BB’s leniency in blaming the ailing banking sector

Banking rules and regulations set a single exposure limit for borrowers to ensure that a bank’s fortunes are not tied to the ebb and flow of a customer’s business. However, the banking regulator itself has routinely ignored this rule for the past sixteen years.

Bangladesh Bank used to allow the limit to be exceeded on special grounds, leaving the state-owned banks in a distressed condition.

By law, banks may not lend more than 25 percent of their paid-up capital to one party.

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

For example, state-owned 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 many as Rs 19,000 crore of Beximco loans have defaulted.

The sprawling conglomerate took on the huge amount of loans when the central bank allowed Janata to exceed the limit.

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

Despite objections from the Department of Off-Site Supervision, the central bank’s arm responsible for monitoring and regulating banks, then-Governor Abdur Rouf Talukder granted the exemption to Beximco.

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

The controversial S Alam Group has taken a large number of loans from Islami Bank. The Chattogram-based conglomerate also dominated the Sharia-based lender’s board.

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

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

The three lenders were able to approve such a large amount for Orion as the central bank had in November 2022 relaxed Section 26-kha (1) of the Bank Company Act-1991, which states that loans made by a bank to one single borrower may 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 provided the no-objection certificates for the loans from the Orion power plant.

However, the loans were later canceled at the request of the business group.

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

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

With the exception of the Bangladesh Development Bank, all exceeded the exposure limit for a single borrower.

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 consultant Mohammad Abu Tayeb told The Daily Star that the infrastructure of the gold refinery project is now ready and they are awaiting the arrival of the machines.

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

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

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

“This type of waiver is given on many large projects,” she added.

Deshbandhu Group recently applied to the BB to relax the limit on a single borrower’s exposure to imports of essential commodities ahead of Ramadan.

The state-owned banks have been held hostage by some customers due to frequent exposure limit violations, industry insiders said.

A lender’s risk increases when one customer receives a large share of the loans, sometimes even more than the customer’s capital, she added.

As of June last year, Janata had the highest number of large borrowers (67) and the highest percentage of large borrowers who had exceeded the 25 percent capital exposure limit for a single borrower, central bank documents showed.

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

Agrani had 55 large borrowers and 20 of their exposures exceeded 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 banks to exceed the single borrower exposure limit, there was no need to fix the limit,” said Mustafa K Mujeri, former chief economist at BB.

Such exemptions for certain customers are not legal.

The current dire situation of the banking sector is a reflection of such waivers from rules and regulations, said Mujeri, who is also executive director of 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 if they are not obeyed? The central bank cannot deny responsibility for the fragile situation of most banks,” he added.

By the end of September, the six state-run commercial banks — Agrani, Janata, Rupali, Sonali, Bangladesh Development Bank and BASIC Bank — had together defaulted on loans worth Tk 126,111.5 crore, which is 40.35 percent of their disbursements 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 for good governance, said Anis A Khan, former chairman of the Association of Bankers Bangladesh (ABB).

Some large borrowers who are now receiving loans beyond their capacity are unable to meet the interest payments on the loans.

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