BB’s leniency to blame for ailing banking sector

Banking rules and regulations stipulate a single borrower exposure limit but the banking regulator itself disregarded the rule routinely in the last 16 years.

Bangladesh Bank always allowed the limit to be exceeded on special consideration, which put the state-run banks in an ailing condition.

Banks are not allowed to lend more than 25 percent of their paid-up capital to a single party, as per the act.

But the surprising move is that some lenders provided more than 500 percent as loans of their paid-up capital.

For instance, state-run Janata Bank's loan exposure to Beximco Group stood at Tk 25,000 crore, which is about 950 percent of the lenders' paid-up capital.

As much as Tk 19,000 crore of the Beximco loans has become defaulted.

The sprawling conglomerate took the huge amount of loans as the central bank allowed Janata to breach the limit.

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In August last year, the banking regulator gave a no-objection certificate to extend loans amounting to Tk 479 crore to Beximco although the amount violated Janata's single borrower exposure limit.

Despite objections from the Department of Off-Site Supervision, the central bank wing responsible for monitoring and regulating banks, then governor Abdur Rouf Talukder gave the exemption to Beximco.

Not only the case of Beximco, the BB allowed state-run banks to exceed the exposure limit for many conglomerates including S Alam Group, Orion Group and Bashundhara Group.

The controversial S Alam Group took out a huge amount of loans from Islami Bank. The Chattogram-based conglomerate dominated the board of the Shariah-based lender too.

S Alam also took Tk 10,449.45 crore from Janata, which was 451 percent of the state lender's paid-up capital.

Three state-run banks -- Janata, Agrani and Rupali -- had approved Tk 10,579 crore in loans for a power plant of Orion Group far exceeding their limits thanks to policy relaxation by the BB.

The three lenders were able to approve such a big amount for Orion as the central bank had in November 2022 relaxed section 26-kha (1) of the Bank Company Act-1991 that states loans given by a bank to a single borrower shall not exceed 25 percent of the bank's capital.

The BB relaxed the rule for coal-based power companies for the next five years. It gave the no-objection certificates for the Orion power plant loans.

However, the loans were later cancelled following an application by the business group.

Orion secured approval for the syndicated loan based on the coal project's financial credibility and without any undue influence, said Salman Obaidul Karim, its managing director.

Bashundhara Group, one of the country's largest conglomerates, availed Tk 2,726 crore as loans in 2022 from five state-run banks -- Sonali, Rupali, Janata, Agrani and Bangladesh Development Bank -- under special consideration from BB for its gold refinery project.

All of them except Bangladesh Development Bank exceeded the single borrower exposure limit.

The scam-hit Janata bank, which is in deep trouble, approved the highest Tk 883 crore for the project.

In this case, Bashundhara Group media adviser Mohammad Abu Tayeb told The Daily Star that the infrastructure of the gold refinery project is ready now and they are waiting for the machinery to arrive.

Banks have given loans to the project after proper assessment and inspection.

In some cases, the banking regulator allowed the state-run lenders to exceed the exposure limit due to political pressure or pressure from influential quarters, said BB officials.

However, BB spokesperson Husne Ara Shikha told The Daily Star recently that the waiver from the single borrower exposure limit was given by the central bank to some clients for special purpose and special interest.

"This type of waiver is given in case of many large projects," she added.

Deshbandhu Group recently applied to the BB to relax the single borrower exposure limit to import essential commodities ahead of Ramadan.

The state-run banks are hostage to a few clients due to the frequent violation of exposure limit, industry insiders said.

A lender's risk increases when a single customer gets a large portion of the loans, sometimes even more than the client's capital, they added.

As of June of last year, Janata had the highest number of large loan borrowers (67) and the highest proportion of large borrowers that have exceeded the single borrower exposure limit of 25 percent of capital, central bank documents showed.

Sonali had 21 large borrowers and 13 exceeded the single-borrower exposure limit.

Agrani had 55 large borrowers and 20 of their exposure was over the limit.

As of June 30 last year, Rupali had 35 large borrowers and the exposure of 10 of them was above the ceiling set for a single borrower.

"Since the central bank itself allowed the banks to cross the single borrower exposure limit, there was no need to fix the limit," said Mustafa K Mujeri, former chief economist at the BB.

Such waivers for certain clients are not legal.

The current ailing situation of the banking sector is the reflection of such waivers from rules and regulations, said Mujeri, also the executive director at the Institute for Inclusive Finance and Development.

"Laws and rules are made to be obeyed but what is the logic of having laws and policies when they are not obeyed? The central bank cannot deny the responsibility for the fragile situation of most of the banks," he added.

At the end of September, the six state-run commercial banks -- Agrani, Janata, Rupali, Sonali, Bangladesh Development Bank and BASIC Bank -- together had defaulted loans amounting to Tk 126,111.5 crore, which is 40.35 percent of their disbursed loans.

Of the amount, Janata accounted for Tk 60,489 crore, Agrani Tk 26,891 crore, Sonali Tk 16,623 crore and Rupali Tk 12,738 crore.

The central bank should never allow the exposure limit to be exceeded as it is not meant for good governance, said Anis A Khan, former chairman of the Association of Bankers Bangladesh (ABB).

Some large borrowers who are getting loans beyond their capacity now are not able to serve the interest payment of the loans.

The single borrower exposure limit can only be relaxed for importing essential commodities amid Ramadan and for the power sector because power is very important for the country, said Khan, also a former MD of Mutual Trust Bank.