Central bank's cry for help

FT ONLINE

As a Bengali saying goes, “Don't dig a canal to let the crocodile enter.” Never has this been more fitting than now for Bangladesh Bank (BB) that is voluntarily inviting the interference of the Ministry of Finance (MoF) into all banking affairs, severely damaging the image of a fairly independent central bank.

BB governor in a recent meeting of Agrani Bank implored for the quick intervention of the finance minister to reduce panic among bankers and depositors by bailing out a beleaguered private bank (probably Farmers). While this is actually indicative of the governor's continued obedience to the finance minister, the call for help invariably poses an inauspicious sign for a central bank which is supposed to handle these issues on its own. This also justifies the ministry's excessive interference into banking affairs seen in recent years.

As a leading daily reported last month, the governor's appeal for the finance minister's intervention created both confusion and panic in the market. This was expected because a definitional head of the banking industry is asking for help from the minister. This cry for help is only warranted when the governor has exhausted all avenues and failed. That hasn't happened yet and thus the problem actually lies in BB itself. BB's governance lacks the guts to tell MoF: “We can take care of ourselves.” The series of appeals the governor has extended so far to the finance minister on banking matters is unwarranted even as per the BB Order 1972 (amended in 2003) which requires further amendments to assign more powers to BB.

Bangabandhu believed in mutual respect and institutional autonomy. And it is reflected in the BB Order which says: “The Order was made by the President on the advice from the Prime Minister.” The Order keeps no undue room for the finance ministry's repeated interventions. We hardly see the words “Ministry of Finance” in the entire 27-page document (except for the Coordination Council whose chair is the minister). The phrase “in consultation with” is always followed by the words “the Government.” Article 2 defines “government” not as the Ministry of Finance, but the real government of the state.

Justice Abu Sayeed Chowdhury signed the document, not the then finance minister. Article 7 defines one of BB's major functions as “to regulate and supervise banking companies and financial institutions”—period—with no additional phrases such as “under the regular dictations and blessings from the Ministry of Finance.” BB's increasing indulgence of the ministry's interventions has spawned moral hazards among delinquent borrowers who now “manage” the ministry, not giving two hoots about BB.

The Order defines MoF's job as “to bring to the notice of the Coordination Council the impact of tax, budget and debt management policies on overall macroeconomic situation.” It sounds like a textbook outline of what a fiscal authority should actually do. But recent excessive engagement of the finance minister in banking affairs, due to BB's power vacuum of course, makes him more suitable to entirely be a “banking minister.” Indeed, the MoF's main job is to design the budget, devise an efficient way of financing deficits, and to enhance the fiscal capacity of the state which is currently one of the weakest in the world with a meagre 10 percent tax-GDP ratio.

At a recent Sonali Bank meeting, the finance minister blamed government interference for the pervasiveness of bad loans in all state-run banks. This is more so for Sonali Bank as he added. This is a million-dollar quote not for its truthfulness but for its utter contradiction. At this point, BB should stand straight and speak courageously to MoF and demand its right. BB should approach the prime minister and ask for an end to the Lord Clive-style dual rule in the banking industry—which makes us wonder whether the state banks belong to the Secretariat and the private banks partly belong to BB. A healthy fight between Topkhana and Motijheel would be good for BB. But the governor seems to suffer from the nostalgia of directly serving under the finance minister at the Secretariat and hence doesn't seem to see the benefits of an independent central bank. This psyche is doing more harm than good for banking governance.

Based on deteriorating conditions in the banking industry, particularly for the last two years since the resignation of Governor Atiur, three burning questions remain. First, do we really need a separate central bank when MoF controls all banking affairs? Second, do we really need a banking division at the ministry or does our past experience indicate that we have been performing very badly without this controlling agency? And finally, why are default loans mounting when economic growth seems to be on the right track? These problems can't be addressed without strong leadership at the central bank. The BB Order empowers the central bank to give recommendations for monetary, fiscal, and administrative measures if the bank anticipates economic disturbances (Article 81). The Order is enough to help BB emerge as the real custodian not only of the banking sector, but also of the whole economy.

Once Netaji Subhash Chandra Bose rightly articulated that rights are not given, they are taken. The sooner our institutions embrace the truth, the better results the economy will deliver. And strong leadership at the central bank is essential in this respect. Dr Subbarao, who was the finance secretary of India before becoming Reserve Bank of India's governor, visited BB in 2016 and said, “The day I became RBI governor, I fought for its integrity forgetting that I came from the ministry. The central bank, at the end of the day, is a knowledge institution.”

--RNA