Good banks in danger under pressure of non-performers

Mahfuja Mukul: Although the formal process of merging weak banks with good banks has started, many questions remain unanswered. It is not clear to anyone how the huge amount of bad loans or bad assets will be adjusted, especially in weak banks. Experts fear that if proper steps are not taken in this case, good banks may also fall under the pressure of bad loans of weak banks.
Center for Policy Dialogue (CPD) executive director Fahmida Khatun told media, “Many bank managers, including ordinary depositors, are worried about the merger of weak banks with comparatively good banks. Because the good banks that are there, they have become better by following the rules, complying with the compliance, overcoming various kinds of adversities. So why should they take over a weak bank?’
According to the information received, Bangladesh Bank started the process of bank merger by announcing the ‘Prompt Corrective Action (PCA) Framework’ in December last year. Later, BB issued another notification last February clarifying the matter. After that, the merger talks started. Last March, the bank’s managing directors were called upon to suggest a voluntary merger by December. If not, it is said that the decision will be imposed on the banks in March next year.
However, the central bank has not clarified many aspects of the merger process so far. In particular, no policy has been made so far on how to adjust the loans of the weak banks which are treated as bad. In this case, it is said to build a separate institution for debt or asset management, but so far, no legal framework has been created in that regard.
Exim Bank announced the merger with Padma Bank on March 14 at the beginning of the initiative taken by Bangladesh Bank. Among these two banks, Exim Bank is relatively better, but Padma Bank was sinking due to irregularities, loan scams and lack of good governance at various times.
According to the data, the total amount of disbursed loans of Padma Bank till last December stood at Tk 4,054 crores. In the meantime, Tk 1,880 crores, which is 46.39 percent of the total loan, have defaulted. Apart from this, a large part of the disbursed loans of the bank is in the foreclosure account. Tk 1,863 crores of defaulted loans of Padma Bank have become ineligible. As of last September, the bank’s capital deficit was Tk 607 crore.
On the other hand, the loan disbursed by Exim Bank is Tk 46,937 crores. Out of this, the amount of defaulted loans is Tk 1,629 crores, which is 3.47 percent of the total loans. Exim Bank’s uncollectible debt is Tk 1,297 crores. However, the bank has no capital deficit. Apart from this, huge amount of loans of both the banks have been waived.
According to the information, even if the amount of defaulted loans of the two banks does not increase from now, then after the merger, the default rate of Exim Bank will stand at 6.44 percent of the total loans. According to international standards, bank defaults should be below 5 percent.
Although Bangladesh Bank policy says bad bank liabilities can be sold. However, no such policy has been issued so far. Even after the sale of bad assets at a low price, there is no clear description of how the remaining liabilities will be adjusted in the central bank’s policy. Not only that, there is currently no shortage of capital in Exim Bank. However, if no adjustment is made, the bank will face a capital deficit of Tk 607 crore after the merger with Padma Bank. In this case, additional money must be deposited in the central bank as capital.
A review of various reports of the Central Bank shows that adequate collateral has not been taken against the loans disbursed by Padma Bank. Even as most of the disbursed loans were not returned, the bank faced a liquidity crisis. Later in March 2022, the central bank exempted Padma Bank from statutory deposit SLR till 2025. The facility is still in place today.
According to analysts, United Commercial Bank (UCB) is likely to suffer the most in the merger process. Because this institution has to take responsibility of National Bank which is several times bigger than them. Many fear that UCB will eventually collapse itself-taking on the responsibilities of a gigantic, but financially crumbling institution.
Information received from the Dhaka Stock Exchange (DSE) says that the authorized capital of the listed UCB is Tk 1,500 crore. And the paid up capital of the bank is Tk 1,476 crore. However, the authorized capital of the National Bank, which is going to be merged with the bank, is Tk 5,000 crores and the paid up capital is Tk 3,220 crores.
Not only that, the amount of loan disbursed by National Bank is Tk 42,771 crore. Out of this bad debt is Tk 11,377 crore. And the total defaulted debt is Tk 12,368 crore or 28.92 percent. If merged, UCB’s total debt will be Tk 92,727 crore along with Tk 49,956 crore. Currently UCB’s default is Tk 2.5 billion, but then it will stand at Tk 14,868 crore. Currently UCB’s default rate is 5.01 percent. After the merger, this rate will stand at 29.76 percent.
Although UCB has no provision deficit, National Bank’s deficit is Tk 11,697 crore. Apart from this, the bank which failed to maintain provision has taken deferral facility of about Tk 11 thousand crore from the central bank. In other words, National Bank’s provision deficit is more than Tk 23 thousand crore. Apart from this, the bank has a capital deficit of Tk 2,240 crore. All in all, with the merger, UCB will enter the list of financially weak banks.
However, the directors of the National Bank have shown a negative attitude towards the merger with UCB. In the meantime, they have decided not to merge by holding a board meeting.
National Bank Chairman Syed Farhat Anwar said, “National Bank is a well-organized bank. Out of the nearly 300 branches and sub-branches of the bank, all but a handful of 11 to 12 branches are making profit. Now, as a result of taking special initiatives, the collection of defaults has increased. Targets are set ahead. It is hoped that defaults will come to a satisfactory level soon. If it doesn’t come, then it can be merged.’
Bangladesh Development Bank (BDBL) is slated to merge with state-owned Sonali Bank. The amount of loan disbursed by BDBL till last December is Tk 2,313 crore. Out of this, Tk 982 crore is defaulted, which is 42.46 percent of the total loan. Apart from this, the amount of the bank’s hidden or hidden loans is Tk 1,327 crores. That is, most of the disbursed loans of the bank are in default.
And Sonali Bank’s total loan amount is Tk 93,096 crores. Out of this, the amount of defaulted loans is Tk 13,150 crores, which is 14.13 percent of the total loans. Although there is no provision deficit, Sonali Bank has taken Tk 3,720 crore deferral facility. Apart from this, the amount of the bank’s foreclosed loans till last December is Tk 6,611 crores.
An exceptional initiative in the merger process is the merger of the public sector Basic Bank with the private sector City Bank. In the meantime, even though Basic Bank has written to the highest level of the government not to go through this process, it is difficult for the bank to withdraw from the process. In that case, BASIC can be merged with City itself. The total loan of BASIC Bank was Tk 12,868 crore till last December. Out of this, defaulted loans are Tk 8,204 crores, which is 63.76 percent of the total loans. Out of this bad debt is Tk 8,042 crores. The bank’s provision deficit is Tk 5,195 and with special facilities the deficit is shown to be Tk 4,785 crore. That is, the total provision deficit will be Tk 9,980 crores. As a result, the bank has no security for bad loans.
Not only that, this government bank has written off a loan of Tk 2,458 crore. And there is a capital deficit of Tk 3,150 crores.
On the other hand, currently the default rate of City Bank is only 3.52 percent. The bank has no provision deficit and no capital deficit. However, this bank will become weak after taking over the responsibility of Basic Bank.
Apart from this, there are two state-owned specialized banks, Krishi and Rajshahi Krishi Unnyan Bank (Rukub), which are in the process of merger. Out of this, the disbursed loan of Rakab is Tk 7,178 crore. Out of this bad debt is Tk 1,311 crore. The amount of defaulted loans is Tk 1,534 crores, which is 21.37 percent of the total loans. Apart from this, Rakub’s capital deficit is Tk 2,472 crore.
The former governor of Bangladesh Bank Dr. Salehuddin Ahmed said, ‘if one bank is forcibly merged with another bank, the main problem of the banking sector will not be solved. Bad debt burdened Padma Bank is being merged with Exim Bank. The directors who caused this result of Padma Bank today will be able to become directors of Exim Bank again after five years without bringing them under any punishment. Does it matter? Without taking necessary initiatives and without complying with international norms, Bangladesh Bank is forcing hasty mergers. The depositors are panicking and withdrawing their deposits. A panic has spread in the entire banking sector.