Weak NBFIs seek Tk 3,100cr to turn around

A group of 15 struggling non-bank financial institutions (NBFIs), including nine set for liquidation, has informed the Bangladesh Leasing and Finance Companies Association (BLFCA) that they would collectively need about Tk 3,100 crore in liquidity support to regain stability, said the association's Chairman M Jamal Uddin.

The government could feasibly provide the amount to help the firms rebound, he said in an interview with The Daily Star, adding that the institutions themselves had assessed their needs and conveyed the figure to the BLFCA, which is now advocating on their behalf.

"Without such support, loan recovery at these weak institutions may be further disrupted, worsening their condition," he said.

He noted that the affected NBFIs are currently unable to finance new businesses or extend fresh loans because their liabilities have become too large. "It will take them a long time to recover from this situation. What they really need now is support from the central bank and reforms."

The struggling NBFIs approached the BLFCA with a formal request for it to seek Bangladesh Bank's help. With the proposed support, they hope to settle part of their dues to depositors while retaining enough funds to revive business operations. Once operations resume, they expect to be able to gradually clear the remaining obligations, Uddin said.

On September 23, the BLFCA met Bangladesh Bank (BB) and proposed liquidity support at a 2 percent interest rate, repayable over seven to ten years on a quarterly basis.

The association suggested that BB consider extending support equivalent to up to 30 percent of an institution's balance sheet for at least seven years.

"This support could alleviate current liquidity stress through diversified fund management techniques," said Uddin, who is also managing director and CEO of IDLC Finance.

According to the BLFCA's presentation, one-third of the support would be used to meet encashment requests from small depositors to restore confidence, while the remaining two-thirds would be channeled into the CMSME sector to generate returns for reinvestment. Potential BB pre-financing could strengthen this further.

All loans, leases, and advances, including those newly issued using the support funds, would remain under BB's lien as security, as per the association's proposal.

Classified loans in NBFIs exceed Tk 27,000 crore, more than 33 percent of their total lending portfolio. The erosion of capital has left many institutions technically insolvent.

Asked if Tk 3,100 crore would be sufficient for recovery, Uddin offered caution.

"We do not have our own research team, nor are we strong enough as an organisation to analyse full balance sheets and income statements of all institutions to definitively conclude that this money would be sufficient," he said.

"However, the institutions themselves have claimed that this amount would allow them to start recovering."

NBFIs and their customers argue that since the government has supported troubled banks, including shariah-based lenders, a targeted, even if smaller, package for NBFIs would be reasonable.

Jamal stressed that any government assistance must include safeguards. "If the government provides money, there has to be protection in place. There must be clarity on the form of support, how it will be disbursed, and how and when it will be repaid."

"Once the institutions restart operations with the aid, they can gradually recover part of their assets. But if their operations stall, they will not be able to recover their existing assets in the market," added the BLFCA chairman.

LIQUIDATION NOT THE ANSWER

The government has announced plans to liquidate nine NBFIs.

Speaking on the matter, Uddin cautioned that closures will not necessarily strengthen the sector.

He said, "It cannot be said that shutting down a few institutions will help the sector recover. In fact, doing so may weaken others already in fragile condition. But if they are given the opportunity to revive operations to some extent, public confidence in the sector might gradually return."

He warned that other marginal institutions could eventually fall into the same position unless they receive interim support.

Uddin acknowledged that weak corporate governance is at the core of the crisis currently gripping the NBFI sector.

"This is why Bangladesh Bank is saying: if your governance, management, and credit risk analysis capabilities are lacking, you do not have the strength to do business sustainably," he said, adding, "This is why the central bank is taking a different approach toward the sector."

Reforms, he noted, are essential to strengthen corporate governance and stop a recurrence of the existing crisis. Some policies for NBFIs should be aligned with those of banks, such as loan write-off rules, the number of directors, and regulations on deposit collection and eligible securities.

"If these issues remain unresolved, even strong NBFIs will struggle."

He emphasised that many well-performing NBFIs have succeeded because they maintain strong internal governance.

"Often, central bank intervention is not necessary when an institution ensures self-governance," he said.

While BB has adequate policies for the sector's sustainability, he said the challenge lies in enforcement.

"Policies are often made and revised, but enforcement and compliance are weak. Over time, institutions gradually become vulnerable and eventually reach the point of closure."