Non-banking financial institutions (NBFIs) are currently facing a challenging situation as they contend with increased regulatory measures from central banks alongside inflationary pressures, resulting in heightened competition with traditional banks.
The concerns are compounded by instances of irregularities and corruption within these institutions, dissuading customers from keeping their funds there.
Consequently, managing liquidity within non-banking financial institutions has become notably challenging.
In response, a new law has been passed, setting a limit on deposits. Under these regulations, no individual can hold more than Tk50 lakh in a single name within a financial institution.
This move is expected to redirect deposits away from institutions marred by irregularities as well as affect well-managed institutions in this sector, a concern raised by top executives in these organizations.
The managing director of a financial institution expressed concerns regarding the impact of the new law.
He highlighted the potential inability to renew most of the deposits that are due to expire. Moreover, many institutions might struggle to return deposit funds to customers due to a shortage of funds.
Notably, well-managed institutions will be disproportionately affected. According to the new regulations, deposits that mature will be transferred to other institutions by law, he said.
The bill, passed on Wednesday, restricts finance companies from accepting deposits exceeding Tk50 lakh in a single name or Tk1 crore in joint names, or more than the limits set by Bangladesh Bank from time to time.
The bill also enforces a cap, stating that no person or their family members can acquire more than 15% of the shares of a financial institution, directly or indirectly, with the aim of curbing irregularities and corruption. However, scepticism remains regarding the potential effectiveness of these measures in reducing such issues.
Adverse impact
The former chairman of the Association of Bankers, Bangladesh (ABBD), Md Nurul Amin, expressed his concern about the adverse impact on well-functioning financial institutions due to the deposit limit.
He said the negative impact on deposits has already started since Thursday, the day after the law was passed.
Highlighting the potential dangers, Nurul Amin pointed out that good institutions will experience a negative impact on their deposits. This change has already initiated a decrease in deposits from well-managed institutions, signalling potential future challenges for the sector and the broader economy.
He said the decision on the Tk50 lakh deposit limit should be changed.
Officials of non-bank financial institutions emphasise that these institutions typically attract deposits from selected customers who have the capacity to invest larger sums. However, the new law limits their ability to retain deposits above the set threshold.
Concurrently, attracting new deposits has become challenging due to higher bank interest rates and constraints set by the central bank, resulting in a reduction in deposits in these institutions, as indicated by recent Bangladesh Bank statistics.
Wishing to remain anonymous, the managing director of an organisation underscored the multifaceted problems arising from the deposit limit, foreseeing challenges in renewing deposits above the stipulated amount and the subsequent inability of many organisations to comply due to insufficient funds.
Importantly, institutions use customer deposits for providing loans; thus, a financial crisis might ensue due to the implications of this law, he said.
However, a senior official from Bangladesh Bank defended the imposition of the maximum deposit limit, saying that many depositors were attracted by high interest rates but faced challenges in retrieving their savings from financial institutions, prompting them to approach the central bank for assistance.
The stipulation was introduced to prevent such occurrences in the future.
Bill passed in a haste
Critics of the law suggest that it was hastily passed without consulting stakeholders, particularly highlighting the imposition of the maximum deposit limit at Tk50 lakh in the act without thorough discussion.
The timeline of events shows a swift process. The cabinet approved the “Finance Companies Act, 2023” draft on October 23, and within six days, the law minister presented the “Finance Company Bill-2023” in Parliament on October 29.
The bill was subsequently reviewed and sent to the Parliamentary Standing Committee on Finance to report within three days, leading to its passing on November 1.
Meanwhile, according to central bank data, deposits in financial institutions increased by more than Tk930 crore in the six months from January to June this year.
At the end of December 2022, deposits in this sector were Tk43,753 crore. At the end of June this year, the amount increased to 44,683 crores.
Despite an increase in deposits in financial institutions according to Central Bank data in the first half of the year, concerns loom large regarding the potential impact of the new regulations and their swift implementation on the financial sector.
Other aspects of the bill
The newly introduced legislation contains several significant provisions aimed at regulating shareholding and operations within financial institutions.
It restricts the acquisition of shares by any individual or family member to a maximum of 15% in a financial institution, either individually or jointly. Furthermore, any excess shares must be transferred within two years from the enactment of this act; failure to comply will result in the forfeiture of the surplus shares in favour of the government.
Notably, these regulations do not extend to government-owned finance companies.
The law also specifies that no family member can hold more than two director positions.
If a family owns more than 5% of the shares, a maximum of two directors can be appointed from within the family, whereas if the ownership ranges between 2 and 5%, only one family member can become a director of the finance company.
The definition of “family” is expressly outlined in the new law, encompassing spouses, parents, children, siblings, and all dependents.
The legislation also mandates a maximum of 15 directors, inclusive of two independent directors.
In contrast to the previous law, which did not impose limitations on the percentage of shares an individual could hold in a financial institution, the new law introduces a definition of a willful loan defaulter.
Among other stringent measures, the law prohibits finance companies from granting loans or financial facilities against the security of shares.
It also bars loans or financial aid to anonymous, non-existent, or nominal entities. Additionally, the legislation restricts finance companies from offering loans exceeding Tk10 lakh to an individual without following the amounts prescribed by Bangladesh Bank.
Another stipulation is that finance companies cannot receive loans or financial benefits from any director or their family member without collateral, constituting an offence punishable by imprisonment or a fine.
Provisions for punishment
The law outlines penalties for various violations, including a penalty for approving the waiver of interest or profit on loans without the approval of Bangladesh Bank. Any individual involved in this offence may face imprisonment or fines.
A willful defaulter is defined based on three criteria: failure to repay a loan despite the capacity to do so, misusing the loan for purposes other than intended, and submission of false documents. Such defaulters may face criminal cases, travel bans, and restrictions on trade licences imposed by Bangladesh Bank.
The legislation escalates fines and penalties in specific scenarios. For instance, the penalty for non-compliance with licencing conditions has been raised from Tk10 lakh to Tk50 lakh.
Foreign individuals or institutions looking to buy shares in financial institutions must obtain approval from Bangladesh Bank, which will determine the allowable share amounts.
Moreover, the bill grants Bangladesh Bank the authority to investigate individuals involved in unlicensed financial activities.
Non-cooperation in such investigations can result in imprisonment or fines. False statements in financial records or documents could lead to imprisonment or fines for the individuals concerned.
