The interim government assumed office at a time when the financial sector was in its worst state. A year has now passed since it took charge. To revitalise the banking sector, the interim government has already undertaken several initiatives.

Speaking to Banglanews, former lead economist of the World Bank’s Dhaka office, Dr Zahid Hussain, discussed how far these measures have met expectations. The interview was conducted by Banglanews senior correspondent Zafor Ahmad.

Banglanews: There had been much criticism regarding the financial sector. How do you evaluate the reforms undertaken in the banking sector during the interim government’s one year in office?

Zahid Hossain:  The most reforms have been seen in the banking sector. There had been apprehension over how the public could retain confidence in the financial sector with so many distressed banks. In that context, the boards of many banks were dissolved and reconstituted. Liquidity support was provided. Laws were amended to enable assessment of the banks’ financial conditions. Asset quality was determined for six banks, with assessments for another eleven planned.

No resolution model has yet been introduced. Of the six banks whose asset quality has been determined, one—ICB Islamic Bank—was excluded because it has foreign investment. The remaining five are set to be merged. For this purpose, a dedicated department has been established at the Bangladesh Bank to implement the Bank Regulation Ordinance (BRO). Officials say a model could be finalised within the next three to four months.

On the regulatory side, the criteria for recognising non-performing loans (NPLs) have been changed. What was initiated in 2019 but later rolled back has now, from April this year, reverted to the 90-day criteria. Some simplifications have been made in provisioning to improve compliance. Another circular has mandated regular reporting by banks to identify actual beneficiaries. Related parties—those with ownership links to banks—are now subject to limits on how much they can borrow, and these must be adhered to.

Banglanews: The reform process is ongoing. How much trust has it managed to build?

Zahid Hossain:  Look, the first four months were spent just putting the house in order. Many bank owners fled. The governor of the Bangladesh Bank vanished. The president of the Bangladesh Securities and Exchange Commission (BSEC) was absent. Considering such adverse circumstances, the government effectively had only seven or eight months. Over the past decade, no reforms were undertaken—rather, things regressed. In that context, the government’s initiatives are significant. But much work remains before reaching the finish line.

I don’t think all the work will be completed during this government’s tenure. The state in which the current government found the sector was very fragile; the next government will inherit it in a much better condition. But they, too, will have a lot to do. Corporate governance must be kept under control. This government has started that process, and continuing it will be the real challenge. Because the volume of non-performing loans is still increasing.

Previously, NPLs were swept under the carpet—now the data is being disclosed. Alongside this, a new circular has been issued. From now on, loans will be classified as non-performing after 90 days. So, I expect NPL figures will continue to rise until September. Only then will it be clear whether new defaults are being added or whether there has been any improvement in NPL management.

Banglanews: Yet confidence is building. How do you see that?

Zahid Hossain:  It is happening. But 15 to 20 banks are effectively bankrupt. And I am only talking about banks; the condition of non-bank financial institutions is even worse. These banks must be resolved one way or another—either through mergers or, if investors are interested, by selling them off.

All banks have capital shortfalls and liquidity problems. Whether they are merged, sold, taken over by the government, shut down, or liquidated—these options are laid out in the Bank Regulation Ordinance. Determining which option applies to which bank is the biggest challenge. The reforms carried out so far have been regulatory—such as in classification and provisioning—and their implementation has begun.

No resolution work has yet been undertaken, especially for these distressed institutions. Of course, this is not possible in such a short time. The World Bank says state-owned banks are also in poor condition. They will need to be addressed in the future.

Banglanews: There is talk of some positive changes regarding reserves, the exchange rate of the dollar, and imports. How do you view this change?

Zahid Hossain:  These are visible, and improvements can be seen. There was a troubling situation in the dollar market, and that has improved. But this improvement can be looked at from two angles. One is stability in the exchange rate, and the other is the increase in dollar reserves held by the Bangladesh Bank and commercial banks. The exchange rate remains stable.

This improvement has two positive reasons and one negative reason behind it. The most positive is the surge in remittances. Take remittances, for example — previously, if USD 1.7 to 1.8 billion came in, it was considered good. Now, if it falls below USD 2.5 billion, it is considered not good enough. This means the baseline level of remittances has risen. The second is that export earnings are now arriving within 15 to 30 days. These two are positive developments, meaning supply has increased. In June last year, there was a one-off increase in supply — the World Bank and IMF disbursed two installments, and the ADB also added dollars. Altogether, USD 350 crore came in during June. This was due to disbursements from various international institutions.

In this case, supply has increased, but demand remains weak. This is a negative aspect. Calling it an investment slowdown would be an understatement. This is because the settlement and opening of letters of credit have been negative compared to the previous year. As a result, dollar demand is also weak. This, too, is contributing to increased reserves and stability in the exchange rate.

Banglanews: Regarding this surge in remittances, is the reason a reduction in money laundering, as has been suggested?

Zahid Hossain: Yes. Particularly for this surge in remittances, no other explanation fits. It is not as though the income of migrant workers abroad has suddenly increased, or their expenses have decreased, resulting in higher savings and thus more money being sent home — that is not the case. The inflation that occurred has been happening since after COVID-19, but no reflection of this was seen in remittances. This means expatriates’ dollars were not crossing the border — not that they were not sending money, but that the transactions were taking place through hundi channels. So after the changes, the major money launderers themselves have been forced out. This has caused a major downturn in hundi transactions. However, there remains a concern — will new players enter the scene and resume the old game in the future? If that happens, this current relief will not last.

Banglanews: These matters are now starting to be discussed.

Zahid Hossain: In some cases, the old players have stepped aside, but it has not taken long for new ones to take their place. However, replacing the old players in large-scale money laundering takes more time. A “regime change” in this area will take some time. What happens on the ground and at small levels is a minor matter. But large-scale money laundering is an international issue — it takes time to change. These are the activities of the big fish. We will have to wait and see what happens.

Banglanews: Reform work has started. After the election, a new political government will come to power. Will this reform effort face setbacks, then, and what advice would you give in this regard?

Zahid Hossain: The government that comes through elections will inherit a much better situation than the one the interim government faced when it took over. At that time, institutions were broken, leaderless, streets were unstable, and protests were taking place daily. The new government will not face such a situation after the election. For the new government, not only will it be easier to continue this work, but it should also be easier to address matters that have not yet been tackled. However, challenges will remain, and whether goodwill remains active will depend on the new government’s vision.

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