Money supply must be stopped to keep weak banks operational

The International Monetary Fund (IMF) has imposed conditions to stop the supply of money from the central bank to keep weak banks operational. They discussed these issues in several closed-door meetings of Bangladesh Bank with the visiting IMF mission on Wednesday.

The IMF also said that keeping weak banks operational by providing money disrupts the competition in the banking sector. This hinders the development of banks. In addition, the problems of this sector are hidden behind a veil. Which is now emerging as a boil.

The IMF has called the incident of keeping weak banks operational by printing money and lending it to the central bank under a special arrangement rare.

It also discussed the autonomy of the central bank, the progress of the merger of five weak banks, the Bank Resolution Ordinance, and the risk-based supervision system to be introduced from next January. The mission also held several meetings with the Finance Ministry on Wednesday. In those meetings, the IMF has sought information on the government's financial situation and the overall economy, including budget management.

A mission from the government's agency arrived in Dhaka on Wednesday to review the progress of implementing the conditions for the sixth tranche of the IMF's $5.5 billion loan to Bangladesh. On the first day, they held a series of meetings with Bangladesh Bank and the Ministry of Finance. The mission will remain in Dhaka until November 13 and meet with various government agencies.

Sources said that the meeting held at Bangladesh Bank in the morning was led by Deputy Governor Nurun Nahar. Other deputy governors, executive directors and other officials were present at the time. In the meeting, the IMF asked the government to stop lending money from the central bank to keep weak banks operational. Due to unprecedented looting in the banking sector during the previous government, some banks became extremely weak. Those banks were kept operational by lending money from the central bank under special arrangements. Still, the banks could not turn around. The IMF called such incidents rare.

To borrow money from the central bank, a bank must pledge government or central bank-approved bills or bonds purchased by them. But weak banks did not have any such bills or bonds. Still, the central bank gave them special consideration for loans. They even gave them loans in printed money. As a result of these loans, the banks could not learn strategies to deal with the crisis. At the same time, they could not gain skills by dealing with their own weaknesses. Which has been identified as a major weak point for the banks.

In this context, Bangladesh Bank said that weak banks were previously provided with money based on political decisions. Now it is not being provided. The government is providing money for the merger of five banks. The central bank is not providing any money. However, in the future, the central bank may have to make concessions in policy support in some sectors. Considering the risk of the bank, the central bank can make concessions in this sector.

Two more meetings were held at the central bank after noon. In those meetings, it was asked what kind of steps are being taken to ensure that the banking sector does not face any more crises in the future. In response, various steps taken by the central bank were mentioned.

Meanwhile, the IMF has already announced that the sixth installment of the loan was supposed to be released at the end of this year, that is, next December. They will not release it for now. Because when the elected government comes to power next February, they will decide to release the loan installment after talking to them.