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Stopping the plunder of public resources
FROM PAGE B4
The reform options for eliminating the downside risk presented by state-owned banks remain unchanged now as nine years ago. In that report we had provided detailed analysis based on international experience why public ownership of banks is not a viable long-term option in an environment of poor national governance. Ido not wish to repeat that analysis as it is rather detailed to fit the space here, but I will be happy to put a soft-copy of the report on the PRI website for interested readers.
The first best option is to privatise the state-owned banks. Yet we are mindful that privatisation is not a politically palatable option. There are also other practical
problems, including union pressure against privatisation and, additionally, finding sound buyers who are untainted by political favours is a major challenge.
In a political environment where privatisation is not imminent, there is a second-best approach that might work. Public banks tend to have an unfair advantage in mobilising deposits because of the perception of state guarantees and a de facto immunity from effective supervision. Because of these privileges, state-owned banks are able to stay float even with very poor loan portfolios. The adverse implications of these improper privileges for efficient lending decisions could be tackled by taking away the lend-
ing functions of these banks.
If such banks are allowed to only hold government paper, their deposit growth would be indirectly limited and sounder banks would intermediate more flows. Importantly, the deposits mobilised will be safe and not exposed to risks of the type presented by the recent Sonali bank lending scam.
Such lending restrictions are akin to a “dual banking system” with “narrow banks” that are likely to remain state-owned (and only allowed to gather deposits to invest in government paper) and conventional private sector banks. No new laws are required because the government as owners of the state bank could take this decision.
The idea of narrow bank is not a new one and merits serious attention. At the least the government might ask Bangladesh Bank to review this option carefully and provide a technical proposal.
In the meanwhile the government must adopt the minimum reform of putting immediately all state-banks under the direct supervision of the Bangladesh Bank and require the full compliance by these banks of all prudential regulations, including certification of quality of board and senior management within a tightly stipulated time frame.
Sadiq Ahmed is the vice president of Policy Research Institute of Bangladesh. He can be reached at Sadiqahmedl952@gmail.com.