Audit firm to be mandatory for loans exceeding Tk500cr
For loans of Tk500 crore or more, banks will have to conduct their own verification as well as engage an audit firm listed with the Bangladesh Bank to examine how the funds have been used.
Banks will have to verify the use of loans of up to Tk500 crore through their internal audit or risk management units, while an audit firm will be mandatory to check the utilisation of loans of Tk500 crore or more under proposed Bangladesh Bank rules.
A senior Bangladesh Bank official confirmed the matter, saying the proposed policy is now awaiting final approval.
Under the proposed rules, loans ranging from Tk100 crore to Tk500 crore will have to undergo end-use verification by the bank's internal audit or risk management department.
However, officers involved in the verification cannot be from the unit or department directly involved in approving or disbursing the loan.
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For loans of Tk500 crore or more, banks will have to conduct their own verification as well as engage an audit firm listed with the Bangladesh Bank to examine how the funds have been used.
The audit firm conducting the end-use verification cannot be appointed to finalise the same bank's financial statements.
For loans below Tk100 crore, borrowers will have to submit a statement or declaration explaining how the funds have been used. Banks will then conduct risk-based checks depending on factors including the borrower's risk profile, account conduct, and other relevant considerations.
Bangladesh Bank officials believe stronger internal monitoring, combined with third-party verification after disbursement, could significantly reduce loan misuse and irregularities. The audit reports could also provide a basis for taking action against those involved in wrongdoing.
Mohammad Obaidul Haque, managing director of Bangladesh Commerce Bank, told The Business Standard, "Effective monitoring of how and where the funds are used after disbursement would increase accountability on both the bank and borrower sides. It would also improve transparency in loan management and help ensure that loan proceeds are used for the approved purposes."
He added, "This could reduce the tendency to use business loans to purchase land, invest in the stock market or transfer funds abroad. As a result, misuse of loans would decline and the risk of new non-performing loans emerging in the future would also be reduced."
Md Touhidul Alam Khan, managing director and CEO of NRBC Bank, said the proposed framework is appropriate and timely for Bangladesh.
"Many large loans have gone wrong because of paper-based disbursement, inflated project costs, borrowed equity, and diversion of funds. So, stronger verification of how loan proceeds are used after disbursement is timely and appropriate," he told TBS.
Touhidul said the proposed framework targets these weaknesses while building on existing safeguards, including internal control and concurrent-audit mechanisms, ICAB's professional framework and Credit Information Bureau checks.
"Clear thresholds for group exposure are also needed to prevent borrowers from splitting loans to stay below the verification thresholds," he added.
Tighter checks on term and project loans
The proposed rules will also introduce stricter end-use monitoring for term and project loans of any amount when they are disbursed in instalments.
Banks will have to verify whether each previous instalment has been properly used before releasing the next instalment.
If the total amount of a term or project loan is Tk100 crore or more, a listed audit firm will have to conduct an overall review of the use of funds after the full loan has been disbursed.
The verification will cover whether the funds have been used for the approved business or project and whether any amount has been diverted to other purposes.
Banks will also have to examine whether any portion of the loan was withdrawn in cash and used for unauthorised purposes, whether funds were used to repay loans from other banks or financial institutions, or whether the money was invested in the stock market, real estate or other unauthorised activities.
The checks will also cover the use of funds for personal or non-business purposes, direct or indirect transfers to related parties, transfers abroad and any other unauthorised use.
Banks will have to verify the physical existence of assets, goods, machinery, equipment and vehicles purchased with the loan proceeds. In the case of project loans, the actual progress of the project will also have to be assessed.
For import financing, the relevant import documents, including letters of credit, bills of entry and customs records, will have to be examined.
Banks and auditors will also review bank statements, bills, vouchers, invoices, purchase documents and other supporting records. They will have to verify the physical existence of projects, assets, inventories and other materials, while checking for any significant irregularities.
Where necessary, banks may conduct physical inspections themselves or through audit firms. They may also verify information through third parties and check the authenticity of transactions with suppliers or buyers.
Loan misuse seen as major source of bad debts
Bangladesh Bank officials say anonymous and fraudulent loans are among the major causes of the banking sector's high level of non-performing loans.
In some cases, borrowers have allegedly obtained loans by overstating the value of mortgaged assets several times over. A significant portion of such funds was allegedly transferred abroad before the borrowers fled the country, they said.
Investigations at different times have also found alleged collusion involving bank directors, senior head-office officials and branch-level employees in securing such loans through various forms of fraud.
Bangladesh Bank inspects banks every year, but typically prioritises selected branches and operations, leaving irregularities in other branches undetected in some cases, officials said.
They also said audit firms in some cases approved banks' annual financial statements without raising adequate questions. The central bank believes a separate and effective audit of the actual use of loan proceeds could reduce such risks.
BB steps up scrutiny of large loans
The proposed policy comes as Bangladesh Bank has stepped up efforts to examine who is receiving large loans and whether the funds are being used properly.
In May, the central bank asked banks to provide information on loans of Tk20 crore or more that were disbursed or rescheduled between July 2025 and April 2026, including details of the borrowers and the purposes for which the loans were provided.
The central bank subsequently examined whether individuals previously involved in fraud or money laundering had obtained loans in someone else's name or through other means, and whether the rules had been followed in rescheduling the loans.
The Bangladesh Bank found several irregularities, according to officials. These included an instance of an anonymous loan at a state-owned bank, large loans being rescheduled without the required down payment and loans being extended without adequate collateral.
The central bank sent warning letters to the managing directors of the banks concerned over the irregularities.
Despite Bangladesh Bank's continued efforts to contain non-performing loans by relaxing rescheduling facilities and easing down-payment requirements, total defaulted loans in the banking sector crossed Tk6 lakh crore at the end of June.
The volume of non-performing loans increased by nearly Tk18,000 crore in just three months to June, according to the latest Bangladesh Bank data.
The NPL ratio rose to 32.79% at the end of June from 32.26% at the end of March. The total amount of NPLs stood at Tk5.80 lakh crore at the end of March, according to the figures cited in the report.
Against this backdrop, most banks, with a handful of exceptions, have failed to generate their desired level of profit.
Banks are required to maintain capital equivalent to around 12.5% of their loans, but the banking sector ended last year with a capital shortfall of 2.64%, according to the figures cited in the report.
International practices
Several jurisdictions have measures for monitoring the end use of borrowed funds, although the specific requirements vary.
In India, Reserve Bank of India rules require banks to closely monitor the end use of funds, while project financing can involve certification by chartered accountants. The RBI also says lenders should strengthen their own internal controls and credit-risk management rather than rely solely on external certificates.
The RBI's framework also allows lenders to engage their own auditors for specific certification on diversion or siphoning of funds and, where appropriate, commission forensic audits.
In the European Union, the European Banking Authority's guidelines require banks to maintain robust systems for the ongoing monitoring of credit facilities, borrowers and relevant financial and qualitative indicators.
The proposed Bangladesh framework would therefore strengthen an existing principle of banking supervision by introducing more specific thresholds and third-party verification requirements for large loans.
