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Loan scams, soaring NPLs, bank owners increasing clout hurt banking sector

  • Published at 10:40 pm January 2nd, 2019
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The roles of the government, particularly the Ministry of Finance and Bangladesh Bank (BB) were largely limited to appease bank owners, as they succeeded to amend The Bank Company Act , 1991, reduce corporate tax, and manipulate the pledged 9 % lending rate

Bangladesh's banking sector in 2018 was marred by: loan scandals, lending rate manipulation, soaring non-performing loans (NPLs), and increasing influence of bank directors in policy making.

The roles of the government, particularly the Ministry of Finance and Bangladesh Bank (BB) were largely limited to appease bank owners, as they succeeded to amend The Bank Company Act , 1991, reduce corporate tax, and manipulate the pledged 9 % lending rate.

In 2018, banks have no role in stemming soaring NPLs, instead, loan scams of a large magnitude resurfaced in the banking sector. Amid a proliferation of scheduled banks, many of which have been incurring losses for years, the BB stunned the sector by giving permission to another new bank, Community Bank of Bangladesh, to operate.

Farmers Bank scandal

The Farmers Bank became a hotbed for financial irregularities, just three years after commencing operations, near the end of 2017.

Established in 2013, the bank was involved in siphoning off more than Tk3,500 crore, according to BB. Currently, its NPLs account for 58% of its total outstanding loans. 

Muhiuddin Khan Alamgir, board chairman, and Md Mahabubul Haque Chisty, chairman of the audit committee, were forced to resign from their respective posts in November, 2017—following corruption allegations. 

As a result, from January 2018, depositors started withdrawing money from the bank, prompting the central bank and the government to step in and rescue the organization.

Later, four state-owned commercial banks—Sonali Bank, Janata Bank, Agrani Bank, and Rupali Bank—and the Investment Corporation of Bangladesh bailed out the bank, buying its equity shares worth Tk715 crore.

Managing directors of all five of the aforementioned financial institutions were appointed as directors of The Farmer's Bank.

Janata Bank loan scam

In August, 2018, a loan scam perpetrated by state-owned Janata Bank came to light. 

A BB report revealed that the bank had lent more than Tk10,000 crore to AnonTex and Crescent Group without complying with the central bank's single borrower exposure limit criteria.

Janata Bank lent about Tk5,500 crore to AnonTex—in clear violation of the Bank Company Act 1991—as it provided 25% of the state-owned bank's capital base. The law set the single borrower exposure limit to 10%. 

Currently, Janata Bank has the most default loans, worth Tk14,376.46 crore. Capital shortfall of this bank stood at Tk3,923.34 crore, as of September, 2018. 

Once considered a strong performer among the state-owned banks, Janata Bank is going through troubled times, former BB Governor Salehuddin Ahmed said, adding there is no plan of action in sight to solve the crisis.

Salehuddin cited a lack of good governance and widespread corruption as major reasons for the current dire situation of Janata Bank.

“The politically-appointed bank directors often influence bank officials to sanction loans which cannot be recovered later. Additionally, loyalty to vested groups, corruption, and lack of experience—among a section of bankers—worsens the situation,” he added.

Bringing down the lending rate: pledge, and reality

Following demands from businessmen, the government asked banks to bring their lending rates down to single-digits in April, 2018. 

Directors of private banks utilized this opportunity to acquire benefits—lowering corporate tax, slashing the repo rate, and reducing the cash reserve ratio—from the government.

Lending rates were officially brought down on July 1, 2018. However, only a few banks reduced the rates for certain loan categories. The bank owners announced they would lower the rate in late June as the government was slammed for reducing corporate tax for banks by 2.50% in the proposed budget for the 2018-19 fiscal year. 

Default loans

At the end of 2018, default loans of the banking sector hit nearly Tk1,00,000 crore for the first time in the country's history. 

The amount of NPLs stood at Tk99,370 crore, or 11.45% of disbursed loans, at the end of September, 2018. The bad loans of banks rose by a staggering Tk19,063.71 crore since 2017.

Speaking about the situation of the country's banking sector, the Association of Bankers, Bangladesh (ABB) President Syed Mahbubur Rahman said: “2018 was a very challenging year for us. There was a liquidity crisis at the beginning of the year, dollar prices have risen, while the amount of default loans has also increased.” 

Mahbubur, also the Managing Director and CEO of Dhaka Bank, opined that the dollar will be also be in high demand next year. 

"To provide liquidity, we have to depend on the bond market. Banks have to improve their governance. Special attention will be given to banking supervision, as well as to recovering loans from defaulters next year," he furthered.  

Detrimental changes to legislation

Economists and financial experts blamed: a lack of good governance, corruption, political interference in approving loans, and a culture of impunity towards loan defaulters for the banking sector crisis.

Executive Director of the Centre for Policy Dialogue (CPD) Dr Fahmida Khatun said two dubious amendments were made to the Banking Company Act in January, 2018; which undermined good governance in the sector.

“The tenure of banks’ boards of directors increased from six years to nine years, while up to four family members can now be allowed to be on a board, instead of two,” she said.

Fahmida further recommended the number of judges dealing with Artha Rin Adalat Ain (Money Loan Court Act) 2003 and Bankruptcy Act 1997 be increased, to ensure the speedy disposal of loan default cases and reduce backlog.

"Immediate action must be taken against banks that are performing poorly and are ill-prepared for BASEL III," she added.