ICB to withdraw Padma Bank investment as return eludes

The Investment Corporation of Bangladesh (ICB) has decided to withdraw investment from Padma Bank, the erstwhile Farmers Bank, after not getting any return on the investment in five years. The state-owned investment corporation is now looking for strategic investors from home and abroad to sell its shares in the crisis-ridden lender.

"We made an equity investment so that we can get a share of the bank's profits. But, we did not get any return on the investment in Padma Bank, which is why the board of directors of the ICB has decided to sell the shares [in the bank] and withdraw the investment," Md Abul Hossain, managing director of the ICB told The Business Standard.

An equity investment is a money that is invested in a company by purchasing shares of that company in the stock market.

When asked about this, Padma Bank MD and CEO Tarek Reaz Khan told TBS that he has heard about the ICB's decision to withdraw investment from Padma Bank.

He, however, said the investments made by the ICB and four state-owned banks in Padma Bank are entirely government funds, which is why the ICB needs annual general meeting approval if it is to withdraw investment from Padma Bank. Approval of the Bangladesh Bank is also required, he added.

Asked whether Padma Bank will be in trouble if the ICB withdraws its investment, the bank's MD said that he was not fully aware of the matter.

The four state-owned commercial banks that invested huge sums of money to rescue the erstwhile Farmers Bank that was mired in loan scandals are also disillusioned with almost five years of no return on their investments, according to sources at the banks.

The state banks are not getting any response from the Padma Bank authorities despite repeated letters asking for dividends against the equity investments or at least interest against the investments on the current deposit rate, the sources said.

In this regard, the Padma Bank MD said that the equity investors are not getting any return as Padma Bank is still operating at a loss.

The ICB and state-owned Sonali Bank, Janata Bank, Agrani Bank, and Rupali Bank together injected Tk715 core or 65% of its capital into the troubled private bank in 2018 as per the finance ministry's decision to save it from going bankrupt. At that time, the four public banks invested Tk165 crore each while the ICB invested Tk55 crore. The ICB's investment increased by Tk30 crore afterward.

A high official of one of the state-owned commercial banks told TBS on condition of anonymity that the banks invested depositors' money in Padma Bank. Therefore, even though they did not get any return on the investment in the past five years, they are having to pay the depositors 6% interest every year.

"Letters are [often] sent to Padma Bank asking for dividends against the equity investment or interest on the investment in line with the current deposit rate. The bank does not even respond let alone pay the money," the official said.

In April 2018, while taking investments from state-owned banks and the ICB, it was said that Farmers Bank would be listed in the capital market and then the investors would be able to withdraw their funds by selling their shares. But the bank that was renamed Padma Bank is yet to be listed in the capital market.

MD Abul Hossain, managing director  of ICB, is also a member of the board of directors of Padma Bank. He said, "It is not sure when Padma Bank will be listed. So we are looking for strategic buyers to sell our shares to withdraw the investment." 

Several officials of the ICB and the investor banks told TBS that they were forced to invest in Padma Bank to save it due to the government's decision.

An attempt was made to gain the trust of customers by appointing the CEOs of these institutions to the board of directors of Padma Bank, but the bank could not turn around as per the expectations and has continued to make losses, added the officials.

Padma Bank is not able to return the deposits of many government institutions, including the Bangladesh Jiban Bima Corporation, Titas Gas Distribution Company, even on maturity owing to a liquidity crisis. The bank has taken time till 2029 to return the deposits of Jiban Bima Corporation.

Crisis with the ICB

Sources said the ICB has not been able to make good profits due to the recent downturn in the capital market, which has reduced the corporation's capacity to pay dividends.

Funds invested in various institutions outside the capital market getting stuck is another reason for the crisis the ICB is currently in, they added.

The sources went on to say that the investment corporation has sought fresh funds of Tk10,000 crore from the finance ministry and Tk3,000 crore from the Bangladesh Bank. But, there has been little progress in this regard.

Even though the ICB has decided to withdraw investment from Padma Bank against this backdrop, it is not encashing the deposit of Tk157 crore in Padma Bank for the time being.

Padma Bank merger in limbo

In July 2021, Md Ehsan Khasru, the then-managing director of Padma Bank submitted a merger or acquisition proposal to the finance ministry in the wake of huge defaulted loans, inability to return deposits, and large losses.

According to the information given by the bank at that time, the operating loss of the bank in the first six months of 2021 was Tk120 crore.

At that time, Finance Minister AHM Mustafa Kamal indicated that the floundering bank would have merged with the state-owned BASIC Bank after an amendment to the existing law. But the law has not been finalised yet.

The then Finance Minister Abul Mal Abdul Muhith, who tried to save Farmers Bank with the investment of four state-owned banks and ICB, in an exclusive interview with TBS in December 2019, said giving a new lifeline to Farmers Bank was not the right decision.

"I realise that it was not the right decision to save Farmers Bank, I should not have allowed it to live. I should have allowed it to die," he said. But he had to act on Farmers Bank because of political pressure, he added.

"But when it was done [steps taken to save Farmers Bank], I thought it would die eventually," the former finance minister said.

After proposing the merger, Padma Bank said in a press release in September 2021 that it had entered into an agreement with US-based investment bank DelMorgan and Company. It said DelMorgan would act as the lead arranger of a $700 million investment, including $350 million in equity investments and the rest $350 million as a credit facility.

The notification also said that this investment would come within the following 4-6 months.

But Padma Bank MD Tarek Reaz Khan confirmed to TBS that the investment has not yet come.

He, however, mentioned that the bank should bring equity investment from foreign sources by 2024 as per a MoU signed with the Bangladesh Bank. 

"Already, we have made several presentations to get equity from abroad. In all cases we are giving priority to the interests of Bangladesh. Hopefully, we will get good news within this year," Tarek told TBS.

What's the present situation?

Tarek Reaz Khan said that in its MoU signed with Padma Bank in September 2021, the central bank set various targets for the bank for a period of three years from 2022-2024. And the bank is working to achieve the targets set in various indicators including deposit mobilisation, loan disbursement and recovery, and reduction of defaulted loans.

"We have succeeded in achieving the targets set for 2022. Hopefully, Padma Bank will be able to reach break-even in 2025 if we can achieve the target set for this year and next year," he said.

The Padma Bank MD said they are refraining from lending for now.

"However, we are planning to start disbursing agricultural loans and SME loans on a small scale. Padma Bank has already signed an agreement to participate in the disbursement of loans under the Tk5,000 crore refinancing scheme that the Bangladesh Bank has created for the agriculture sector. Money can be borrowed from that fund at 0.50% interest, which can be distributed among farmers at 4% interest."

A history of crises

When Farmers Bank – which later became Padma Bank – was nearing collapse due to massive lending anomalies since its inception in 2013, the four state-owned banks and Investment Corporation of Bangladesh came up with a Tk715 crore bailout in 2018.

The state-owned banks also invested more around Tk1,000 crore in the bank in other forms, such as subordinate bonds and fixed deposits.

The total investment of public money could not stop capital erosion of the bank as it could not recover money from defaulters. 

The capital shortfall of the bank stood at Tk 540 crore at the end of September in 2021 and the default loan of the bank was 62% during the same period, according to Bangladesh Bank data.