For a consolidated state bank

While we learned not to put all eggs in one basket, dumping all rotten apples in one basket might seem rather prudent. When two companies of a similar business nature, languish to survive, they opt for a merger that gives additional synergy to help the merged entity run better than before. The same is true for our six state-owned commercial banks (SOCBs): Sonali, Agrani, Janata, Rupali, Bangladesh Development, and Basic. They are all now bad apples and should be put aside together so they do not ruin the whole banking industry by polluting the other forty private commercial banks (PCBs). Forming a consolidated state bank, bringing together all six public banks, seems to be the most appropriate rescue plan not only for the state-owned banks but also for the beleaguered banking industry that seems destined to a progressive collapse in three years or so.

Every bank has to maintain a minimum amount of capital, which is at least 10 percent of its risk-weighted assets, called the capital to the risk-weighted assets ratio (CRAR). Taking deposits goes to the liability side of the balance sheet of a bank while giving a loan becomes an asset. The bank has to keep Tk 10 as capital if it extends a loan of Tk 100 to a borrower named A assuming that A is a normal person in a safe business. But the bank has to keep capital of Tk 15 if it lends Tk 100 to a risky person named B once the bank has assessed the risk-weighted asset as Tk 150. Now the total capital of Tk 25 is stored against a total loan of Tk 200 whose risk-weighted value is Tk 250.

The CRAR in six public banks have fallen to as low as below six percent while it is above twelve percent in private banks and almost twenty-four percent in foreign banks. The ratio in two state-owned specialised banks: Bangladesh Krishi Bank (BKB) and Rajshahi Krishi Unnayan Bank (RAKUB) is astonishingly minus thirty-five percent. After 2009, the government has taken almost Tk 10,000 crore taka to refuel the capital of these state-owned banks. Despite all ethical oppositions, the budget has allocated another Tk 2,000 crore for repeating the same practice, an attempt to pour water into a leaky bucket while other national priorities are being starved.

That is not the solution because the leak, which is seemingly created due to mismanagement, corruption, and willful default, is turning into a bigger hole every year. Not only is this short-term measure of recapitalisation with taxpayers' money unfair, but it also signals that we are bankrupt in finding a long-term solution. And hence, the rescue plan of 2018 would be the best alternative that bundles all bad tenants into a single house so control becomes easier and transparent through one set of financial statements.

In the 1980s, the quickest advice to fix a losing state-owned bank was to make it private. But that easy fix would be a blunder right now. Some experts are suggesting the privatisation of all state owned banks - except for Sonali Bank, the largest state-owned commercial bank that also supports the central bank in treasury management. Despite having good intentions, these experts are ignoring some vital points such as employment, rural development, funding the poor, and extending credit to socially desirable projects – which private banks shy away from due to their excessive profit-maximisation appetite. State owned banks still serve a bunch of welfare and pro-poor operations which we badly need to mitigate ever-increasing income inequality and discrimination.

Six state owned banks employ almost 60,000 people while forty private banks have employed around 92,000 people. Although the number of employment is lower in state owned banks, it is much higher proportionately based on the share of deposit. State-owned banks keep fifty-five percent of their total 3,700 branches in rural areas whereas private banks keep only one-third of their total 4,300 branches in rural areas. State-owned banks have more than 2,000 rural branches whereas private banks have around one and a half thousand branches in these areas. Total deposit accounts in state owned banks are close to three crores – slightly less than that in all forty private banks. Still state-owned banks have more loan accounts (Tk 32 lakhs) than private banks (Tk 28 lakhs). Thus, comparing private banks with state-owned ones is inappropriate.

The proposal of a consolidated state bank takes these aspects into consideration. It recommends retaining all state-bank networks as opposed to breaking the network into profit-greedy pieces. A recent study finds that private banks avoid hiring new workers since the profit motive reigns supreme in their work ethics. In contrast, public banks though inefficient, try to maximise hiring – a much needed action for a hugely labour surplus economy like Bangladesh. Hence, the first thing the society will face if a public bank is converted into a private one is a further rise in unemployment. Theoretically, the higher the capitalist margin, the higher the level of unemployment. Recently, we saw that private banks made a profit growth of more than 17 percent – not commensurate with the growth of their hiring process, which has been negligible of late.

Combining the SOCBs will bring a transformative change in the banking industry, provided that the court decisions on classified and written-off loans are expedited and the government has sufficient political will to pressurise the habitual defaulters. Otherwise, the whole banking industry will head toward a doomsday scenario, and this will be more so for public banks. The largest state bank is Sonali Bank, whose total deposit collection is almost Tk 1 lakh crore, but it is trying to survive on around Tk 20 to 30 thousand crore while almost Tk 20,000 crore has gone down the drain. How can a bank leverage that much liability with a much smaller amount?

The government should think ahead to rescue this industry if we really do not want another stock-market type collapse of the state banks. Proper homework to put all the bad apples together must be initiated so that we can generate investment vibrancy in the economy from 2018.