Bangladesh in 1972, a newborn country, had inherited the banks left by the Pakistani ruling class. Bangabandhu Sheikh Mujibur Rahman prudently decided to merge these banks into four state owned banks — Sonali Bank, Agrani Bank, Rupali Bank and Janata Bank as we know of today. Thus, the banking industry in Bangladesh started with mergers and by turning private owned banks into public ones.
| New Bank | Merged From |
|---|---|
| Agrani Bank Limited | Habib Bank Limited and Commerce Bank Limited |
| Sonali Bank Limited | National Bank of Pakistan, Bank of Bahawalpur and Premier Bank |
| Rupali Bank Limited | Muslim Commercial Bank Ltd., Australasia Bank Ltd. and Standard Bank |
| Janata Bank Limited | United Bank Limited and Union Bank Limited |
Later, Bangladesh Shilpa Rin Sangstha (BSRS) was established to provide financing to industries in 1972, along with Bangladesh Krishi Bank to provide loans to farmers. Since the mid-70s, loan defaults started emerging in Bangladesh’s finance sector — something that we did not inherit from the Pakistani ruling class, rather we figured it out ourselves. Bangladesh Shilpa Rin Sangstha (BSRS) and Bangladesh Shilpa Bank (BSB) started giving out loans to willful defaulters who never had any intention to pay them back. In the early 80s, the fault lines were exposed; according to a study conducted by Dr. Rehman Sobhan and Akhtar Mahmood, 80–85% of their loan portfolio consisted of bad loans.
“Now we are looking at the advanced stage of deterioration in the banking system, but the problem was identified when myself and Akhtar Mahmood did a study of bank default in the Development Finance Institutions (DFIs) — Shilpa Bank and Shilpa Rin Sangstha. This was right at the end of the Ziaur Rahman regime. We identified that the default rates were almost then 80–85%... The problem started when short term depositors’ money which goes into commercial banks, was being lent to long term borrowers, setting up industry who had begun defaulting on those loans… The crisis is now a much more serious structural problem.”
Prof. Rehman Sobhan — at an event organised by the Centre for Policy Dialogue (CPD)Ever since, Bangladesh’s economy kept growing and newer banks were introduced. We can divide them into 4 broad generations according to their year of inception — 1st generation (1971–1990), 2nd generation (1991–2000), 3rd generation (2001–2012) and 4th generation (2013–present). The biggest jumps in the number of banks happened in 1995 when five banks entered the market and in 2013 when eight new banks were permitted.
It’s not unusual to note that both 1995 and 2013 bank registration hauls had political considerations to some extent. For example — Prime Bank was provided licence in 1995 and its founder Azam J Chowdhury brought charges of extortion against Sheikh Hasina in 2007. Another SIBL permitted in 1995 was later found connected to terrorist financing. In 2013 Padma Bank came into existence, the founder chairman being M.K. Alamgir, an Awami League politician. The bank was later troubled due to an unsustainable amount of non-performing loans.
Cases of non-performing loans troubling a bank are not new. The now-defunct Al-Baraka bank was established in 1987 which ran into trouble in 1994 and was renamed “Oriental Bank” in 2004. Later in 2006 when there were lawsuits of around BDT 340 million embezzlement, Oriental Bank’s Board of Directors was dismissed and ICB Group bought majority shares of the bank in a bid. Even 18 years after corporate reconstruction, the Bank, currently ICB Islami Bank, now has BDT 4.44 billion of frozen deposits, BDT 18.2 billion capital shortage and BDT 7.9 billion loan portfolio of which 87% are non-performing loans.
A Decade of Bank Scams
The Bangladesh Bank first unearthed scams at the Farmers Bank in 2015 as it detected that BDT 4 billion loans were given without proper documentation and following procedures. Later, another investigation in 2017 detected an even bigger BDT 5 billion scam of similar nature. The bank was later renamed “Padma Bank”. More than BDT 35 billion was siphoned off from the bank according to Bangladesh Bank. As of September, default loans at the bank stood at BDT 30.71 billion, up from BDT 7.23 billion at the end of 2022. It stood at BDT 36.30 billion by the end of Q1 of this fiscal year.
Janata Bank, a state-owned commercial bank was marred with loan scams, majority of which was approved by the bank’s board. Janata Bank provided loans and banking facilities worth BDT 55 billion to a single borrower named Yunus Badal of Annontex Group. Crescent Group has taken as much as BDT 51.3 billion from the bank since 2013. Most of these loans have defaulted — AnnonTex’s bad debt to Janata Bank stands at BDT 66.29 billion, Crescent Group’s at BDT 18.96 billion, Remix Group at BDT 10.78 billion. By the end of 2021, Thermax Group’s dues stood at BDT 16.23 billion. Altogether, Janata Bank’s non-performing loans now stand at BDT 175 billion.
In May 2012, the Bangladesh Bank discovered fraudulent lending operations involving more than BDT 35 billion at the Ruposhi Bangla Hotel branch of Sonali Bank. Only Hallmark was responsible for BDT 26.86 billion, and they did it by forging documents and working in conjunction with bank employees. During 2009–2013, BASIC Bank was responsible for embezzling BDT 45 billion using false organisations and accounts.
The following is an account of Bangladesh’s banks with the highest amount of non-performing loans by the end of Q1 of this fiscal year:
| Bank | NPL Amount (Billion BDT) |
|---|---|
| Janata Bank | 164.64 |
| Agrani Bank | 150.73 |
| Sonali Bank | 134.98 |
| National Bank | 124.53 |
| Basic Bank | 80.73 |
| Rupali Bank | 79.18 |
| AB Bank | 55.79 |
| Islami Bank | 43.47 |
| Padma Bank | 36.30 |
| Bangladesh Krishi Bank | 28.42 |
Why are Banks Important and Different?
- Dealing with Public Deposit: A manufacturing company, say Pran-RFL, sells plastic chairs — they buy raw materials, manufacture in their own plant, and only the buyer is at risk if the chair is faulty. However, banks accept deposits from people and lend it to others. Capital only accounts for around 10–15% of total assets — the rest comes from deposits. Therefore, if a loan turns bad, depositors are the ones at risk.
- Fiduciary Relationship: A fiduciary relationship is one where the service provider must act in the interest of others. A banker is not lending their own money, rather depositors’ money. If a bad loan is disbursed, the trust on banks decreases — depositors lose confidence in the bank’s ability to pay them back.
- Too Big to Fail: If a bank is unable to return deposits, other depositors feel insecure. If everyone rushes to withdraw, even the strongest bank can realistically never pay them back at once, because the money is disbursed as loans in different terms and maturities. That is what we call a bank run.
Health of the Banking Sector
An IMF study finds that most financial crises exhibited Non-performing loans (NPL) to Total loans ratio above 7%. In Bangladesh, it crossed 9% in 2014 and later came down to around 8% in the early 2020s. The problem was there, looming.
| Year | NPL / Total Loans (%) | Capital-to-Assets (%) |
|---|---|---|
| 2011 | 1.90 | 8.01 |
| 2012 | 6.72 | 6.19 |
| 2013 | 4.84 | 6.56 |
| 2014 | 9.37 | 6.18 |
| 2015 | 8.40 | 5.72 |
| 2016 | 8.86 | 5.71 |
| 2017 | 8.90 | 5.25 |
| 2018 | 9.89 | 4.74 |
| 2019 | 8.90 | 5.17 |
| 2020 | 7.74 | 4.77 |
| 2021 | 7.97 | 4.76 |
Since 2011, the banks of Bangladesh have seen around a 50% decline in their average capital-to-assets ratio. The decay started 10 years ago; we are facing its consequences now that the macro economy has taken a hit and exposed the fault lines. But how did we try to manage these issues for the last 10 years?
- Increasing the Number of Family Members in the Board of Directors: In 2013, the Bank Company Act 1991 was amended to permit up to two family members on a board. In 2018 this was increased to four family members, allowing their interests to dominate over depositors’ interests. A 2023 amendment decreased this to three but extended director tenure to 12 years while reducing independent directors from 3 to 2.
- Listing of Willful Defaulters: The 2023 amendment required banks to send lists of willful defaulters to the central bank. However, directors engaged in default cases have no incentive to send their own names to Bangladesh Bank, so a better mechanism of identifying them has to exist.
- A Relaxed Rescheduling Policy: In 2022, the rescheduling policy was changed — banks were allowed to reschedule themselves, requiring debtors to pay only 2.5–5% of outstanding amount (down from 15%). This allowed classified loans to decrease on paper but did not improve the actual quality of assets held by banks.
| Particulars | Amount (Billion BDT) | % of Total |
|---|---|---|
| Substandard (SS) | 235.16 | 15.07% |
| Doubtful (DF) | 66.49 | 4.26% |
| Bad / Loss (BL) | 1,258.74 | 80.67% |
| Total Classified Loan | 1,560.39 | 100.00% |
What is Bangladesh Bank Trying to Do Now?
Not all banks are weak. Only 10 banks account for 62% of the defaulted loans. The systematic problem we have been facing has to come to an end, and the banking sector requires widespread reforms. The most recent amendment to the Bank Company Act 2023 gives Bangladesh Bank the authority to force any bank to merge if it is discovered that management or the board of directors is engaged in actions detrimental to depositors’ interests.
The central bank unveiled the Prompt Corrective Action (PCA) Framework in December, categorising banks according to their Capital to Risk (Weighted) Assets Ratio (CRAR) and non-performing loans (NPLs).
| Indicator | Category 1 | Category 2 | Category 3 | Category 4 |
|---|---|---|---|---|
| CRAR incl. 2.5% CCB (min. 12.5%) | 12.5% > CRAR ≥ 10% | 10% > CRAR ≥ 8% | 8% > CRAR ≥ 5% | CRAR < 5% |
| Tier 1 Capital Ratio (min. 6%) | 6% > T1 ≥ 5.5% | 5.5% > T1 ≥ 4.5% | 4.5% > T1 ≥ 3% | T1 < 3% |
| CET1 Capital Ratio (min. 4.5%) | 4.5% > CET1 ≥ 3.5% | 3.5% > CET1 ≥ 2.5% | 2.5% > CET1 ≥ 1.5% | CET1 < 1.5% |
| Net NPL | 5% < NPL ≤ 8% | 8% < NPL ≤ 11% | 11% < NPL ≤ 14% | NPL > 14% |
Bank Merger Guidelines
Bangladesh Bank published Draft Guidelines for Merger/Amalgamation of Banks/FIs. Based on selection criteria scores, the Bangladesh Bank will classify banks into three groups: sound, stable, and distressed. If a troubled bank’s financial situation does not improve over two periods, it will be advised to choose a voluntary merger. If this continues for two more periods, the bank will be considered eligible for forced merger.
- Step 1Proposal — Board of Directors of both banks agree in principle by resolution.
- Step 2Due Diligence — Transferee bank submits credentials and appoints Lawyers, Financial Advisors, Chartered Accountants, and Valuers to Bangladesh Bank.
- Step 3Due Diligence Report — Report submitted including secured and unsecured debts, and value of all assets and liabilities of both companies.
- Step 4Shareholder / Creditor Consent — Three-fourths of shareholders by value must consent to proceed.
- Step 5Draft Scheme Submission — Transferee company submits proposed Scheme to Bangladesh Bank.
- Step 6Examination — Bangladesh Bank satisfies itself the Scheme can be successfully implemented.
- Step 7Valuation & Transaction Cost — Bangladesh Bank mediates if parties cannot agree on asset values.
- Step 8Approval — Bangladesh Bank approves if merger is deemed in public interest.
- Step 9High Court Petition — Parties appear before the High Court within 3 months of receiving approval.
Key Concerns
The NPL Concern
Mergers do not mean the non-performing loans will be fixed. The government planned to purchase NPLs through an asset management company (BAMCO Act 2020), but Bangladesh Bank has since indicated the private sector will be in charge of taking on the loans.
The Interest Concern
Why will stronger banks be interested in taking over distressed banks without incentives? Bangladesh Bank will offer regulatory relaxation on MCR, provisioning, CRR, SLR, and LCR requirements, plus liquidity support, tax incentives and goodwill as an asset.
The Procedural Concern
Before merger, a comprehensive audit of banks is necessary to unearth actual NPL amounts. Without specifying the procedure of selling bad assets, particularly given that a major portion of bad debts are in the hands of a few people who have mostly fled the country, recovery is unclear.
The Justice Concern
The perpetrators behind forgery should be punished to create precedence. However, a majority have already fled the country. The ‘developed’ countries that provided them entry should cooperate with Bangladesh to deport them.
The Trust Concern
Panic withdrawals can lead to bank runs. City Bank’s share price declined after announcing its merger; UCB’s surged after announcing merger with National Bank. Maintaining utmost transparency is critical to avoid widespread panic.
The Long Run
The banking industry has long-standing issues: independence of Bangladesh Bank, alternative investment avenues, lack of good governance. Regardless of the mergers, these have to be solved. Bangladesh Bank has set a deadline of June 2026 to achieve its reform roadmap.
“Firstly the non-performing loans have to be identified, which are good enough to be recovered. Ideally this asset should be put at a market price. So, even the bad assets can be sold at a nominal price. And for that matter, we need a lot of asset management companies, who will buy those assets at a market price and then they will try to get back the money from the parties concerned. This has to be a multi-actor operation.”
Dr. Atiur Rahman, Former Governor, Bangladesh Bank“A lot of people are talking about it as if it [the merger] will happen tomorrow — nothing like that. But in the meantime, if it is not done properly, if the hype is created, there will be a lot of problems in terms of confidence in the banking sector. Already the depositors’ confidence has been affected. People are withdrawing their deposits from the weaker banks, which are supposed to be marked to the stronger bank. So, one has to be very careful in terms of strategic communication.”
Dr. Atiur Rahman, Former Governor, Bangladesh Bank“And a lot of our efforts will have to be made to attract an independent director into the merged bank. Some professionally done well are good professionals to become independent directors and these independent directors should be well paid. There is a provision of 50,000 Taka for the independent directors. The Indians give independent directors 150,000 rupees. So why not Bangladesh?”
Dr. Atiur Rahman, Former Governor, Bangladesh BankThe Bangladesh Bank’s action plans on the roadmap address 17 important concerns, five of which are thought to be very important: lowering the percentage of loans that collapse, stopping fraudulent and anonymous lending, putting in place procedures for selecting capable directors, selecting qualified independent directors, and merging weaker banks with stronger ones. The IMF has mandated Bangladesh to reduce NPL below the 5% threshold as a condition of the loan being provided. Will all these efforts pay off? That question will be sufficiently answered by the passage of time.