Bangladesh Bank tightens credit facility for bank directors and affiliates

In a significant move to strengthen governance in the banking sector, the central bank has issued a detailed circular outlining strict provisions for Bank-Related Persons or Institution.

According to the new master circular issued by Bangladesh Bank, a director of a bank is prohibited from borrowing more than 50% of their total invested shares in the concerned bank. However, for loans exceeding tk1 crore, prior approval from the central bank is required.

Yesterday, the Bangladesh bank issued a circular outlining these regulations. The directive aims to ensure greater transparency, minimise conflicts of interest, and prevent undue influence in the lending process, particularly in transactions involving bank-related persons.

Defining `bank-related persons or institutions'

As per the circular, "bank-related persons or institutions" include current directors, MDs or CEOs, significant shareholders, their family members, and affiliated or controlled institutions.

Entities transacting on behalf of or for the benefit of these individuals, as well as subsidiaries or associated firms, also fall under this classification.

Key restrictions and approval requirements

A bank is barred from extending more than 10% of its Tier-1 capital in credit facilities to all bank-related persons or institutions combined. Any breach of this limit must be reported immediately to both the bank's board and Bangladesh Bank, along with a corrective action plan.

Transactions with bank-related parties must mirror the terms available to regular customers. This includes market-based interest rates, appropriate collateral requirements, and fees. Importantly, such dealings must be backed by robust internal governance—board approval is mandatory, and directors with a vested interest must recuse themselves from the decision-making process.

Additionally, these transactions must receive shareholder approval in the subsequent Annual General Meeting (AGM) and be disclosed in the bank's audited financial statements.

Directors and representative directors

The circular imposes stricter limits on credit extended to directors or representative directors and their related entities. Total exposure to these individuals cannot exceed 50% of the face value of shares held in the director's own name. In cases where multiple family members serve as directors, the combined shareholding may be considered, provided sufficient guarantees are furnished.

If the credit exceeds the prescribed threshold, the excess amount must be reported to Bangladesh Bank and the board, and repaid within a timeframe specified by the central bank. Such transactions cannot be renewed or altered unless explicitly permitted.

Moreover, for any direct facility exceeding Tk50 lakh, or total direct and indirect exposure over Tk1 crore, prior approval from Bangladesh Bank is compulsory. This includes any renewals, modifications, or guarantee adjustments. 

Applications must include CIB reports, board approvals, and documentation demonstrating fair treatment compared to non-related parties, and must be submitted at least seven working days prior to the expiry of the existing facility, reads the circulard.

MDs/CEOs and their affiliates

The notification mandated strict limitations applicable to the bank's managing director or chief executive officer. Banks cannot extend any unsecured loan or advance to the MD/CEO or to any institution controlled by or affiliated with them. 

Furthermore, the tenure or terms of any existing loan cannot be extended, renewed, or modified, nor can any interest or profit waiver be granted during their period in office.

Since MDs and CEOs are contractual officers, they are excluded from employee loan schemes, although country heads of foreign banks may follow their institution's policies. A credit card may be issued under general customer terms, with a mandatory notification to Bangladesh Bank at least seven working days in advance.

According to the central bank notification, credit facilities to their family members or affiliated institutions must be fully secured, with personal guarantees from the MD/CEO, and must be backed by collateral such as bank deposits, gold, land, or shares listed on the stock exchange. These facilities must also be reported to Bangladesh Bank within seven working days of execution.

No principal or recognised income (interest/profit) may be waived for the MD/CEO or their affiliates without prior approval from Bangladesh Bank.

Regulatory oversight and enforcement

To ensure compliance, Bangladesh Bank holds discretionary power to classify persons or entities as bank-related and issue binding instructions accordingly. Banks must reflect such classifications in their official registers and adjust their internal systems to prevent conflicts of interest.

This sweeping reform is viewed as a response to longstanding concerns over insider lending and governance failures in Bangladesh's banking sector. The central bank's new rules are expected to enhance accountability, protect depositors' interests, and ensure that lending decisions are made based on merit rather than connections.

Banking insiders and experts welcomed the move, noting that rigorous implementation will be key to restoring trust and stability in the financial sector.