NBFI liquidation plan: How much shareholders stand to lose

When Bangladesh Bank (BB) recently announced that shareholders of five weak shariah banks slated for merger would receive nothing for their holdings, it sent shockwaves through the market. The move meant an estimated Tk 4,500 crore in paper wealth turning to dust overnight. Investor confidence plunged, with the DSE key index falling to its lowest level in four months.

Now, another fear is looming over the market. Shareholders in eight non-bank financial institutions (NBFIs), all earmarked for liquidation, may also lose almost everything.

BB Governor Ahsan H Mansur said in August that nine NBFIs would be shut down because their financial condition had deteriorated beyond repair.

Eight of those are listed on the stock exchanges: FAS Finance, Bangladesh Industrial Finance Company, Premier Leasing, Fareast Finance, GSP Finance, Prime Finance, People's Leasing, and International Leasing.

Together, these eight NBFIs have a combined paid-up capital of about Tk 1,450 crore. Stock-market investors hold roughly two-thirds of this, with a face value of Tk 947 crore, which they are likely to lose entirely if the firms go into liquidation.

Even the current market value of those shares, reportedly above Tk 100 crore, matters little, since liquidation payments are based on actual realised asset value, not market speculation.

NOTHING FOR SHAREHOLDERS

The problem is that the NBFIs' liabilities far exceed their assets: their net asset value (NAV) per share is deeply negative for most. In other words, when the companies' assets are sold off and debts cleared, there will be nothing, or far too little, left for ordinary shareholders.

In such insolvency-driven liquidation, shareholders sit at the very bottom of the list of claimants.

For small investors, it is another chapter in a difficult month. Share prices have stayed depressed, and now the looming NBFI liquidations have darkened the mood further.

Rony Haidar, a retail investor, said he bought thousands of shares of People's Leasing at Tk 3 last year, hoping the company would recover the way several weak banks once did after receiving government support.

"Now the share is trading below Tk 1. I have already suffered huge losses," he told The Daily Star. "The government stepped in to save some banks, so I thought something similar might happen here. But no support came for the NBFIs."

He believes years of unchecked irregularities in banks and NBFIs have left small investors exposed and unprotected.

Updated financial reports paint an equally grim picture. Seven of the eight listed NBFIs have an average net asset value of negative Tk 95 per share. Prime Finance is the exception, but even its last disclosed figure – Tk 5.31 per share in 2023 – offers little comfort given the sector's steep deterioration.

"This situation had been building for years," said Saiful Islam, president of the DSE Brokers Association of Bangladesh.

"We warned that a financial crisis was brewing because banks and NBFIs were being drained. Their non-performing loans (NPL) grew so large that they had nothing left to rebuild with. Now, with liquidation coming, small investors are being hit hardest," he added.

Islam said many investors were misled because financial statements did not reflect the true extent of the problems.

"Auditors and credit rating agencies must be held accountable. Regulators, too, cannot avoid responsibility," he added.

According to BB data, the eight NBFIs accounted for 52 percent of the sector's Tk 25,089 crore in defaulted loans at the end of last year. Twelve institutions alone carried 73.5 percent of all bad loans in the sector.

In January, the central bank classified 20 NBFIs as financially "red-category" – meaning they had dangerously high defaulted loans and weak capital positions – and asked them to justify why their licences should not be cancelled.

Nine failed to provide satisfactory answers and have been put on the initial liquidation list.

DIFFERENT TREATMENT FOR NBFIs?

A senior official of the Bangladesh Securities and Exchange Commission (BSEC) said the regulator would communicate with the government if liquidation proceeds, in order to safeguard small investors, though he declined to specify how that might be done.

"The government doesn't consult us before making such decisions. We are left out," said another BSEC official.

Earlier, during discussions on the five-bank merger, the BSEC had urged the central bank to ensure that general shareholders did not lose everything – a plea that went unanswered.

The BB governor later said investors of the five banks would not get anything from the merger, adding that the government could decide separately whether to offer compensation. No such announcement has been made for the NBFIs so far.

Asif Khan, president of the CFA Society, an association of investment professionals, said, "There is no difference between what happened in several banks and these NBFIs. But as banks are larger, the government thought to save some of them."

"The situation of the NBFIs has already impacted the price of their stocks. Shares of many are down below Tk 1 or around Tk 2," he stated.

He added that NBFIs are already bankrupt and have failed to repay depositors' funds for several years. "In this situation, shareholders have nothing to get back. Depositors have priority in repayment. Even if the government wanted to give something to shareholders, who would bear the cost?"

Khan suggested that a system should be created to prevent such cases, with proper reporting of NPLs and accountability for regulators. "Finally, wrongdoers should be punished to send a signal," he said.

A top official of a leading NBFI noted that while shareholders accept market risks, it is unfair that general shareholders bear full losses caused largely by misconduct.

"Whatever decision the government takes regarding banks, it should be similar for NBFIs," he said on condition of anonymity.

BB spokesperson Arief Hossain Khan did not respond to calls or texts from The Daily Star.