Banks in overvalued mortgage trap

The plan is as simple as it is devious.

Mortgage a piece of property overvalued manyfold and take out hundreds of crores of Takas from Banks and financial institutions as loans against that inflated value. The errant companies have 'helpful' financial institution officials on their sides who would approve such inflated value and even lobby for the loans.

This has become a regular practice in the financial market as companies and individuals take loans and become defaulters while the banks and financial institutions are left with trash collateral hardly covering the loan amounts. Examples are many.

JACQUARD Knitex Limited – based in Tongi, ​​Gazipur – borrowed Tk85 crore from Janata Bank's Tongi branch in 2010 by offering 113 kathas of land as collateral in the Nishatnagar area of ​​Tongi.

The mortgage deed was executed showing the market price of each katha of the land at Tk1 crore. As the company failed to repay, the loan amount including principal and interest stood at Tk183 crore in 2019. In the same year, the company was declared a defaulter by the Credit Information Bureau (CIB).

 As per the Section 12(3) of the Artha Rin Adalat act, Janata Bank put up the 113-katha mortgaged land for auction. Even though auction notices were published thrice, no one showed interest in buying the property.

A legal officer at Janata Bank's head office told The Business Standard that the actual market price of the land was Tk30 lakh per katha.

"As such, the total value of the mortgaged property is around Tk33 crore while the loan amount is Tk183 crore. Therefore, it was not possible to sell the land at auction."

Then in November 2019, Janata Bank filed a case against JACQUARD Knitex Managing Director Anayet Uddin in the Gazipur Artha Rin Adalat (money loan court). The trial of the case has not started yet.

Janata Bank is not the only bank from where JACQUARD Knitex has taken out loans through overvaluation of mortgaged property. The company has borrowed another Tk180 crore from AB Bank, Islami Bank, City Bank and Agrani Bank at different times.

Law officials of the concerned banks told TBS that the mortgaged properties were overvalued for taking out loans from all of the banks. JACQUARD Knitex Limited has defaulted on Tk577 crore in loans with five banks.

AB Bank, Islami Bank, City Bank and Agrani Bank also tried to sell the mortgaged property at auction to recover their loans but failed. As a result, the four banks have filed cases in money loan courts in Dhaka.

Barrister Tanjib-ul Alam, a company and banking law expert, told TBS that a review of cases filed against the top defaulters listed by the CIB would show that most of the immovable properties they offered as collateral against loans were overvalued.

He further added, "These influential borrowers and defaulters carry out such irregularities with the help of some corrupt bank officials. There are allegations that these powerful bankers make arrangements for the approval of these loans for personal gains through unfair means. There is a lot of evidence in support of these allegations."

Rules flouted in inspection of mortgaged property

Shah Mohammad Ahsanur Rahman, a banking company law expert and Supreme Court lawyer, told TBS prevailing laws and regulations limit the maximum loan limit for individuals or institutions at 70% of the value of the mortgaged immovable property. On the other hand, a company or industry can obtain a loan up to 25% of its capital.

"Besides, the designated official(s) has to submit a report after inspecting the mortgaged property before the approval of the loan. This is where a major forgery takes place."

"An even bigger responsibility of the bank is to determine the price of the land according to the official original list of properties in the area concerned. The bank would also find out if the property was mortgaged to another bank. At the final stage, the bank will determine the value of the property with the help of an engineer or surveyor."

"It will then register a mortgage deed in the name of the bank in the concerned sub-registry office. The bank will take a power of attorney to sell the mortgaged property, so that the bank can sell the property at any time."

This expert also said in case of lending, a guarantor has to be appointed.

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), told TBS that it is now an open secret that no rules are followed in approving these loans. There have been such irregularities in almost all the much-talked-about cases of loan default, he added.

He further added that there is no precedent of bringing any bank official to justice, making it impossible to rein in this misdeed in the banking sector.

This expert also said that actions or initiatives on part of the Ministry of Finance, the Bangladesh Bank and others concerned are not noticeable either. "They should increase surveillance on big loans. Besides, stern legal action must be taken against those who were involved in these kinds of scandals in the past."

More mortgage overvaluation incidents

In the Tk3,500 crore Sonali Bank loan scam, Hallmark Group's assets were mortgaged at a rate of 150 to 200 times higher than the market value.

In the Tk4,500 crore BASIC Bank loan scam, fake mortgages were created against each loan, said the Anti-Corruption Commission (ACC).

In another much talked about loan scam, Crescent Group misappropriated Tk3,443 crore from Janata Bank. ACC investigation reveals properties were mortgaged inflating the value several hundred times higher than the market price in this case.

Aslam Chowdhury, a well-known Chattogram-based businessman, and two of his business entities face about 30 cases as they defaulted after borrowing Tk1,600 crore from ten banks and seven non-bank financial institutions.

There are 30 cases against Chattogram's businessman Aslam Chowdhury after defaulting on loans of about Tk 1,600 crore from 10 banks and seven non-banking financial institutions. Two of these cases have been filed by the Anti-Corruption Commission, where he has been accused of embezzling around Tk 500 crore from two banks.

The ACC said the businessman borrowed Tk500 crore with doctored mortgage papers while the remaining Tk1,100 crore loans were taken against overvalued properties.     

The ACC said that the several thousand crore Taka loan scam of AnonTex Group also took place through mortgage overvaluation. 

Cases those did not make the headline

Controversial Youth Employment Society Jubok not only embezzled around Tk2,500 crore from its clients, but also it is accused of embezzling bank loans of around Tk400 crore.

In May 2004, four other banks and non-bank financial institutions, led by Dhaka Bank, gave a syndicate loan of Tk300 crore to Jubok's "Telebarta" – a ghost project which never saw the light of the day. There were allegations that the loan was approved on the lobbying of a founding member of Dhaka Bank.

Jubok mortgaged a plot with a building in Dhaka's Tejgaon industrial area and a plot with a three-storied building in Purana Paltan Lane. As the banks lodged lawsuits to recover the loans, the Dhaka money loan court ruled to put the property to auction. But none turned up to bid in the auction that took place on 25 January this year.    

Meantime, the bank officials said the value of the properties is only around Tk150 crore. Another bank source said the Dhaka Bank official who lobbied for the loan to Jubok overvalued the mortgage and paved the way for the loan.

Chattogram's Maheen Enterprise is in debt of Tk935 crore with several banks. After defaulting, the enterprise was included in the credit information bureau (CIB) list in 2019.    

Gazipur's Suprov Composite Knit Ltd owes different banks a total of Tk862 crore. Chattogram's SA Oil Refinery Ltd defaulted on Tk876 bank loans.

Bangladesh Bank lawyer Barrister Shameem Aziz told TBS that about 70% of the nearly 1,000 loan defaulters in 2019 and 2020 who were on the CIB's list overvalued the mortgage. There are also many cases of non-existent property being mortgaged.

He said the mortgage frauds came to light as the bank put the mortgaged properties on auctions.

About 74,000 cases filed by banks against about Tk1.25 lakh crore defaulted loans with the money loan courts were pending as of December last year, the lawyer added.

Of the lawsuits, nearly 22,000 cases have been stayed by the High Court. Reviewing those, it was found that the mortgaged properties have been overvalued in almost every case.

Contacted, former Bangladesh Bank governor Dr Mohammed Farashuddin said, "It is important to scrutinize the loan proposals before approving them. Besides, there are allegations that a section of banks and bank owners are involved in such frauds. This also needs to be verified."

He said alongside with the loan supervision department of the concerned bank, the surveillance of the central bank also should be strengthened. At the same time, he thinks the board of directors of the banks should appoint qualified people instead of going for politically convenient appointments.

Mortgaged properties do not see mandatory charge creation  

Company law expert Advocate Probir Neogi told TBS that banks and non-bank financial intuitions are supposed to create charges with the Office of the Registrar of Joint Stock Companies & Firms after receiving a mortgaged property.

According to Companies Act-1994, the Office of the Registrar of Joint Stock Companies & Firms will then be able to inspect the property.  

The law has the charge creation provision so that no bank or financial institution faces risks or fraud over mortgages. If any financial institution does not go through charge creation, there is a provision of financial penalty, said the lawyer.          

On top of this, the High Court in 2010 directed the Office of the Registrar of Joint Stock Companies & Firms and the Bangladesh Bank to take appropriate measures for charge creation.    

But the legal expert said charge creation is rare. 

Zakir Hossain, registrar of the Office of the Registrar of Joint Stock Companies & Firms, told TBS that they could not settle down on the mandatory charge creation after several meetings with the Bangladesh Bank and others. 

Sirajul Islam, executive director and spokesperson of the central bank, said their supervision unit has been working on mortgage issues since various loan scams came to the spotlight.