Banking Sector Needs Separate Ministry

The new government has commenced its journey with many challenges and priorities, of which economy and banking should top the rank. In our country, ministry of finance traditionally manages both the economy and the banking sector. But the country's banking sector has remarkably expanded during the last three decades, particularly in respect of the number of banks, customers and volume of deposits and loans. More than a hundred banks and non-banking financial institutions have been operating in the country’s money market as well.

 

The country's success in establishing a large banking sector has, however, been marred by many weaknesses in this sector, which include a lack of good governance, no clear demarcation between the board of directors and senior management, an absence of digitalisation, lack of bankers’ professionalism, poor credit risk management, abnormally high NPL (non-performing loan), and weak supervision of the central bank. In fact, this sector has been allowed to grow without following good practices and features of the standard money market. Consequently, the country’s banking sector has been running with mismanagement, anomalies.

Banking plays the role of blood circulation in an economy. So, weak banking means a poor economy, and conversely, strong banking means a good economy. For example, Germany is one of the largest economies in Europe, but their economy could not grow as desired in recent years because their banking sector has been hard hit with some compliance and regulatory breaches. On the other hand, Spain, being a relatively small economy, has been performing well because of maintaining a very strong banking sector. After the financial crisis in 2008, Italy’s economy suffered with a severe impact in the country’s banking sector. Italy’s government had been striving hard to put their economy on a growth track but was facing tremendous difficulty. Subsequently, they fixed their banking sector first, and then the economy started growing. Even China has successfully established a very strong and efficient banking system by setting up a dozen of the world’s strongest banks.

There are many such instances in the world that suggest that a standard banking system is inevitably required if the economy needs to grow. Unfortunately, no previous government in our country has realised the importance of a standard banking sector. So they have either ignored or deliberately kept this sector in a mess. Now responsibility will rest on the new government, who will need to not only restore the economy but also fix the banking problem.

This is, of course, not an easy task. It needs to be carried out with topmost priority. In order to support the economic recovery, the country’s banking sector is required to be overhauled, for which the government can consider forming a separate ministry with exclusive responsibility. 

The country’s banking sector has multiple areas, which require priorities comprising short, mid, and long-term action plans. Firstly, during the interim government’s tenure, some banks could not refund depositors’ money as per their demand, which was an unprecedented incident in the country’s history, eroding people’s trust in the banking system. So, establishing a deposit insurance corporation may be considered, which will not only restore depositors’ trust in the banking sector but also safeguard their money to some extent. Secondly, the world’s banking sector is heading towards the AI (Artificial Intelligence) era, whereas our banking is still following a paper-based system, so complete digitalisation is to be implemented in the banking sector, which will not only standardise the country’s banking system but also significantly reduce the scope of fraud and loan defalcation.

The country's banking has been confined to the century-old conventional activity of mobilising deposits and sanctioning loans, whereas the world’s banking has undergone massive diversification. Our banking sector should also consider diversification by introducing loan trading, wealth management, customer retirement planning in order to help businesses mobilise funds through the issuance of bonds, mergers and acquisitions. Besides, credit risk management and loan operation must be fully automated so that the scope of manual manipulation is eliminated or restricted. Additionally, an efficient secondary bond market is needed to support the government expenditure and reduce the pressure on depositors’ money for banks' source of loanable funds. Even introducing a special expatriate dollar bond can be an option, which may help the country overcome the dollar crisis and support investment in foreign currency with its own source. There are many such measures needed for the banking sector.

Taking these measures and accomplishing them is a massive responsibility for which a separate ministry’s role is inevitable. Even the separate ministry for banking, if created, should be retained under the prime minister’s portfolio so that unnecessary interference from different influential quarters, which is found very common in our country and thus causes serious impediments to every good initiative, should be avoided. Besides, competent and experienced bankers, lawyers and professionals can be employed in this separate ministry. If we decide to continue fuelling economic growth, a standard banking system is a must. Fixing the country’s banking sector and reshaping it with standardisation is a mammoth task, for which a separate ministry is needed.