A parliamentary watchdog Monday recommended to the central bank to issue proper guidelines for the loan disbursement and recovery in the state- owned commercial banks (SCBs) and specialised banks (SBs) to help save depositors' interest, said a release.

The Parliamentary Committee on the Finance Ministry also asked all the SCBs to follow the Bangladesh Bank (BB) guidelines for their operations and strengthen monitoring of the central bank in this regard, the release added.

The recommendations came at the committee's 52nd meeting at the parliament building with its chairman AHM Mustafa Kamal in the chair. Members of the committee Ali Ashraf, AKM Maidul Islam, Tajul Islam, MA Mannan and Farida Rahman were also present, among others, in the meeting.

The meeting discussed the activities of the SCBs of the country. The performance reports of the SCBs like Sonali, Janata, Agrani and Rupali, SBs like Bangladesh Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKAB), Bangladesh Development Bank Ltd (BDBL) and Bangladesh Small Industries and Commerce Bank Ltd (BASIC) and Expatriate Welfare Bank, Karmasangsthan Bank and Ansar and VDP Development Bank were presented and discussed in the meeting.

The various weaknesses inthe basic structure of the banking sector were identified in the meeting. Recommendations were also made to follow proper rules and regulations regarding loan disbursement and recovery to save the depositors' money from being embezzled and to bring back the confidence of the local and foreign customers in the public sector banks.

The meeting also asked persons concerned to discharge their duties properly and ensure transparency and accountability in the banking sector.

The committee suggested all the government banks to follow the central bank guidelines in their operations. Besides, the committee decided to hold separate meeting with central bank and finance ministry and another one with BASIC Bank and finance ministry.

Additional and deputy secretaries of the finance division and high officials of Bangladesh Bank were also present at the meeting.

News: The Daily Financial Express/Bangladesh/20-Nov-12

I was lecturing at a training session on `trade risk management'. For the sake of the training, we all had to contain our presentation and discussions with regard to risk associated with 'letters of credit, advising, negotiation, shipping document, bill of exchange, payment, bill of entry, pricing, exchange rate and other trade products'. In the question and answer session a lady bank executive from a second generation private commercial bank asked me a question- 'sir, could an independent central bank help avoid the Hallmark scam'?

Considering the recent 'hue and cry' raised over the central bank's independence or autonomy, I wanted to avoid the answer. But the other attendees joined the lady and the voice seemed to have become louder. Though I always felt that an independent, strong and effective central bank could play a significant role in improving the overall banking environment in the country, I don't think that central bank autonomy had anything to do with 'Hall-Mark scam'.

We unfortunately had to swallow a lot of `knowledge donations' re: the possible causes of 'Hall-Mark episode' as explained by people not having even an iota of knowledge in international trade, risk analysis, risk management, bank limit, audit, governance, information technology in banking or financial institutions risk management. Any humble student of banking should be able to say; Hall-Mark is a glaring example of - 1) control lapses in state-owned commercial banks- the head office didn't have enough control on the branches and didn't have adequate knowledge about what was really happening in the branches, 2) non-compliance with the procedures of 'accommodation bill' and bill discounting under bank limit- nobody was keeping track of transaction happening within two group entities under Hall-Mark in the same branch of a state-owned bank and continuous diversion of funds to other banks , 3) local banks are happily taking exposures under bank limit on another bank without analyzing the underlying fundamentals, strengths or weaknesses of the respective banks , nobody in the bank branches as well as head office were monitoring the outstanding against the bank limits and some people even thought that they could take any exposures or risks on Sonali Bank, which is a government of Bangladesh undertaking 4) documentation as well as validation process in `local or domestic trade' is very weak in Bangladesh- in many cases letters of credit is established after the goods have been shipped and only in order to formalize the payment process or in most cases, 'delivery receipts' can't be verified 5) banks are increasingly becoming subservient or captive to the big business groups- in most occasions drawings by the large groups are heavily in excess of their overall sales numbers or turnover and, most importantly, 6) banks are not in command of the required and relevant information due to absence of right information technology platform or weak management information system (MIS) or inappropriate record keeping process. While respective banks' lending capability is constrained by a percentage of their capital and reserve, the large clients can enjoy a 'loan bonanza' without any relevance to their capital and reserve.

Added to these were of course the lack of accountability in the state-owned banks, politicization of the board and, may be, the entire banking system and weak or no human resource development practices and performance management culture.

Strong control over the CEO and board appointment process might have helped the central bank to have louder voice on timely submission of the returns, dictate a proper audit plan on the state owned banks or even impose a better asset-liability management plan. But I don't think it would have helped a bank like Sonali to avoid 'Hall-Mark' type scam. We need a better risk appraisal culture, data processing, mining and analyzing capability with well-trained human resources to detect or protect fraud or risk managers to identify and mitigate transaction risks in order to make sure we do not encounter surprises like that of Hall-Mark.

Who does not want the central bank to enjoy autonomy to formulate an effective monetary policy or even in a transition economy like Bangladesh to achieve respectable supervisory strength to protect depositor's interest? Having said that, I would rather put my money more on the banks to improve their human resources, rewrite their transaction or audit manuals or check lists, ensure establishment of a proper risk appraisal and approval process with an effective information technology delivery platform and, more importantly, see to that the internal control and compliance process is working.

I would also humbly remind our friends in the central bank that nobody is telling them to increase their number of offices or recruit 10,000- odd auditors or inspectors to ensure supervisory excellence in the commercial banks, be those government-owned or private commercial ones. We only want them to improve their 'offsite supervision', increase the use of technology in bank supervision manifold and, more importantly, their senior officials to start learning and appreciating the 'practical way' of handling international trade transactions, large loans or treasury management. But one important thing needs to be remembered by all concerned - 'no matter how much we improve our systems, process or platform, nothing can stop fraud and forgery in banks, unless we can recruit better people, capable but non-controversial people in senior positions in regulatory, supervisory and business development affairs.

News: The Daily Financial Express/Bangladesh/20-Nov-12

The Ministry of Finance (MoF) has agreed to a proposal of the International Monetary Fund (IMF) to give the Bangladesh Bank (BB) the authority to fire managing directors (MDs) of the state-owned banks (SoBs) -- both commercial and specialised ones -- found guilty of any wrongdoing.

But, the ministry still remains rigid on the issue of authorising the central bank to dismiss directors, chairmen or abolish the boards of the banks concerned, highly placed sources in the MoF and BB said.

The enhanced power would be delegated to the BB by amending the existing Bank Company Act (BCA), 2003. The final draft of a bill seeking to amend the said Act is almost ready for submission to the Cabinet Division for approval.

The partial acceptance of IMF suggestion has already been conveyed to the local office of the Fund, sources said.

Finance Minister AMA Muhith had at least two meetings with Eteri Kvintradze, IMF Resident Representative in Dhaka, in the current month to sort out differences over amendments to the BCA, 2003, particularly on BB and SoBs, it is learnt.

A finance ministry official said the IMF local office has accepted the latest stance of the government on empowering the BB in line with its suggestion, though partially.

He said the BB is yet to be competent enough to exercise absolute power to regulate state-owned banks as suggested by the IMF.

"We have retreated from our earlier position, at least. Any abrupt power transfer from finance ministry to BB for regulating the government-owned banks could prove to be too much because of the poor monitoring capacity of central bankers," a senior finance ministry official told the FE.

However, top BB officials said much would depend on the position of IMF's upcoming mission. The Extended Credit Facility (ECF) mission of the IMF is scheduled to arrive in Dhaka on November 27 next to review the development of reform measures in financial sector including the revenue issues.

Under the ECF programme, the multilateral lending agency asked the government to empower the BB to dismiss bank directors, managing directors and abolish boards of directors of all SoBs, if needed.

News: The Daily Financial Express/Bangladesh/20-Nov-12

Banks' exposure to the stockmarket is now well below the legal limit due to the downward trend of the market and a cautious policy adopted by the banks.

Banks' total exposure to the share market, as of September 30, stood at Tk 16,988 crore, which is 3.10 percent of their total liabilities, according to data from Bangladesh Bank.

Rules say banks can invest up to 10 percent of their liabilities in the stockmarket, but the highest exposure by any bank stood at 7 percent.

The four state-owned banks held 3.29 percent of their liabilities, or Tk 4,676 crore, in the capital market, while 23 of the private commercial banks had 3.94 percent of their liabilities, or Tk 10,299 crore.

Holdings of the six Islamic banks were even less: 1.53 percent of their liabilities, or Tk 1,500 crore.

Apparently, the government indirectly encouraged banks to invest in the share market, as per a senior official of Janata Bank preferring to remain unnamed.

But the banks were put off by the sluggish trend of the market. “Many banks suffered losses after investing in the stock market, which brought down their third quarter profits,” a banker said.

An official of Al-Arafah Islami Bank said the banks have taken on a measured approach after all the criticism they have received over their market exposure.

However, some banks are still investing considerably to recover their losses.

“Yet the stockmarket is not showing any bullish trend,” the Al-Arafah official said.

After the current government assumed power in 2009, the stockmarket showed a bullish trend, as a result of which many banks made invested beyond their limits.

In 2010, the share market, however, plunged into a bearish trend, and the banks' heavy exposure came under criticism from various quarters then.

A high official of the central bank said the banks' exposure in the share market in absolute terms is still Tk 1,000 crore more than the same period last fiscal year.

The banks' present investment in the stockmarket, in absolute amounts, is much higher than in many countries of the world.

The International Monetary Fund and the Asian Development Bank recommended to the government that the banks' investment in the capital market should be 25 percent of the bank's capital instead of its deposits (liabilities).

“All over the world banks' investment in the share market is related with capital, not deposit,” a BB official said.

The finance ministry official said the government is actively considering the IMF and the ADB recommendations, but they would like the investment threshold to be 40 percent, instead of 25 percent of capital.

News: The Daily Star/Bangladesh/20-Nov-12

the World Bank concluding a two-part summary of its latest report on Bangladesh titled 'Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth: Opportunities and Challenges'

It is important to ensure that growth is inclusive. Growth has been pro-poor in Bangladesh in the sense that it came with a significant reduction in the number of absolute poor. Income inequality remains high, but the good news is that consumption grew for poor and non-poor alike over the past decade. Similarly, the distribution of economic opportunities has remained inequitable, but opportunities have increased for all deciles over time.

Notwithstanding its achievements in poverty reduction, the size of Bangladesh's vulnerable non-poor remains very large. Simply moving from the national poverty line of US$1.09 per day to the international US$1.25 per day line increases the headcount ratio from 31.5 per cent to 43.25 per cent. The pace of poverty reduction in the last two decades slows considerably with the raising of the poverty line. Thus, while the 'Cost of Basic Needs'-based poverty headcount rate has declined rapidly in the past three decades, vulnerability has not. Large numbers of people are at the margin, indicating potential vulnerability to myriad idiosyncratic or covariate shocks to income and/or expenditures. Bangladesh has almost 81 million people in the US$1.09-US$2.00 per day range.

Vulnerability varies by region and household characteristics. Bangladesh can make growth much more inclusive by focusing on enhancing the human capacities of the poor and vulnerable and by strengthening social insurance mechanisms. Inclusion is also helped by an enabling environment for local economic development in small and medium-size cities by connecting them to markets and creating a level playing field in the provision of basic services.

Growth also needs to be sustainable. How can this accelerated growth be sustained given the challenges to growth posed by climate change and unplanned urbanisation? Both these issues are increasingly affecting growth and need to be on the forefront of the development agenda in Bangladesh.

As one of the most climate-vulnerable countries in the world, growth in Bangladesh is eroded through both ex-post and ex-ante channels. Ex-post macro effects include the direct effects of climate phenomena such as sea-level rise, changes in crop yields, and floods after they occur. Over the next decade, growth could be 2.0-6.0 percentage points lower, depending on the frequency of flooding. Ex-post impacts of climate change include depression of labour demand, with demand for low-skilled workers declining more than that of skilled workers. Most of the effects of climate change will be felt a few decades from now and these impacts on the economy are only likely to worsen. These national level estimates capture impacts of climate change after they occur.

But what about the ex-ante impacts of climate change before the shocks hit? Taking a micro view by looking at how households alter their behaviour in anticipation of a climate risk and how this affects productivity and growth, it can be said that by anticipating climate risks, households can diversify employment of its members to hedge against such risks. While this is good if diversification happens due to "pull" factors that attract people to higher productivity jobs, evidence suggests that climate-related "push factors" could lead to sub-optimal employment choices that lower productivity, welfare and growth under certain conditions. Adopting policies that encourage climate-resilient sectors as well as helping households cope with climate variability will help Bangladesh alleviate the impact of climate change on growth.

While further urbanisation offers opportunities to accelerate growth, it also comes with risks to sustainability if not managed properly. Based on salient features of urbanization in Bangladesh today, it is important to have an urban vision for a middle-income Bangladesh. Given its high urban population density and low economic density (GDP or value added per square km), it is argued that Bangladesh needs to substantially increase its economic density to become a middle-income country by 2021. This could happen if Bangladesh had taller "mountains" (higher value added per square kilometre) around its current growth centers in Dhaka and Chittagong and/or increased the number of "hills" (created alternate growth centers). Accelerated growth can be sustained only if the urban space is competitive i.e., well connected, livable, and innovative.

These three objectives could be achieved by a three-pronged policy approach that focuses on infrastructure, institutions, and incentives. Four strategic directions are provided that point to improving Dhaka's competitiveness, leveraging Chittagong's natural advantage as a port city, creating an enabling environment to foster local enterprise in smaller cities, and finally, locating Export Processing Zones (EPZs) strategically.

The reform agenda is vast for Bangladesh to become a middle income country (MIC) by 2021. Real gross domestic product (GDP) growth would have to accelerate by a couple of percentage points from its current level. Where would this come from? Would it be inclusive and sustainable? A comprehensive list of actions across several fronts is proposed for the purpose.

It is interesting to note that at least four policy actions are important across all the objectives of accelerating growth, making it inclusive, and ensuring that it is sustainable. To help prioritise, the focus here is on key reforms that cut across the three main themes, while recognising that bold actions across all fronts are necessary if Bangladesh is to reach its goals. These cross-cutting action areas are infrastructure, land, human development and the business regulatory environment:

News: The Daily Financial Express/Bangladesh/19-Nov-12