Banking sector most 'ravaged' by corruption: White Paper

Infographics: TBS

The White Paper on the state of Bangladesh's economy has ranked the banking sector as the most "corruption-ravaged" sector, identifying the culprits within the system as "heavyweights", leading to distressed assets of Tk6.75 lakh crore, which constitutes 31.7% of total loans in the banking industry by the end of June 2024.

This amount of distressed assets is equivalent to the cost of constructing 14 Dhaka Metro systems or 22.5 Padma Bridges, said the White Paper submitted to the chief adviser today (1 December).

The report identified that politically influenced lending practices deepened the banking sector crisis, with persistent loan defaults and high-profile scams undermining financial stability and diverting capital from productive sectors.

It also found that all 10 banks termed "distressed" by the regulator are "technically bankrupt and illiquid". Besides, it estimated that the amount of money stolen from banks is nearly 105 times the lifetime income of the average Bangladeshi.

The White Paper pointed out that the collusion between Bangladesh Bank (BB) insiders and influential outsiders was more apparent than ever between 2015 and 2024. 

"The equation between BB and the leadership in the cabinet was recalibrated when fiscal and political dominance found a friendly reception in the leadership of BB," it reads.

It also said the licensing of banks was transactional, and the ministry's politically motivated interference influenced the approval of private banks.

Speaking at the event marking the submission of the White Paper, Governor Ahsan H Mansur, who was appointed under the interim government, said half of the defaulted loans are concentrated within a few groups.

A significant amount of money has been rapidly syphoned off from the banking sector since 2017, he said, suggesting that these issues should be documented as evidence in the White Paper.

He added, "We need to strengthen our institutional framework and compliance. In this regard, the issues they face should be addressed in a consultative manner."

He further said their job is not to save the banks, but to ensure the security of bank depositors.

"Whether or not a bank will survive, or whether a name will change, is another matter. We are providing liquidity support to banks facing liquidity shortages, which will help restore customer confidence in these institutions," said the governor.

Depth of distress

The unseen is over three times the seen, said the White Paper.

"The window dressed part of the NPLs (Non-Performing Loans) are the loans rescheduled or restructured, because they turned bad in the past, and the amounts written off because they have been on the balance sheet as Bad Loans for too long," it said.

Part of the sharpness of the increase of NPLs in the last quarter of FY24 (12% in June 2024 at over Tk2.11 trillion) may have come from unedited disclosures of unrecovered loans that used to be shown as regular by offering various concessions, said the report.

The depth of the "banking blackhole" (distressed assets) exceeded Tk6.75 lakh crore at the end of FY24. This amount is equivalent to the construction costs of 13.5 Dhaka Metro systems and 22.5 Padma bridges. 

"Banks did not get into such a deep hole due to idiosyncratic factors or a few bad apples. The fragmented regulatory system provided multiple avenues for wrongdoing," added the report. 

It mentioned that the banking system is inadequately provisioned to withstand such excruciating stress. The distress is even larger when the bad loans of NBFIs are accounted for. 

"Bangladesh's 35 NBFIs had Tk21,658 crore at end-September 2023, constituting 29.8% of their disbursed loans, with 10 institutions accounting for 67.5%. The incidence of their NPLs was 25% in September 2022. The notorious People's Leasing and Financial Services and International Leasing and Financial Services faced high profile scams and irregularities. The NBFIs were Tk2,020 crore short on provisioning. The regulator was largely unmoved, going after a few small fries once in a while."

Safeguards don't guard

The report noted that collusion between central bank insiders and influential outsiders was most blatant during 2015-2024. The Bank Company (Amendment) Act 2023 exemplified this, extending the tenure of bank sponsor directors to 12 years, up from nine in 2018. 

The 2023 amendments also reduced the number of family members allowed on a private bank's board from four to three, still higher than the two permitted under the 1991 Act. 

These changes weakened the Bangladesh Corporate Governance Code, allowing as few as two independent directors, down from the previous requirement of at least one in five, according to the White Paper.

The amendments also introduced a "vague distinction between willful and unwilful defaulters, with the former defined as those who "do not repay though they have the capacity," leaving room for judicial interpretation.

It exempted sister concerns of defaulters from loan restrictions at BB's discretion. Penalties for willful defaulters were mild, including travel restrictions and denial of trade licenses. Board members and their relatives were allowed to borrow with collateral, marking a shift from rule of law to rule of the powerful.

Enforcement was unevenly lax

The White Paper stated that the lack of independent directors in overpopulated bank boards allowed sponsors to control decisions, with board compositions often lacking relevant skills. 

Auditors were not always chosen for their expertise, and biased enforcement by the BB allowed misconduct in both domestic and state-owned banks. 

BB failed to monitor changing risk profiles or enforce supervision based on capital ratios. BB also lacked full discretion to act against state-owned banks (SOBs) noncompliant with prudential requirements, it said.

Licensing was transactional 

The report said "predators" easily bypassed licensing barriers. It criticizes the system for lacking a proper corporate governance framework, failing to assess major shareholders' suitability, and not requiring the disclosure of ultimate beneficial owners. 

The licensing of private commercial banks (PCBs) has largely become a tool for political patronage, with ownership concentrated in the hands of politically connected individuals, despite concerns from external stakeholders about its economic rationale, added the White Paper.

'Capture by dominant groups'

Embezzlement of vast sums by large borrowers through fake companies or undocumented loans became a privilege in the banking sector, said the report. 

It mentioned that the CPD identified 24 cases of malfeasance from 2008-2023, involving Tk922 billion across forgery, fraud, theft, money laundering, and irregularities. 

Major perpetrators include Hallmark Group, Bismillah Group, AnnonTex, Regent Hospital, and NRB Global Bank. Each case averaged Tk3.86 billion ($32 million), nearly 105 times the lifetime earnings of the average Bangladeshi, estimated at $0.31 million over 50 years with 10% annual income growth.

Related parties capitalised relations 

Related-party lending, a correlate of regulatory capture, is widespread among banks controlled by individuals or entities with a substantial interest in nonfinancial firms. 

Restrictions on related-party transactions do not bite. Directors can borrow from banks other than the one for which they are directors. Not surprisingly, related party lending soared. 

For instance, reciprocal loans of directors of eight banks amounted to Tk45,000 crore at the end of 2023. These banks bent rules and norms under the regulator's watch. 

10 banks technically bankrupt

According to the White Paper, all 10 banks classified as "distressed" by regulators are technically bankrupt and illiquid. These include two state-owned banks affected by major scams in the past decade and eight severely weak Sharia-based and conventional private banks.

The White Paper committee chose not to disclose the names of these banks for confidentiality. 

Together, these banks account for 33% of total loans and 32% of total deposits in the banking sector. All are rated "Very Weak" due to poor profitability, high NPLs, and inadequate capital. 

While two have moderate liquid assets, the remaining eight are nearly illiquid and unable to meet obligations. Denied market support and reliant on the central bank's exhausted assistance, they now survive solely under the BB's Guarantee Scheme.