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Volume:7, Number:50
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Business & Finance 1
THIS WEEK

Crisis of Capital

Bad lending is causing loan defaults, which is causing losses in five state-owned banks, which is requiring injection of fresh capital with taxpayers’ money

| Afsana Khan |

The capital shortfall of the five state-owned banks is widening day by day. Instead of making profit, keeping the supply of capital steady has become the bigger concern for these banks. The banks – Sonali, Rupali, Basic, Krishi and Rajshahi Krishi Unnayan Bank – had kept aside more money from their capital for maintaining provisioning requirement against classified loans. In that process, they ended up losing their own capitals and incurred a deficit worth over BDT145 billion. Sonali, Rupali, and Basic banks have failed to reserve provision in accordance to credit. As per rules, banks have to set aside a certain amount of money from their profits for future provisions.

Economists said that when the default increases, the provision has to be kept according to a standard percentage. Since our banking sector is riddled with irregularities and corruption, loan default is increasing alarmingly. As a result, the banks are struggling to maintain their capital requirements. Unfortunately, the deposits from general clients are being transferred to a group of unscrupulous businessmen in the form of loans. These loans end up being defaulted in most cases. To fill up the capital deficits, the banks are taking money from government funds. This money too belongs to the common people of the country, as it is the tax they pay to the government. At the end of the day, the mass people are ending up losing money, while the unscrupulous corrupt people are remaining at large. Many influential members of the ruling party are allegedly involved in these irregularities directly and indirectly. Shielded by their political affiliation, they are getting away with their crimes. Former finance adviser to the immediate-past caretaker government Mirza A B Azizul Islam said: "This situation has been created due to the bad debts of the banks. The internal management should be maintained. It should be monitored to whom loans are being disbursed. Legal actions should be taken in time against those who fail to repay loans. Immediate measures should be taken for the disposal of the cases related to loans. If necessary, Bangladesh Bank, the attorney general and the chief justice can discuss the issue and take appropriate measures.”

According to data, the capital shortage of Sonali Bank stood at BDT34.74 billion, Basic Bank BDT26.84 billion, Rupali Bank BDT7.14 billion, Bangladesh Krishi Bank BDT70.83 billion and Rajshahi Krishi Unnayan Bank BDT74.2 million. The combined capital deficit of the five banks is BDT146.97 billion. To meet their capital deficit, the government provided them with BDT3.41 billion in FY2011-12, BDT5.41 billion in FY2012-13, BDT50billion in FY2013-14, BDT50.68 billion in FY2014- 15 and BDT16 billion in FY2015-16 from the national budget. Even in the current year, Tk 2000 crore has been earmarked for the state banks. Even after the substantial capital injection, the banks have been running high deficits. To bridge the gap, the banking division has sought another BDT 140 billion from the government.

Of all the banks, Sonali, Basic, and Krishi have the most allegations of corruption stacked against them. Once a well-reputed state-owned bank, the BASIC Bank started to go downhill from 2008. Under the leadership of former chairman Sheikh Abdul Hye Bachchu, a loan scam worth BDT45 billion occurred between 2009 and 2014. Following that, the bank is facing a capital shortfall worth BDT26.84 billion and defaulted loan worth BDT72.99 billion. The bank is riddled with the provision deficit and defaulted loan. Its net profit dropped from BDT65 million to BDT27.80 million in 2012. The bank suffered its first net loss in 2013 worth BDT530 million, which increased to BDT1.10 billion in 201 and BDT3 billion in 2015. In last three years, the government has injected BDT23.90 billion capital into the bank to pull it out of this financial mess. In August 2016, the bank wrote to the finance ministry proposing floating of 26 interest-free bonds worth BDT26 billion.

Failing to recover the loans distributed through anomalies, Sonali Bank, Basic Bank and Krishi Bank could not keep necessary safety provisions against their loans issued. The shortage of safety provisions of these six banks has stood at BDT65.39 billion at the end of 2016. During this period, the shortage of Basic Bank stood at BDT40.63 billion, Rupali Bank at BDT2.41 billion, and Sonali Bank at BDT17.76 billion. Zahid Hossain, chief economist at the World Bank's Dhaka office, said, “No positive change has been seen in our banking system in the last couple of years. So it is not strange that the banks are losing their capital. This is an old story now. Without going to the roots of this issue, this saga will continue.” Bangladesh Bank officials said loans disbursed without proper scrutiny are being defaulted, making those loans almost impossible to recover. They said one protection against this problem is to keep provisions against these loans. But a number of banks cannot keep these provisions because they do not make profits. Hence, capital shortfall is the logical conclusion.

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