Bangladesh’s Banking Sector Heading For Collapse? – OpEd


Is Bangladesh heading for a Sri Lanka type economic collapse just when that island nation seems to be finally getting its act together?

The country’s central bank, Bangladesh Bank (BB)’s latest report has found more than two-thirds of the banks in the country in the weak to very weak category, hovering in the “Red Zone” or the “Yellow Zone” and only a few are stable enough be in the “Green Zone” in good condition.

Of the 54 banks, 12 are in critical condition, of which nine have already moved to the red zone. The other three out of 29 banks in the yellow zone are very close to the red zone, says the report titled “Bank Health Index and HEAT Map”. 

On the other hand, only 16 banks, including eight local ones, have found a place in the green zone, it said.

This report has been prepared based on data from 54 banks for the past six semi-annual periods, spanning December 2020 to June 2023 by the BB’s Financial Stability Department .

They have been preparing the Bank Health Index and HEAT Map on a half-yearly basis following a comprehensive methodology based on six different ratios used in CAMELS rating (capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk) excluding the sensitivity to market risk but including the leverage ratio proposed in Basel-3, estimating Z-scores.

Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank and ICB Islamic Bank have been excluded from analysis because their data points differ significantly from other observations/data of the sample banks, while Bengal Commercial Bank, Citizens Bank, Community Bank Bangladesh, and Probashi Kallyan Bank have not been taken into account due to a lack of historical data.

“The central bank’s report revealing such horrific information came at a time when the discussion of merging weak banks with strong banks is gaining momentum in the country,” said an analysis in the country’s most credible financial newspaper, ‘The Business Standard’.

But surprisingly BB spokesperson Md Mezbaul Haque denied any knowledge of the report . “I don’t know anything about which department has made the list of weak and strong banks,” he told mediapersons even when the report was all over the press.

But Haque elaborated  that “the new Prompt Corrective Action Framework enunciated last December classifies troubled banks into four categories based on their non-performing loans (NPLs) and Capital to Risk (Weighted) Assets Ratio (CRAR). It will be effective from May 2025. According to the PCA Framework, the banks of the country will be classified into 4 categories.”

Business Standard however quoted a senior BB official speaking on condition of anonymity that, “The central bank regularly categorises banks based on various indicators every six months. I think even those banks that are shown as strong banks in this list are weak.”

In a meeting with bank owners last week, Bangladesh Bank Governor Abdur Rouf Talukder said that about 10 banks in the country will be merged by January 2025. In that case, the weak banks have the option to coordinate with the bank they want to merge with, he said.

Former Bangladesh Bank governor Salehuddin Ahmed thinks there are far too many banks in the country considering the size of the economy.

“A significant portion of those that have been established has been influenced by political considerations or taken over by someone close to power,” Mr Ahmed said.

Out of six state-owned commercial banks, four banks (BASIC Bank, Janata Bank, Agrani Bank and Rupali Bank), four private commercial banks (Padma Bank, Bangladesh Commerce Bank. National Bank and AB Bank) and one foreign bank (National Bank of Pakistan) fell in the red zone.

The yellow zone contained 3 commercial banks (Bangladesh Development Bank and Sonali Bank, First Security Islami Bank) that were close to becoming in the red zone.

Banks that fill in the yellow zone have 3 state-owned commercial banks, 19 conventional private commercial banks and 8 Shari’ah-based Islami banks. 

They are: Sonali Bank, Bangladesh Development Bank, First Security Islami Bank, IFIC Bank, Meghna Bank, Social Islami Bank, Islami Bank Bangladesh, ONE Bank, United Commercial Bank, NRB Bank, Al-Arafah Islami Bank, Standard Bank, Union Bank, NRBC Bank, Mercantile Bank, Mutual Trust Bank, Exim Bank, Dutch-Bangla Bank, Global Islami Bank, Premier Bank, BRAC Bank, Southeast Bank. City Bank, Trust Bank, South Bangla Agriculture and Commerce Bank, Modhumoti Bank, Dhaka Bank, Uttara Bank and Pubali Bank.

The central bank report mentioned that these banks need supervisory attention due to the relative deterioration of their health in comparison to the industry average. 

The banks in the green zone are: Prime Bank, Eastern Bank, HABIB Bank, NCC Bank, Midland Bank, Bank Alfalah, Bank Asia, Shimanto Bank, Jamuna Bank, Shahajalal Islami Bank, Woori Bank, HSBC, Commercial Bank of Ceylon, Citi Bank NΑ, Standard Chartered Bank Bangladesh and State Bank of India.

Bangladesh Bank data shows as of December 2023, the total amount of non-performing loans in bank accounts stood at Tk145 lakh crore. The non-performing loans of 12 banks in the red zone amount to Tk90 lakh crore, which is 62% of the total NPLs.

Political influentials Never Payback

Bangladesh burgeoning and soon-to-be-unmanageable bank defaults are primarily a political problem rooted in the country’s endemic corruption , not very different from neighbouring India, with political cronyism on the rise.

Just sample the case of Beximco, the lead bank defaulter (outstanding bank debt Taka 52 billion), whose vice-chairman Salman Fazlur Rahman, is the private investment advisor to Prime Minister Sheikh Hasina, despite being a known pro-Pakistan element whose Muslim Leaguer father had suggested Bengali should be written in Arabic script. Considering Hasina is daughter of Sheikh Mujibur Rahman, who led the country to freedom, her unusually close links to Rahman raises many eyebrows.

In August last year, Bangladesh Bank allowed Janata Bank (now categorised as in the Red Zone) to grant over Tk 4790 million in loans to Beximco Group, despite the group’s previous outstanding loans to the bank reaching nearly 950 percent of its paid-up capital in gross violation of rules.

The BB allowed the fresh loan for the group from Janata Bank under ‘special consideration’ (no business plans cited)  shortly after uncovering the group’s previous loan amount in the bank totalling Tk 21,978 crore.

BB officials said that these loans were initially not attributed to any specific group and claimed that they were not previously informed of these loans prior to this development.

Upon finally receiving details about the liabilities of different companies linked to the group, the central bank found that BEXIMCO Limited and its affiliated firms had funded liabilities of Tk 21,612 crore and total liabilities of Tk 21,978 crore in the bank as of June 30, 2023.

A report compiled by BB found that the Beximco Group’s loan amount in Janata Bank stood at 949.78 percent of the bank’s paid-up capital of Tk 2,314 crore.

Beximco is a continuous beneficiary  of the Bangladesh Bank’s  large loan restructuring policy since 2015, when in the first place, it was not supposed to get another chance to reschedule its loans.

When the BB had offered the restructuring facility in 2015, one of the conditions was that the borrowers would be marked as defaulters if they fail to pay two consecutive instalments; their benefits would be withdrawn and they would be barred from any rescheduling facility in future.

But half way into the rescheduled loan tenure, Beximco Ltd was stuttering again to pay back its instalments.

Anticipating it would be marked as a defaulter, it requested Sonali Bank to reschedule its loans again to give it a longer horizon to pay back the loan, which the state bank got on board with.

On July 8, Sonali wrote to the central bank requesting for Beximco Ltd’s rescheduling of demand loan from six years to 12 years.

And the central bank high-ups gave the application its nod, a development that can be viewed as a stunning reversal of its stance.

Many top bankers were openly critical of this growing culture of political cronyism since Beximco boss Salman Rahman’s son Shayon F Rahman and PM Hasina’s son Sajeeb Wajed Joy are known business partners . 

Joy has been accused of corruption as well.

Within a week after his arrest by the Indian Enforcement Directorate in May 2022 on charges of money laundering, Bangladeshi banker P.K.Haldaer revealed to his interrogators that kickbacks to the tune of Tk 1,500 crore were allegedly paid to  Sajeeb Wazed Joy in 2014.

ED documents disclose the names of relatives and associates of top  politicians, from across the Bangladesh’s political spectrum, who were paid kickbacks or received “financial benefits” for the award of business contracts to a powerful and influential businessman Mohammad Saiful Alam. A resident of Singapore, Alam is the chairman of Reliance Finance Ltd and NRB Global Bank Ltd besides other businesses in Bangladesh and other Southeast Asian countries and some say he competes with Salman Rahman to lead the crony capital race in Bangladesh.  The only difference– while Rahman is politically ambitious and resents Hasina not making him a minister after the recent Parliament polls, Alam is a classic businessman who pleases the powers that be for business sake.

 Joy ,like Rahman, is also an advisor to the Prime Minister. “Here in Bangladesh, advisors run ministers, not the other way round,” says a former Indian diplomat.

Beximco’s Latest Stunt : Zero-Coupon Bonds 

Now with Beximco’s debt rocketing sky-high and Salman Rahman’s close connection to the first family becoming politically embarrassing for PM Hasina , Beximco has hit upon a new stunt .

It has decided to raise Tk 15 billion by issuing zero-coupon bonds at a higher-than-market rate to invest in the sluggish housing business.

In a stock exchange filing on Tuesday, Beximco said the bonds would have an annual yield of 15 per cent, whereas the current maximum lending rate of banks hovers between 12-14 percent.

Beximco Chief Financial Officer Md Luthfor Rahman said one-third of the fund would be spent on paying back bank loans while the rest would be invested in a new township project – 100-acre Sreepur Township Ltd in Gazipur.

But Bangladesh’s leading business journalist Farhan Fardaus says in his ‘Financial Express’ report that “Beximco not only seems to go against the present trend of cutting borrowing costs by repaying banks and non-bank financial institutions with bond money, it will also take risk by investing in real estate at a time when sales of apartments have plummeted.” 

According to Beximco disclosure, the project will build 18,000 apartments along with healthcare, education, entertainment, sports and recreation centres. 

Business analysts say general recessionary conditions due to high energy prices following conflicts in Middle East and Ukraine makes high quality housing demand growth unlikely.

“Just hope this does not end up as the Chinese ghost cities,” said an analyst but unwilling to be quoted for fear of ‘upsetting’ the powerful Salman Rahman.

“Investors will have to wait for a long time to see if they actually receive the high return promised by the company,” he said.

Since zero-coupon bonds are a kind of debt security that is issued at a deep discount, rather than giving monthly interest, bond purchasers will get the yield at maturity.

Lutfor Rahman told FE’s Farhan Fardaus that “Beximco 1st Zero Coupon Bond” will have a maturity period of five years and that investors will get the principal amount plus return as one-time payment.

Asked why Beximco would give a higher return than bank interest, an investment banker, wishing not to be named, said the company seeks to lure investors with a lucrative yield.

“But I am going for any of these because this company cannot be trusted. It could end up the way chit funds like Hallmark have, ” said pensioner Laili Ahmed.

Beximco would use a portion of the fund to repay banks maybe because it is finding a way to avoid defaulting on loans, he said, adding that it may also be looking to overcome cash crunch.

The bonds to be issued will be non-convertible and non-tradable, meaning the securities will not be converted into shares, will not be listed and will not be exchangeable, said Shahidul Islam, chief executive officer of VIPB Asset Management.

Investors, who will buy the bonds, will have to keep those until maturity, he added.

Is Sreepur Project a hoax? 

Sreepur Township Ltd (STL) is a new company with no previous experience of building apartments or developing lands.

It has given rise to murmurs in the financial market when it gathered Tk 10 billion in November last year through five-year “IFIC Aamar Bond” — in a deceptive move.

Though the real name of the bond was IFIC Guaranteed Sreepur Township Green Zero Coupon Bond, the name was changed into “IFIC Aamar bond” in advertisements, giving an impression that the bank was raising the fund.

At the time of floating “IFIC Aamar Bond”, the project was 37 acre, which would be expanded to 100 acre with a partnership of a 75:25 ratio between Beximco and STL.

The investment banker said it would be highly unlikely for the companies to generate enough revenue within the five-year time to keep the promise of high repayments.

At present, Beximco’s price-to-earnings (P/E) ratio is 1,927, according to the Dhaka Stock Exchange, which shows the stock is overvalued though it is still stuck on the floor. An investor of the stock has paid Tk 1,927 for every Tk 1 income of the company at the current stock price.

For the six months through December last year, its EPS (earnings per share) is Tk 0.03, which was Tk 7.35 for the same period a year earlier.

The company said its profit had plunged for a decline in exports and an abnormal decrease in the local demand for its products.

Its earnings fell more than 43 percent year-on-year in FY23 to Tk 7.1b. Beximco reported the highest revenue and profit in at least five year for FY22.

The bonds will be issued if approved by the Bangladesh Securities and Exchange Commission (BSEC). But with Commerce Minister Asadul Islam Titu considered a close buddy of Salman Rahman and allegedly his partner in crime in previous stock market scams for which Beximco was held responsible, the permission is a foregone conclusion.

The company promises to make refunds of a tiny portion of its loans [long- and short-term] of Tk 52 billion from the fund, but whether investors will get the promised return or not will depend on the success of the housing project in Gazipur.

PM Hasina has announced fighting corruption will be her top priority in her current term ( 4th) but as they say charity should begin at and from home. So far no sign of it as Salman Rahman remains the kingmaker — or queen maker.

The opinions expressed are the author’s own.

Subir Bhaumik

Subir Bhaumik is a former BBC and Reuters correspondent and author of books on South Asian conflicts.

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