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[🇧🇩] Banking System in Bangladesh

G Bangladesh Defense
[🇧🇩] Banking System in Bangladesh
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How to choose a good bank


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Depositors looking to put money in banks often face the risk of selecting a bad bank. This is because often they don’t have complete information about the financial and other conditions of the banks. VISUAL:SALMAN SAKIB SHAHRYAR

Depositors looking to put money in banks often face the risk of selecting a bad bank. This is because often they don't have complete information about the financial and other conditions of the banks. For a safe and good banking experience, it is essential to recognise strong banks, which can be done in the following ways.

A good bank ensures quality of loans (assets) by selecting the right borrowers, sanctioning loans to various sectors in different sizes, and keeping collateral. It avoids credit concentration and aggressive lending to high-risk borrowers, and grants loans to those who have credit discipline. It is motivated by value-driven strategies rather than immediate performance-driven ones. A bank's performance can be measured by its loan quality: if it has a small amount of distressed assets, its quality is good, but a bank with huge distressed assets—which include non-performing, rescheduled, restructured and other loans stuck in money loan courts—is surely a bad one. Such a bank fails to be profitable because it has to maintain a provision against non-performing assets from its profits. A bank that has a non-performing loan (NPL) rate of less than five percent is a good bank in Bangladesh's context. Depositors should look at this rate.

There is a single-borrower exposure limit, indicating the maximum amount of loan that banks can grant to one borrower. A bank can sanction 25 percent of its capital at most to a single borrower. It can also make a large loan that's at least 10 percent of its capital. It should not extend such loans frequently because doing so creates a concentration risk. It also fails to construct a diversified portfolio with many large loans. In contrast, when a bank extends many small and medium loans, its portfolio is diversified, making a trade-off between risks and returns. Depositors should avoid banks that have high proportions of large loans.

Capital is a parameter that's used to understand banks' loss absorption capacity. A bank must have sufficient capital for solvency purposes. When the capital is adequate, it can absorb significant unforeseen losses. Any loss that arises mainly from credit, interest rate, liquidity, foreign exchange and/or price risks is adjusted against the capital. Hence, a bank must keep a minimum amount of capital against its risk-weighted assets. If it possesses more risky assets, its capital requirement is high. A sound bank also maintains additional capital rather than the minimum. It keeps some capital buffer to face the loss emerging from unfavourable economic conditions and adverse business cycle. Depositors must also look at the overall capital position of a bank.

Liquidity is the ease with which an asset can be converted into cash without affecting its market price. Liquidity risk is a sudden surge in liability withdrawals that may leave banks in a position of having to liquidate assets at a very short notice and low prices. It is one of the most significant risks that banks need to manage to keep the trust of their depositors. When a bank faces a liquidity problem, it generally borrows from the money market. But when it tends to borrow at high interest rates, that signals that the bank is at a serious liquidity risk. It may also tend to collect deposits at abnormally high interest rates. As a last resort, it may borrow from Bangladesh Bank (BB). Sometimes, it may even need special liquidity support from BB to continue its operations.

Depositors should also know whether a bank can maintain regulatory reserves required by the central bank. Every bank has to maintain certain statutory reserves in cash and other assets. Failure to maintain the reserves leads to punitive action. Recently, several banks have failed to maintain these reserves, for which they were fined.

In a good bank, there are checks and balances between the board of directors and the top management where the former ensures that the bank's affairs are carried out competently, ethically, and in accordance with the law and policies; it also ensures that quality services are provided. The latter have to supervise all operations of a bank. There must be a fair participation of all directors in policymaking. The management must have freedom in its operations and the right to say "no" to the board of directors.

However, sometimes a bank is dominated by the chairpersons or directors from the same family. The chairperson makes major decisions on issues such as lending, recruitment, and large purchase. This type of governance puts the bank at a high risk. The banks that are currently facing problems with liquidity, NPLs, capital and provision were largely dominated by their respective chairpersons or a few influential directors. We have seen reports in the media about some banks afflicted with this problem. Depositors must be careful about putting their money in these banks.

The BB discloses information indicating the quality of banks. Recently, it categorised banks in red, yellow and green zones based on their performances. Banks in the green zone are safe, while those in the red zone are risky. The central bank also runs stress testing on banks to better understand their financial position and risks. The test shows the shock absorption capacity of banks under different adverse conditions. A good bank is highly shock-absorbent.

The BB analyses a bank's conditions by the CAMELS (capital adequacy, assets, management capability, earnings, liquidity and sensitivity) rating. Although this rating is not made public, every bank knows its own rating. In addition, banks are also rated by external credit assessment institutions every year. When a bank attains a good rating, it is advertised in newspapers. This rating is an important indicator of performance.

A good bank is also consistent in making profit; it declares a certain percentage of dividends every year for its shareholders and retains a portion of its profit to increase capital base and expand business. Its share price does not change abruptly. A good bank earns a decent return on assets and equity. It has respectable earnings per share, and so is its net asset value. The financial statements of banks contain these sets of information which depositors can look through.

Depositors should not necessarily make all these analyses by themselves. Most analyses are readily available in annual reports. They can depend on media reports too. If they are confused while selecting a bank, they can simply talk to bankers and experts. What's most important is that they need to be conscious about choosing a good bank. Doing so can reduce the risk of losing money.

Dr Md Main Uddin is professor and former chairman of the Department of Banking and Insurance at the University of Dhaka.​
 

Islamic banking to be off limits to regular banks
Draft law aims at levelling the playing field


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A bank will not be able to do Islamic banking business along with conventional banking at the same time, according to the draft 'Islami Bank Company Act-2024', as the central bank looks to level the playing field for Shariah-based banks.

As of June, 30 conventional banks provide Islamic banking services through their 33 branches and 688 windows.

The banks will have to change their banking business model or form a subsidiary company to provide Islamic banking services when the law is effective.

"If the conventional banks are allowed to do Islamic banking, then there will not be a level playing field as the Islamic banks do not have the opportunity to do conventional banking," said Mohammad Shahriar Siddiqui, the head of the committee that prepared the draft.

Globally, this is the practice but, in some countries, there are provisions to open an Islamic banking window, he said.

The basic difference between conventional banking and Islamic banking is interest. Conventional banks are offering and taking interest by providing banking services but Shariah-based banks cannot. Shariah banks can share profits.

The need for the draft came as Shariah-based banking, which began in Bangladesh in 1983, is expanding rapidly without any law or effective guidelines.

The Islamic banking sector accounts for 23.65 percent of the total assets in the banking sector, 26.23 percent in the case of deposits and 28.24 percent in investment as of June.

At present, there are 10 full-fledged Shariah-based banks, and some of them have been involved in irregularities and scams in recent years.

The committee has prepared the draft in accordance with the international best practices by reviewing the existing BB provisions for Shariah-based banks and the existing laws of Islamic banks in different countries, said Siddiqui, also the assistant spokesperson of BB.

The banking regulator is now taking opinions on the draft law, which was approved by the BB governor on October 9.

The 30 conventional banks that are currently offering Islamic banking will have to inform the central bank in writing about their preferred type of banking within six months of the effective date of the act.

The banks will then get three years to become full-fledged Islamic lenders or wrap up their Shariah-based operations. In special cases, the tenure may be extended by a year.

However, the banks can continue the other type of banking business until the liabilities are not paid or the term for the deposits or loans has expired.

All Islamic banking companies licensed under the act will have to use the word Islamic in their name.

An Islamic banking company will not be able to purchase controlling shares in any existing company for the purpose of forming a subsidiary company or converting it into a subsidiary company for any purpose other than providing Islamic banking services.

The central bank will form a central Shariah advisory council to fulfil the adjective of the Act.

The Islamic bank companies will not be involved in any business where Shariah is not allowed, it said.

"You can say that we welcome the law, which is needed. But this is not the right time to impose a bar on conventional banks to do Islamic banking," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

The financial health of Shariah-based banks save for two or three has deteriorated.

"Amid this situation, the customers of conventional banks (Shariah branches or windows) will not find any suitable alternative if the bar was imposed in the law. The customers will be impacted."

Now, the Islamic banking branches and windows are doing better than the full-fledged Islamic banks, he said.

"If we can manage the balance sheet separately then there is no problem to do Islamic banking," he said, adding that foreign banks like Standard Chartered are doing both conventional banking and Islamic banking.

The guidelines and supervision are more important than the bar, said Rahman, also the former chairman of the Association of Bankers Bangladesh.

Conventional banks in Bangladesh opened Islamic banking branches and windows when they saw that there was a huge possibility for making high profits and attracting clients, said Md Main Uddin, professor and former chairman of the department of banking and insurance at Dhaka University.

If the law is passed, including those clauses, then the lenders will concentrate their business in specialised areas and their investment will also increase, which is primarily a positive thing, he said.

The barrier should not be imposed for a long time, he said, adding that the service quality and competition will increase when there will be no barrier.

There is a possibility of the service quality deteriorating if there is no competition.

Some banks can come under the merger and acquisition or liquidation process as there are so many banks in the country considering the size of the economy, he added.​
 

Islami Bank: Tk 120m gift allocation also vanishes into thin air
Shanaullah Sakib
Dhaka
Updated: 09 Nov 2024, 13: 27


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Islami Bank: Tk 120m gift allocation also vanishes into thin air

When different financial irregularities came to light in 2023, Islami Bank plunged into a liquidity crisis. The authorities took special initiative to boost deposit collection and set individual targets for officials.

Later, the board of directors decided to reward 13,500 successful officers with suit pieces. No officials received any suit piece till date, but the allocation – Tk 63 million – has already been spent.

In the same year, Islami Bank took an initiative to boost remittance to tackle the dollar crisis. It decided to purchase 100,000 umbrellas to give to top remitters. No umbrellas were ever provided to the bank, but Tk 55 million has been withdrawn on this purpose.

The bank spent around Tk 120 million on two fictitious purchases between August and October last year, according to internal documents. However, the real beneficiaries of the funds remain untraced.

The funds for the suit fabric were funneled through a businessman’s account in Chattogram and then transferred to three other accounts on the same day. The total amount was withdrawn immediately. Thus, the beneficiaries kept themselves out of sight.

Where did the money go?

Islami Bank, in a board meeting on 26 July 2023, decided to reward a total of 13,522 officials with suit fabric. Its client Belmonte Fabrics was awarded the order.

On 29 August, invoices and bills were submitted on behalf of Belmonte, though no fabric was delivered in reality. Despite being aware of the issue, the bank’s chief financial officer, Farid Uddin, requested authorisation to process the payment, while managing director Mohammed Monirul Moula approved it immediately.

According to records, Islami Bank transferred an amount of Tk 63.5 million to the client’s account on 30 August. On the same day, the fund was withdrawn from Belmonte's account with two cheques.

Belmonte owes nearly Tk 500 million to the Elephant Road branch of Islami Bank, and with a signed cheques submitted as security. When a loan defaults, the bank uses the cheque to file a case. A bank official said the amount was withdrawn using two security cheques of Belmonte.

In this regard, the managing director of Belmonte, Mohammad Badsha, said, “We received an order to supply suit fabric. As far as I recall, the order was never delivered. We have around Tk 500 million in loans at the bank, and security cheques are submitted against it. The funds might be withdrawn using those cheques.”

According to documents, a total of Tk 60 million – Tk 40 million and Tk 20 million in two phases – was deposited in cash from the Elephant Road branch to Masud Fish Processing and Ice Cream Limited of the Khatunganj branch in Chattogram. The entire amount was withdrawn from the branch through three cheques on the same day.

Masud Fish is an old client of Islami Bank and has a loan of Tk 500 million from the Khatunganj branch. It also submitted signed cheques for security.

Ashraf Hossain Masud, managing director of Masud Fish, claimed to have no connection with S Alam Group. “Though we are from Patiya, we have no relations with S Alam Group. Upon a request from the Khatunganj branch manager and second officer, I allowed them to use my account. Now, I have understood that it was a mistake to allow them to use my account and three cheques.”

He also said that they have been a client of the bank since 1988-89, but faced non-cooperation from the bank during the last few years. Hence, he permitted the bank to use his account, in the face of pressure.

During all these transactions, Islami Bank was under the control of Chattogram-based S Alam Group, led by Saiful Alam. His personal secretary and some other close associates were in leading positions in the bank, including the position of deputy managing director. Officials said the particular officers were engaged in clearing the fund.

Allocation for umbrellas

In its 329th board meeting on 20 September last year, the bank approved the purchase of 100,000 umbrellas and awarded the contract to Express Communications. It submitted invoices and bills on 10 October, without delivery of the umbrellas.

CFO Farid Uddin requested the funds, and MD Mohammed Monirul Moula approved it. Later, the bank issued a pay order of Tk 55 million to Express Communications, and it was cashed immediately.

Deepak Ghosh, owner of Express Communications, said, “I had a business partner named Abul Khair. He handled the delivery process of the gifts to the bank. However, he has no longer been with us for the last six to seven months.”

When asked about the issue, Abul Khair said, “I have no idea about the issue.”

The managing director of Islami Bank, MD Mohammed Monirul Moula, could not be reached for comment, while the central bank said a forensic audit could reveal the real beneficiaries of these irregularities in the future.​
 

Bangladesh Bank restructures board
BSS
Published :
Nov 10, 2024 20:51
Updated :
Nov 10, 2024 20:51

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Bangladesh Bank (BB) has restructured its Board of Directors by adding three new members.

The development came through a board meeting held on Sunday at the BB headquarters in the city, said Husne Ara Shikha, BB Executive Director and spokesperson, after the meeting.

The three new directors are Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), Md Habibur Rahman, deputy governor of Bangladesh Bank, and Nazma Mubarek, the secretary of the Financial Institutions Division.

Shikha said today’s board meeting also set and passed the area of responsibility of the six-member taskforce which was formed back in September to conduct reform works in the banking sector.

The central bank spokesperson said the board today was also formally briefed about the writ petition regarding the Beximco Group.​
 

Banking sector needs drastic reforms to restore trust: BB governor
UNB
Published :
Nov 16, 2024 21:54
Updated :
Nov 16, 2024 21:54

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Bangladesh Bank (BB) Governor Dr Ahsan H Mansur has said that the banking sector requires drastic reforms, describing it as the backbone of the financial sector.

Speaking as the chief guest at the 'Mastercard Excellence Awards 2024' held at a hotel on Saturday evening, the governor acknowledged past irregularities in the sector and the central bank's shortcomings in regulatory affairs.

He, however, assured that drastic reforms would be implemented to ensure fairness and restore trust. "Irregularities happened in banks for a long period with state sponsors. It will take time to restore trust in our banking system domestically and globally," Dr Mansur said.

He said that banking sector reforms alone would not be enough and highlighted the need for other state organs and political commitment to achieve a robust financial system.

Dr Mansur dismissed fears of Bangladesh facing a crisis like Sri Lanka's, affirming that there are no severe risks in the banking sector at present. "The government is confident in restoring good governance in the financial sector," he added.

Trishita Maula, Acting Deputy Chief of Mission at the US Embassy in Dhaka, attended the event. CEOs of several leading banks, fintech companies, and merchants were also present.

The Mastercard Excellence Awards 2024 recognised 26 organisations for their contributions to building a sustainable digital economy and advancing financial inclusion.

Mastercard, which began its operations in Bangladesh in 1991 and became the first global payments operator to establish a local presence in 2013, continues to play a pivotal role in strengthening the country's digital ecosystem.

Over the years, the company has collaborated with government and private stakeholders to transform the payments industry with its world-class products and solutions.

Syed Mohammad Kamal, Country Manager for Bangladesh at Mastercard, said, "Mastercard remains committed to digital innovation and fostering inclusive growth in the country. The company is pleased to collaborate with leading banks, fintechs, and merchants as partners."​
 

Default loans soar to Tk 2.85 trillion, actual scenario emerges
Staff Correspondent
Dhaka
Updated: 17 Nov 2024, 20: 00

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The volume of defaulted loans increased to Tk 284,977 crore (about Tk 2.85 trillion) at the end of September, with a humongous rise of bad loans by Tk 735.86 billion in the banking sector in three months.

This is the first time the information of defaulted loans became available since the fall of the government on 5 August, revealing the actual amount of the bad loans.

The money that was taken out from banks during the regime of Sheikh Hasina-led government of Bangladesh Awami League (AL) until it was ousted in the face of a student-people uprising, is now being identified as defaulted loans.

As a result, nearly 17 per cent of the loans disbursed by the banks in the country have become defaulted, which was 12.56 per cent at the end of June.

According to the Bangladesh Bank (BB), the amount of defaulted loans at that time was just over Tk 2.11 trillion.

When the Bangladesh Awami League formed the government in 2009, the amount of defaulted loans in the country was Tk 224.81 billion. Since then the bad loan has seen a steep rise in the last 15 and a half years.

The economists, for a long time, have been alleging that under the state patronage, a huge amount of the money has been looted from the banks in the name of defaulted loans and laundered abroad.

Even different types of initiatives were taken so that the banks could disburse a huge amount of money as loans to the influential people and show the amount less in the banks’ ledger books.

The central bank, the Bangladesh Bank, however, has shifted its stance from that policy.

According to the regulatory body, the role of private banks was more than the state-owned banks in the rise of defaulted loans from June to September.

The bad loans increased by Tk 236.28 billion at the state-owned banks against the amount of Tk 498.85 billion at private banks in the three months.

The six Islamic banks that were under the control of the controversial S Alam Group have started revealing the actual state of their financial conditions following the fall of the government.

Besides, former prime minister Sheikh Hasina’s adviser Salman F Rahman’s Beximco Group, Bashundhara Group and S Alam and a few other large business conglomerates have become defaulted, leading to exacerbating the situation.

The people related to the banking sector, however, think the actual amount of defaulted loans is far more than the amount published.

They pointed out that the central bank could not count the loans written off and on the list of stay orders due to the court order.

Top officials of the central bank think the actual scenario would be revealed more in the coming days due to the steps the interim government has taken for reforming the banking sector.​
 

No bank will be closed
Salehuddin says

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Although some banks are going through a crisis, no bank will be shut down, Finance Adviser Salehuddin Ahmed said as he urged depositors not to panic.

He made the remarks while addressing a press conference at the Secretariat yesterday, reiterating the stance that Bangladesh Bank Governor Ahsan H Mansur had taken the prior day.

"Some banks are crawling while others such as Islami Bank have recovered already. But I want to assure depositors that no bank will be shut down," Ahmed said during a media briefing to mark 100 days of the interim government.

The banking sector in Bangladesh has been facing a series of crises in recent years, marked by rising non-performing loans (NPLs), liquidity shortages, and governance challenges.

The banking sector has been facing a series of crises in recent years, marked by rising NPLs, liquidity shortages, and governance challenges

Bad loans hit a record Tk 284,977 crore at the end of September, fuelled by weak enforcement of regulations, political interference, and inadequate credit risk assessment during the regime of the recently ousted Awami League-led government.

Some private Shariah-based banks and a few state-owned banks were at the centre of controversy, becoming embroiled in massive loan irregularities that were often linked to companies and borrowers with affiliations to the previous government.

This eroded public confidence and created operational challenges, including cash shortages.

Highlighting various irregularities under the past government's watch, Ahmed said policies taken at that time were not bad, but they were not implemented properly.

However, after taking charge, the interim government has assumed the responsibility to salvage the banking sector and efforts are being made to this end, the finance adviser said.

For example, ailing banks are getting liquidity support from the inter-bank money market, he said.

"Depositors kept their hard-earned money in banks so efforts will continue in order to ensure that deposits are unaffected," he added.

Ahmed also said various reforms to the banking sector have been initiated, adding that laws are being amended and that reforms would be made to the central bank as well.

He stressed that the job of the central bank is only to supervise, inspect and audit.

"I heard audit reports were previously sent to the central bank governor and deputy governor for approval. And if those reports impacted any influential person, then they would be scrapped. That should not happen. Measures should be taken according to the findings of the audit report."

Ahmed also urged businessmen to move ahead without fear.

He said that some people are saying that businessmen are fearful but added that honest entrepreneurs should not be afraid. Those involved in irregularities have reason to be scared although many have already fled the country, he added.

During the briefing, the finance adviser also addressed the impact on small investors in the stock market, acknowledging their losses from investments in poor performers. Compensation measures are being considered, according to Ahmed.

Finance Secretary Md Khairuzzaman Mozumder, Financial Institutions Division Secretary Nazma Mobarek, Economic Relations Division Secretary Md Shahriar Kader Siddiky and National Board of Revenue Chairman Md Abdur Rahman Khan were present at the press conference.​
 

Helping banking sector stand on its feet
Published :
Nov 19, 2024 22:28
Updated :
Nov 19, 2024 22:28

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Disbursement of loans bending rules to businesses enjoying political favour during the previous regime had been behind stiff rise in non-performing loans (NPLs) or bad debts in the banking sector. Though substantial amounts of funds were thus siphoned from the banks using fictitious names of borrowers and relaxing banking rules for the purpose, those were shown as regular. Now, the amounts so robbed have added to the existing NPLs. However, the exact amount of those NPLs could not be known during the previous regime due to massive data manipulation and under-reporting by the Bangladesh Bank (BB) authority of that time as well as the management of those looted banks for obvious reasons.

Now that the present BB authority is transparent about figures and has started using international standards in counting defaulted loans, the total NPLs figures, unsurprisingly, have registered a sharp rise. To be more specific, now loans are being classified as NPLs three months (the grace period) after those become overdue, whereas, earlier, the grace period was six months. As the September data of the BB showed, the NPLs have surged to a staggering sum of Tk2.85 trillion. Notably, this is a rise by about 96 per cent recorded on September30, 2024 over what it was at the end of December 2023 at Tk1.55 trillion.

Obviously, observers including experts have expressed grave concern about this alarming rise in default loans warning of its deleterious impact not only on the banking sector, but also on the entire economy. Evidently, the situation calls for carrying out a comprehensive audit of all the loans advanced so far by both the state-owned and private commercial banks to uncover the exact amount of NPLs and losses sustained by the banking sector. Also, efforts should be on to find out those who benefited from the defaulting loans and bring them to justice. If necessary, arrangements may be made to hire reputed international firms to perform the audit to assess the exact position of the NPLs and the losses thus suffered by the banks.

At the same time, to recover the losses, legal measures should be taken to confiscate property of the fraudulent bank defaulters. However, while taking such penal measures against wilful loan defaulters, care should be taken not to punish genuine businesses who failed to repay their loans in time due to the losses made during the floods followed by political upheaval and other issues born of various uncertainties including high inflation. Since a significant portion of this defaulted loan money has been taken outside the country through laundering, to retrieve those lost bank assets from foreign lands, the government should seek cooperation of the governments of the destination countries. In this regard, the chief adviser of the incumbent interim government, Dr Muhammad Yunus, might well use his enormous goodwill and influence at the international level to bring back the money lying in foreign banks and offshore accounts.

The good news is that multilateral lending agencies and financiers like the International Monetary Fund (IMF), the World Bank (WB) and the governments of the USA and the UK have already given word to help Bangladesh recover its money thus stolen and taken illegally abroad by fraudulent businesses and loan defaulters. Hopefully, with the reputed financial experts running the affairs, the interim government should be able to bring down NPLs to a tolerable level and recover a substantial portion of losses the banking sector incurred even within the limited time it has in its hands.​
 

BB asks banks to rebuild image

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Photo: Star/File

Bangladesh Bank yesterday asked banks to find a way to rebuild the image of the country's banking sector in the international arena as Moody's recently downgraded Bangladesh's long-term ratings to B2 from B1.

The ratings agency also changed the outlook of Bangladesh to negative from stable and downgraded Bangladesh's banking sector to "very weak" from "weak".

The central bank's instruction came during a meeting between Bangladesh Bank Governor Ahsan H Mansur and the Association of Bankers, Bangladesh (ABB), a platform of the top officials of banks, at the central bank headquarters.

Selim RF Hussain, chairman of the ABB and managing director of BRAC Bank, Syed Mahbubur Rahman, managing director of Mutual Trust Bank, Sohail RK Hussain, managing director of Bank Asia, and Ali Reza Iftekhar, managing director of Eastern Bank, were present.

The meeting discussed the overall situation of the banking sector alongside the Moody's ratings, which the bankers said would lead to further difficulties in their international trade.

Correspondent banks impose higher confirmation charges and reduce credit lines due to such types of ratings, they said.

Urging for working to brighten the country's image, Mansur recommended first settling overdue letter of credit (LC) payments, reasoning that it damages the image at the international stage and pushes up import costs.

The overdue LC payments stands at $400 million so far, with state-run banks accounting for the biggest amount, central bank officials told The Daily Star on condition of anonymity.

The meeting also discussed the liquidity situation in the banking sector, especially in some banks, said Husne Ara Shikha, executive director and spokesperson of the central bank.

She said the BB governor asked the lenders that were financially sound to find a way to mitigate the crisis.​
 

Why is the banking sector crisis so deep-rooted?
Banking sector crisis

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FILE ILLUSTRATION: BIPLOB CHAKROBORTY

The crisis that Bangladesh's banking sector is facing now is not simply a bundle of problems exclusive to banking, monetary, financial, accounting or managerial aspects. The sector is a victim of political extortion and rent-seeking cultures. The irregularities of the other five institutions of the past regime are mainly attributable to what the banking sector faces now. These institutions include: i) the finance ministry; ii) capital market; iii) parliament and bank-related lawmakers; iv) top-level bank borrowers and bank directors; and finally v) the financial judiciary.

The moral hazards such as taking big-ticket loans and not paying them back were not confined to the banking sector alone. This culture of extracting people's money has been an integral component of big companies, ardently endorsed by corrupt politicians in power. Thus, the crisis in the banking sector is deep-rooted. The amount of defaulted loans as a share of total outstanding loans reached 12.56 percent in June 2024 from 8.96 percent in June 2022. At the end of September, the amount of defaulted loans escalated to almost Tk 2.85 lakh crore, which is 16.93 percent of the total outstanding loans. In December 2023, the International Monetary Fund (IMF) estimated the non-performing loan (NPL) share to be 25 percent of outstanding loans.

The turbulent July-September quarter saw an unprecedented increase of nearly Tk 74,000 crore in defaulted loans, vindicating that the sector is really in a crisis no matter if the government downplays it or not. The crisis was man-made since the default culture was largely wilful, indulged by the past regime for the monetary benefits of the corrupted politicians and laundering tycoons who received blanket endorsement for all their wrongdoings.

The share of defaulted loans rose from nine percent to 13 percent within the last two years when GDP growth was around six percent on average, suggesting that the default culture was largely wilful. Alarmingly, the default ratio that was shown in data is the tip of the iceberg, because the definition of default was perversely loosened by the past finance minister in 2019-2024 and the two central bank governors during the same period to revitalise the energy of the bank looters. That made the crisis worse.

The defaulters were allowed to adjust even as low as five percent of the defaulted loans to get rid of the "stigma" of default. The past Awami League regime allowed multiple loose definitions to let some notorious tycoons participate in the national election and make faulty laws in their favour. There is another way to see that the default culture was wilful and evidently not a macroeconomy-wide issue. The high variation in the NPL ratios based on various ownerships unveils the story of how the state-owned banks were subject to a higher degree of looting, while private or foreign banks were able to maintain much lower NPL ratios.

A Bangladesh Bank report shows that at the end of June 2021, the NPL ratios were 3.9 percent and 5.4 percent in foreign banks and private banks, respectively, while the number was as high as 20.6 percent in state-owned banks. The numbers are much higher than what we see here since these ratios were calculated under the loose definitions of default. One thing is clear: the looting was religiously state-sponsored and passionately orchestrated by the politicians in power. And that's why the crisis is hard to reverse.

Corrupt politicians indulged three groups of culprits—tax dodgers, loan defaulters, and money launderers—who formed the devil's triangle of cronyism, and often belonged to the same group of looters deeply connected with the previous regime. If you can show loss in your income statements by the wicked art of accounting, you can be excused as loan defaulters and you can avoid paying taxes. However, you don't want to keep the fund inside the country, and that's why both tax dodgers and loan defaulters turn out to be money launderers at the same time.

The current Bangladesh Bank governor, Dr Ahsan H Mansur, said last month that $17 billion have been laundered out of the country over the 15-plus years of Awami League regime; only one Chattogram family is alleged to have laundered $10 billion alone. He also said Tk 4 lakh crore is now the de facto defaulted loans that form 25 percent of the total advances. And Tk 2 lakh crore has gone to only a handful of families. This group of mafias plundered Bangladesh's banking sector to dump it into an incurable crisis. Much to people's frustration, some of them became members of parliament and even ministers, while some were made ministerial-level advisers to the former prime minister. The parliament turned into a haven of financial hooligans. The crisis will never end if people see the return of the same political practice of cultivating the tycoons' support in exchange for letting them plunder the banking sector.

More family-based banks were allowed to mushroom in the name of enhancing competition, while a Chattogram-based family was encouraged to eclipse as high as seven banks single-handedly under the service of the intelligence agencies whenever needed. Any allegation or court case against that family was made "unwarranted" by influencing the judiciary. Most default cases fell in the quagmire of judicial tardiness for years, worsening the fate of loan recovery.

Thus, the regime-sponsored immorality to protect or pamper the financial gangsters not only eroded the future of the banking sector, but also made the wound too difficult to recover. Since the crisis in the banking industry is not simply its intrinsic problem, we need to correct those five institutions or related laws before we can expect a healthy recovery of the sector. Reforms must address these areas before energising the sector to move ahead swimmingly.

The writing draws heavily from the keynote speech at the BDI International Conference on Bangladesh held at the University of California, Berkeley on November 8-9, 2024.

Dr Birupaksha Paul is professor of economics at the State University of New York at Cortland in the US.​
 

BB tightens loan classification rules to meet IMF conditions
Bankers fear this may double default loans next year

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Payment failure for three months or 90 days after the due date will now lead to classification of loans regardless of type, according to new rules announced by the central bank yesterday, aligning with international best practices prescribed by the International Monetary Fund (IMF).

The new rules will be effective from April next year, replacing current different non-performing loan (NPL) labelling tenures for different types of bank loans.

This stokes fears about a surge in toxic loans within the banking sector, which stood at a record Tk 284,977 crore at the end of September this year.

While approving the ongoing $4.7 billion loan package for Bangladesh in January last year, multilateral lender IMF set several targets, including reworking loan classification rules.

The Bangladesh Bank (BB) issued a detailed circular yesterday regarding the loan classification.

As per the new rules, a loan will be classified as substandard when the overdue tenure is three to six months. It will be classified as doubtful when the overdue tenure is six to 12 months.

When the overdue tenure is 12 months and above, loans will be classified as bad and loss.

Currently, a loan is classified as substandard when the overdue tenure is three to nine months. It turns doubtful when the overdue tenure is nine to 12 months.

Under the new rules, the overdue tenure for bad and loss category remains the same as now -- which is 12 months and above.

The cottage, micro, small and medium enterprises (CMSME) currently enjoy different loan classification tenures, which have been revoked under the new rules.

CMSME loans are classified as sub-standard when the overdue tenure is six to 18 months. Those turn doubtful when the overdue tenure is 18 to 30 months. When the overdue tenure is 30 months and above, those loans are labelled as bad and loss.

In the new rules, there is no change in provisioning against loans.

Banks now have to keep 1 to 5 percent as a provision against general category loans. This provisioning rises to 20 percent against sub-standard loans, 50 percent against doubtful loans and 100 percent against bad loans.

In the notification, the central bank said a strong financial sector is necessary to support the growing economy in Bangladesh.

According to the BB, timely steps are necessary to reduce the rate of classified loans for financial stability. The government and the Bangladesh Bank have taken various initiatives to reform the banking sector.

As part of those steps, the BB said the instructions have been issued in light of international best practices.

The loan classification and provisioning policy was first introduced in 1989 under the financial sector reform programme in Bangladesh.

Later, various changes were made to the policy to align it with international best practices and methods. Two major changes were brought in 1998 and 2006.

However, the latest major revision of the loan policy was made in 2012, central bank officials said.

Loans disbursed through irregularities to Awami League-affiliated businesses turned sour at an alarming pace after the ouster of the Sheikh Hasina-led government on August 5.

Between July and September, bad loans soared 34.8 percent or by a staggering Tk 73,586 crore, according to BB data.

Bangladesh now has the highest ratio of defaulted loans in South Asia, with nearly 17 percent of the total disbursed loans having gone bad.

Bankers said bad loans will increase further in the upcoming days thanks to the tightening loan classification rules.

"Bad loans will surpass Tk 300,000 crore by December," said Mohammed Nurul Amin, a former chairman of the Association of Bankers Bangladesh (ABB), the forum of bank managing directors and chief executives.

"If the loan classification rules are tightened, this number will jump," said Amin, the chairman of Global Islami Bank.

A World Bank (WB) team is now in talks with the central bank to support banking sector reforms. They urged the BB to implement the international standard loan classification rules immediately.​
 

A welcome step that needs proper implementation
29 November, 2024, 00:00

THE Bangladesh Bank tightening loan classification rules by shortening the period of overdue loans to become non-performing to six months from nine months is welcome. The rules aligned with international practices, issued in a circular on November 27, would give a clearer picture of non-performing and bad loans in the banking sector. The rules are likely to help the authorities regulate the banking sector more efficiently and to address distressed assets, including non-performing loans, more effectively. They will, as the circular says, come into effect on April 1, 2025. According to the new rules, loans overdue for three to six months will be classified as substandard, the first step of non-performing loans, while loans will be classified as doubtful if they remain overdue for six months to a year. The period now is nine months to a year. Loans overdue for more than a year will be classified as bad loans. This classification had, in fact, previously been in use but was altered by the previous government to obscure the extent of defaulted loans. The reduction in the period might, as economists say, see an increase in non-performing loans and pose challenges to some businesses but will help to discipline the banking sector in the long run.

Bangladesh Bank data show that the amount of defaulted loans increased to Tk 2,84,977 crore in September, about 17 per cent of the total bank loans of Tk 16.82 lakh crore. This is the highest ratio of defaulted loans in South Asia. The previous government, which offered irrational concessions one after another to defaulters, showed a lower figure of defaulted loans. Once the new rules come into effect, the figure is likely to increase, but it will also put regulatory authorities in a better position to address the issue that has crippled the banking sector. The new rules are also likely to help banks address provision shortfall, which increased to Tk 55,378 crore in September from Tk 31,549 crore in June. Keeping to the new rules, banks must maintain provisions against their general category loans at a rate of 1 per cent and 5 per cent of the loan balance for special mention accounts, a category newly introduced. Loans that remain overdue for two to three months will be categorised in special mention accounts. Banks are also required to maintain 20 per cent provision for loans in the substandard category, 50 per cent for loans in the doubtful category and 100 per cent for loans in the bad or loss category.

All this appears to be a positive step towards disciplining the banking sector, on the edge of collapse for a decade and a half because of political influence, manipulation and lack of democratic governance. The government and the central bank should, therefore, enforce and implement the steps to ensure transparency, accountability and sound management practices in the banking sector.​
 

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