SoBs in Bangladesh: From cancer to pimple  

“IT TOOK us two years, but the greed kept us going,” Yusuf Munshi told police after they arrested him and his accomplice. Mr Munshi had tunnelled under a branch of Sonali Bank, Bangladesh’s biggest state-owned bank, in the town of Kishoreganj, and made off with five sacks of cash containing 164m taka ($2m). On social media, people advised the robbers that there is a less time-consuming way to get your hands on a pile of cash: befriend the bank manager.

Bangladesh’s government banks are normally fleeced at street level during opening hours, in plain sight. In 2012, in the biggest of many banking scandals since the banks were nationalised 40 years before, Sonali Bank revealed that one of its branches in Dhaka had granted a particular firm almost 27 billion taka in loans on false premises. All but 4 billion taka subsequently disappeared without trace.

SoBsPoor oversight and imprudent lending, often to well-connected firms or individuals, are a hallmark of state-owned banks everywhere. Bangladesh is no exception: in December the central bank estimated that 166 billion taka of loans at the four big state-owned banks were in default—roughly 20% of the total. The government injected 41 billion taka into them that month, 20 billion taka of which went to Sonali Bank. That is only half of the additional capital the central bank thinks they need, and a quarter of what the World Bank deems necessary. The government has promised to raise underwriting standards and institute more effective controls, but observers, both foreign and domestic, doubt its will and ability to do so.

What is remarkable about this story is that the rot at the state-owned banks has not brought the economy to a halt. Lending continues to grow, albeit by less than the central bank’s target of 16% a year. In fact, the state-owned banks are of ever-shrinking relevance. For decades the World Bank and the IMF had been telling the government to clean them up and privatise them. Donors spent millions on clever consultants. But officials at the central bank doubted that any government would willingly part with such important sources of influence and patronage. So they came up with an alternative cure: issue lots of private-bank licences and cap the rate of growth of state-owned banks.

The strategy of transforming state-owned banks “from a cancer to a pimple”, as one former official describes it, worked beautifully. Today, their share of deposits is 25%, down from 60% in 1992 (see chart). In India, in contrast, it has been frozen at 75% since the early 1990s.

Bangladesh’s private banks, in turn, have helped boost garment-making, its main industry. Clients are lining up to secure loans for garment factories, power plants and steel mills, among other projects, says Sheikh Mohammad Maroof, the head of wholesale banking at City Bank, a private bank.

There is plenty more scope to grow. Commercial interest rates, at 15% or so, are among the highest in Asia. The government issued nine new banking licences in 2012, bringing the total number of banks to 56. That should bring new capital to the industry, and spur lending.

But there are fears that the distinction between private banks and state-owned ones may not always remain so sharp. The government, with the help of the central bank, recently took control of Grameen Bank, an embattled microcredit institution (see article). Many of the new banking licences went to applicants with close ties to the current government. It would be a shame if a reform designed to liberate lending from politicians’ whims itself fell prey to them.

-The Economist