The country’s banking sector passed the year 2022 amid various crises and controversies as the Bangladesh Bank’s apathy about the continued irregularities, the loss of confidence among depositors and the dollar shortage persisted as a paramount concern for the sector.

With the sky-high volumes of bad loans, wholesale privileges to defaulters, widespread anomalies and absence of good governance, the banking sector seemed to be overseen by a ‘toothless’ regulator, economists and financial market analysts observed.

In the latest episodes of anomalies, a number of Shariah banks further exposed a longstanding bleeding wound in the banking sector.

Three Shariah banks — Islami Bank, Social Islami Bank and First Security Islami Bank — allegedly sanctioned huge amounts of loans to some shell companies without proper collateral and documents.

As the loan irregularities became public knowledge, depositors, worried about their money in the banks, had rushed to those to withdraw money.

The central bank’s reputation hit rock bottom as it remained mum over the unprecedented magnitude of the borrowings involving massive irregularities rather, it turned out, the regulating institution practically facilitated the unlawful lending.

On top of that, the BB, shrugging off the spate of criticisms from various quarters, came up with measures such as relaxing the rules on loan classifications and rescheduling for several times in aid of the offenders.

The borrowers enjoyed relaxed repayment scopes in both 2020 and 2021, including a one-year moratorium because of the Covid pandemic.

In July 2022, the central bank offered another big break to loan defaulters by way of opportunities to reschedule their loans for up to 29 years and reduced the amount of the down payment to 2.5 per cent of the outstanding loan amount from 10 per cent.

The wholesale facilities for the businesses involved and the culture of impunity encouraged fraudsters to steal money from banks on a regular basis, experts blamed.

The irregularities were not new in nature as the sector in the past decade had witnessed many scams, including those that go by the names of Halmark, Bismillah Group, Annontex,  Crescent Group, Basic Bank, Farmers Bank and PK Halder.

According to Zahid Hussain, former lead economist of the World Bank’s Dhaka office, the financial sector has long been going through structural weaknesses which should not be presented as a result of the economic crisis.

‘The resilience of the financial sector should have been increased so that it can withstand economic shocks, including inflation and dollar shortage,’ he observed.

But, he said, the regulator indulged in dishing out privileges to certain people on the pretext of an economic crisis.

Referring to media reports that disclosed some serious banking sector malpractices in recent times, Zahid said that the regulator, without taking any disciplinary action against the wrongdoers, washed its hands off the wrongdoings by just appointing observers to the banks.

And the depositors did not get their confidence back as they witnessed that the words and deeds of the regulator did not match, he said, adding that they saw no corrective measures against those that defrauded them of their money.

The volume of non-performing loans in the country’s financial sector surged to Tk 1,34,396 crore at the end of September while a staggering amount of Tk 1,18,553 crore turned out to be bad loans which the central bank predicted would never be recovered.

Most of these bad loans are willfully defaulted loans, backed by political and lobbying power of the borrowers.

The volume of classified loans of state-owned Janata Bank stood at Tk 20,255 crore, Sonali Bank at Tk 12,443 crore, Agrani Bank at Tk 12,186 crore, BASIC Bank at Tk 7,959 crore and Rupali Bank at Tk 5,726 crore at the end of September 2022.

National Bank held Tk 11,335 crore in defaulted loans, which was the highest among the private commercial banks.

Experts assessed that the actual size of defaulted loans could be more than Tk 2 lakh crore, as regulatory forbearance by way of the special rescheduling policy and the writing-off of a large amount of NPLs translated into a sharply reduced amount of loans in default on paper.

After huge defaulted loans, liquidity shortage and mismanagement came to be known, the BB selected 10 banks to save them from collapsing. It was this declaration that mainly spurred panic among the depositors.

Policy Research Institute of Bangladesh executive director Ahsan H Mansur told New Age that the deposit growth declined significantly, defaulted loans kept soaring and people’s confidence in the sector hit low, which eventually evaporated the profitability of banks and banking entities in 2022.

Ahsan H Mansur observed that Islami Bank suffered due to various irregularities.

The BB could have prevented the irregularities in the banking system with stiff actions but failed to do so, he said.

He feared that the dollar crisis might continue for another 5-6 months.

To deal with the massive misdeeds in the banking sector, he opined, the government can take suggestions from both domestic and international experts and take actions accordingly.

Meanwhile, due to the inflationary pressure and the low interest rate offer, the total deposit in the scheduled banks increased by only 8 per cent to Tk 157,63,70 crore at the end of the July–September period, the lowest deposit growth in five years.

The banking sector has been struggling for the dearth of liquidity and dollars from the beginning of 2022, which took a worse turn at the end of the year.

After the resumption of the global business activities following the withdrawal of Covid restrictions, the country faced a record trade deficit that pushed up the demand for dollars.

The BB sold more than $6 billion to banks between July 1 and November 30 of 2022–23 while it had injected total $7.62 billion into the financial market during the whole of 2021–22 year, according to BB data.

To add to the grim situation, remittances and export earnings, prime tools for the bankers to meet the demand for dollars, were too sinking.

In the process, the country’s foreign exchange reserve dropped to $44.36 billion on January 6, 2022 from a record $48.09 billion on September 1, 2021. The reserve dipped to $33.83 billion on December 28.

Most of the banks, as a result, could not open letters of credit for importing necessary raw materials and other goods as they did not have enough dollars for LC settlement.

Due to record import bills, some 21 banks had negative balances in their foreign currency reserve and thereby struggled to make their due import payments against the LCs they had issued. Most of them, therefore, delayed fulfilling their import payment obligations.

The crisis prompted every other bank to refuse to open LCs, as they did not have enough dollars to meet the high demand on the market.

Therefore, business entities, especially small-scale ones, had to significantly cut commercial productions due to the shortage of raw materials.

The banks also stopped opening new files for students intending to go abroad for higher studies and to send tuition fees and other expenditures due to the dollar crisis in the country.

The BB had to tighten the country’s imports through various initiatives, including restricting import of luxurious and nonessential items.

Due to the severe dollar crisis, the government eventually had to seek a $4.5 billion credit support from the International Monetary Fund, economists said.

Cashing in on the dollar crisis, various banks started stocking huge greenbacks, further fuelling the crisis and raising the dollar rate against the taka.

On August 8, the BB asked six banks to remove the heads of their treasury departments amid allegations of dollar price manipulation by the banks.

The exchange rate sharply rose — to Tk 107 from Tk 84.8 —within a year. The BB approved the floating rate of dollars on September 14.

BB executive director and spokesperson Md Mezbaul Haque said that the country’s banking sector passed a challenging time due to the global economic disruption following the Russia-Ukraine war.

The global economic crisis, he went on to say, has created the country’s dollar crisis that is expected to be overcome soon.