Bangladesh Bank Governor Atiur Rahman yesterday called for more control over state-run commercial banks to help them run professionally and enhance their accountability.

Exemption of state-owned banks from some of Bangladesh Bank's supervisory empowerments of Banking Companies Act stands in the way of effective supervision of these banks, Rahman said.

"Unless this differential treatment is done away with, management weaknesses from insufficient accountability are likely to linger in the state owned banks," he said.

Rahman spoke at a seminar, "Towards Bangladesh at 50: Financial Sector Resilience- Issues and Prospects" organised by Dhaka School of Economics at the Diploma Engineers' auditorium in the capital.

Rahman's comments came as the central bank's inability to govern the country's state banks the way it supervises the private commercial banks is widely blamed for the underperformance and irregularities at the state banks.

The central bank has full control over the private banks, but it does not have the same control over the state-run banks.

The Banking Companies Act stipulates that the central bank can dissolve a board of a private bank and appoint an administrator to it if its board of directors cannot run the bank properly. But in case of state-run banks the central bank can only recommend actions to the government.

The law says that the government will seriously consider the recommendation. But experts say the government does not always consider the recommendation of the central bank as seen recently when Bangladesh Bank recommended the finance ministry to restructure the board of Sonali Bank Ltd for its gross irregularities in lending Tk 3,600 crore to Hall-Mark Group and some other companies.

The finance minister came up with comments that the central bank cannot make such recommendations, which surprised many.

The governor also said the financial sector has fared in terms of resilience and stability under BB's evolving supervision approach outlined above.

Non-performing loans as percentage of total assets are at single digit levels, liquidity stresses arising from unduly high advance deposit ratios in some banks last year have eased off, according to Rahman.

“Stress testing exercises conducted by us and by World Bank and International Monetary Fund financial sector assessment missions have assessed Bangladesh's financial sector as resilient against moderate shocks,” he said.

Rahman however said this fairly reassuring overall view does not however mean that the country has now no issue in financial sector stability and resilience to be concerned about.

"The overall picture masks considerable variation in capital adequacy and solvency positions between bank groups.”

Foreign banks maintain capital cushions well above prescribed minimum and local private sector banks generally meet requirements but state banks fall well behind in asset quality and capital adequacy, he said.

"Even in local private sector banks, the reported low nonperforming loan levels are due in part to somewhat looser local loan classification and provisioning requirements relative to international best practices,” he said.

"On the whole our financial sector continues suffering from (and to some extent sharing) the general deficiencies of local business culture in respect of corporate governance and financial disclosures."

Although not serious immediate threats to institutional resilience and financial stability, these deficiencies limit capacities of banks in forging strong, deep relationships in international financial markets to attract investment inflows in volumes needed for realising the nation's growth aspirations, Rahman said.

The recent BB revision of instructions on loan classification, rescheduling and provisioning are intended to address this shortcoming, by aligning local standards with international norms.

The governor also said much of the country's growth related new investments will have to be attracted from abroad, which would heighten the country's financial sector's exposure and vulnerabilities to market volatilities in the global scene.

"In step with rising external exposures, our financial sector will need to build up and bolster resilience against shocks from perennial volatilities and instabilities of the international markets."

Besides external shocks, there are demand and supply shocks of domestic origin to build resilience against.

Rahman said preparatory work for Basel III implementation in Bangladesh financial sector is ongoing, for full implementation by the 2018 deadline or earlier.

Rahman said fallouts on financial sector from two stock market price bubble collapse episodes of 1995 and 2010 were likewise limited and easily contained.

News: The Daily Star/Bangladesh/7th-Oct-12