Banks end 2017 on a shaky note
The banking sector in Bangladesh witnessed a fragile year in 2017 due to a spate of negative developments that plagued the country’s lenders.
After four years of its setting up, Farmers Bank Ltd (FBL) has been facing acute liquidity crisis for the last few months because of its failure to draw in depositors, despite offering 12 per cent interest on savings schemes.
Former home minister Mohiuddin Khan Alamgir resigned as chairman of the FBL’s board of directors and executive committee, after the central bank issued a warning on the liquidity crisis FBL has been grappling with for quite some time.
The cash-strapped bank did get a short-term Tk 96 crore loan from the central bank recently. However, FBL now had to agree to a 6.75 per cent interest on the loan, which is at least 2 percentage points more than the inter-bank call money rate.
In December, the bank twice failed to honour a cheque of Bangladesh Telecommunications Company Ltd, worth Tk 35.44 crore, because of fund shortage. The state-run telecom company has now got the sum.
On the other hand, AB Bank faced financial crunch after its provisions were found short by Tk 1,340 crore, at the end of 2016.
The first generation private commercial bank maintained only Tk 250 crore against the required provisions of Tk 1,590 crore, because of bad loans, mostly in its offshore banking unit.
The required capital of the bank was over Tk 3,000 crore while its capital surplus was only Tk 135 crore as of December 2016.
In this situation, the Bangladesh Bank, on May 3, appointed Sheikh Mozaffar Hossain, a general manager at the central bank, as an observer to AB Bank, to closely monitor the lender’s financial activities.
According to a Bangladesh Bank investigation report, AB Bank’s offshore unit disbursed over US $55 million in foreign currency loans in 2015, to four companies, breaching rules.
Recently, Prof. Rehman Sobhan blamed the failure of the regulatory system and the practice of political patronage in access to credit, for the crisis. The noted economist said that the ethical crisis in banking system was destroying the competitiveness of the financial sector in Bangladesh.
This year, Chittagong-based S Alam Group drew huge attention, especially in the financial market, after taking over several banks through buying shares from the stock market.
The latest was the takeover of Social Islami Bank on October 31. The group bought around a 50 per cent stake in the Shariah-compliant bank. S Alam Group had to spend over Tk 1,000 crore to buy around 37 crore shares of the bank, at the market price.
Earlier, in January, S Alam Group strengthened its grip on Islami Bank Bangladesh, the largest private bank in the country, by purchasing significant portion of its shares. It also bought shares of the bank in the name of seven companies. Some of those companies exist only on paper. In addition, the group has direct investments in five other banks—First Security Islami Bank, Bangladesh Commerce Bank, Union Bank, NRB Global, and Al-Arafah Islami Bank.
Saiful Alam Masud, chairman of S Alam Group, is also the chairman of First Security Islami Bank, and Abdus Samad, one of his brothers, is the chairman of Al Arafah Islami Bank.
In June, the government allocated Tk 20b (US $250m) to recapitalise Bangladesh’s state-owned banks. There are signs that the country’s banking sector is facing mounting problems, and regulators’ efforts have so far been insufficient to tackle the issue. Only limited action has been taken to penalise defaulters, improve risk management and strengthen bank management. In its latest Article IV report, the IMF stated that there are some underlying risks to the banking sector owing to excess liquidity. However, an improvement in conditions within the state-owned banking sector will be dependent on the political will to address the problem, which has been limited so far.
In its report, the IMF said that there were weaknesses in the banking sector owing largely to the legacy of loans to large borrowers, who lack incentives to repay, and legal limitations that hamper recoveries. Six state-owned commercial banks account for about a quarter of total banking sector assets. They are supplemented by two state-owned specialised development banks, 40 private commercial banks, and nine foreign banks.
The eight state-owned commercial and specialised banks suffer from problems related to high levels of non-performing loans (NPLs), low profitability, large capital shortfalls, and balance sheet weaknesses. The root of the problem is poor risk management. For decades, state-owned banks have lent large amounts to big, influential borrowers, who have been known to be lax with repayments. Defaulters are rarely penalised; instead, loans are routinely restructured to permit further lending to the same borrowers.
According to a study by the Bangladesh Institute of Bank Management, on average, banks rescheduled bad loans of Tk 109.1b, annually, during 2010–‘14.
As a result, non-performing loans (NPLs) at state-owned banks have risen sharply in recent years. In January-March 2017, overall, bad loans in the banking sector rose by 18 per cent from the previous quarter, to Tk 734.1b. NPLs at the six state-owned commercial banks rose by 15.1 per cent quarter on quarter, to Tk 357.2b, accounting for just under half of total NPLs. It is possible that the problem may be larger than the numbers suggest.
Central bank inspections have found that several state-run and other commercial banks have under-reported bad loans and inflated profits. For example, in the quarter ending December 2016, four state-owned commercial banks—Janata Bank, Agrani Bank, Rupali Bank and Sonali Bank—under-reported Tk 40.7b in loan defaults.
Regarding the prevailing situation, Dr Zahid Hussain, lead economist of the World Bank’s (WB’s) Dhaka office, told The Independent that economic and political factors have made the banking system vulnerable and 2017 a fragile year. He said the board of directors often approves loans without proper assessment. “As a result, non-eligible borrowers, who have no intention to make repayments, get loans,” he added.
While blaming wilful defaulters, Zahid Hussain criticised BB’s monitoring shortcomings that have failed to keep out dubious loan seekers.
During the first nine months of the current year, loan defaults, according to Bangladesh Bank, increased by Tk 181.35 billion. Cumulative loan defaults stood at Tk 803.07 billion. If the written-off amount of Tk 450 billion is added to this, the actual loan default will be Tk 1,253.07 billion.
Shares of banks recorded a fall on the stock market because of media reports on loan default.
Source: http://www.theindependentbd.com
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