue (CPD) has proposed closure of banks and non-bank financial institutions (NBFIs) deemed to be on life support, as part of urgently reforming the dwindling financial sector struggling in severe financial crisis and economic instability. 

The CPD recommends this measure at a seminar in the city on Wednesday and warns that increasing dependency on debt coupled with rising default rates is pushing the financial institutions to the brink.

It said political reforms of the state are essential to reforms the economy. Election may cut the reform process but there must be strong and deeper pledge that state reform and economic reforms will continue after election.
     
The alarming proposal underscores the urgent need for comprehensive reforms of the state to stabilize the struggling banking landscape before it negatively impacts the broader economy.

CPD Executive Director Dr Fahmida Khatun presented the report highlighting its salient points, while other members of her team were present and answered questions.

According to the CPD, the dual governance structure involving the Financial Institutions Division (FID) under the Ministry of Finance has hindered the banking sector's growth and contributed to recent declines in banks' ability to absorb financial shocks. 

As of June 2024, the Capital-to-Risk Weighted Assets Ratio (CRWAR) of banks fell from 10.64 per cent to 6.86 per cent by September 2024, signaling a worrying trend attributed to weak governance and political interference. 

The think tank argues that the existence of the FID has weakened the independence of the Bangladesh Bank, leading to inconsistencies in policy-making that only exacerbate current financial challenges.

Moreover, the ongoing reliance on high-interest domestic sources to finance the budget deficit poses significant risks to financial institutions. 

This strategy not only threatens banking profitability but also stresses the overall economic structure, particularly as high inflation continue to erode the purchasing power of everyday citizens. 

The CPD's report identifies these economic pressures, asserting that the rising cost of living increases the likelihood of defaults, further straining banks' balance sheets.

Economic challenges such as elevated tax rates, surging interest rates, and a deteriorating law-and-order situation have created an unfavorable climate for lending, undermining confidence in the financial system. 

The CPD warns that without proactive measures, the trajectory of the economy could worsen, leading to far-reaching consequences for the financial landscape.

The proposed closures are intended to stabilize the banking sector by addressing the issue of non-performing loans, improving governance, and enhancing risk management practices. 

Additionally, the CPD advocates for a comprehensive strategy to bolster investment in infrastructure, promote foreign investment, and improve tax policies to support economic stability.

Its urgent reform proposals highlight the pressing need for reforms in the banking and NBFI sectors to avert a financial crisis. 

By tackling the underlying issues and implementing strategic measures, policymakers can ensure that financial institutions remain resilient in the face of internal and external pressures, paving the way for a more stable and prosperous economic future.