Liquidation of troubled NBFIs may cost govt Tk12,000cr in taxpayer money

Highlights:

• Government may spend Tk30,000cr to rescue NBFIs, banks
• 20 NBFIs face liquidation; most loans are non-performing
• Deposit Insurance Act amended to cover NBFI depositors
• 83% of distressed NBFI loans classified as non-performing
• Tk20,000cr needed to merge five troubled Islamic banks
• Government plans to recapitalize, then privatize restructured banks

The Bangladesh government is bracing for a substantial financial outlay, potentially needing to spend up to Tk30,000 crore from public funds to address the widespread distress in the country's non-bank financial institutions (NBFIs) and troubled Islamic banks.

This significant expenditure will largely come from the government's budget, as confirmed by Bangladesh Bank Governor Ahsan H Mansur.

Massive liquidation of NBFIs on the horizon

The central bank plans to liquidate between 15 and 20 distressed NBFIs, a move expected to cost the public purse at least Tk10,000 crore to Tk12,000 crore. Governor Mansur revealed that 20 NBFIs are currently on the "red list," with most of them no longer operational. The aim is to "clean up the industry" by dissolving these institutions.

A critical challenge highlighted by Mansur is the lack of legal obligation for the government to compensate depositors of NBFIs under current law. To address this, the newly amended Deposit Insurance Act will include NBFIs, offering coverage for deposits up to Tk2 lakh. This change aims to provide at least partial protection for depositors in the future.

Out of Bangladesh's 35 NBFIs, only four to five are currently performing well. A Bangladesh Bank report from December 2024 paints a grim picture: the total outstanding loans of all NBFIs stood at Tk75,451 crore, with a staggering 33.25% (Tk25,089 crore) classified as non-performing.

The 20 identified distressed NBFIs alone held Tk25,808 crore in outstanding loans at the end of last December. Alarmingly, Tk21,462 crore of this — an astonishing 83.16% — was classified as non-performing, backed by collateral worth only Tk6,899 crore. 

The central bank's report cited serious management deficiencies, with some institutions linked to PK Halder, notorious for large-scale embezzlement. These institutions have failed to repay depositors, severely eroding public trust.

Troubled 20

The 20 troubled NBFIs facing potential liquidation are: CVC Finance, Bay Leasing, Islamic Finance, Meridian Finance, GSP Finance, Hajj Finance, National Finance, Industrial and Infrastructure Development Finance Company Ltd (IIDFC), Premier Leasing, Prime Finance, Uttara Finance, Aviva Finance, Phoenix Finance, People's Leasing, First Finance, Union Capital, International Leasing, Bangladesh Industrial Finance Company Limited (BIFC), Fareast Finance, and FAS Finance. Seven of these have default rates exceeding 90%.

The Bangladesh Bank has recently issued show-cause notices to these 20 NBFIs, asking why their licences should not be revoked. These institutions hold total deposits of Tk22,127 crore, with 74% being institutional deposits and 26% from individuals.

Bangladesh Bank spokesperson Arif Hossain Khan told TBS, "Some of the NBFIs have responded to the central bank's notice, while others are expected to reply shortly. Those whose explanations are not satisfactory will be brought under liquidation arrangements. However, this process will take some time."

He added that legal action will be taken against those involved in loan fraud at these NBFIs.

In contrast, the central bank identified 15 relatively well-performing NBFIs, which collectively hold Tk49,643 crore in loans, with classified loans amounting to just Tk3,627 crore (7.31%).

Md Ahsan Habib, a professor at the Bangladesh Institute of Bank Management (BIBM), pointed out that most NBFIs have failed in client selection and neglected collateral in lending decisions. 

He stressed the need for a strong NBFI sector, noting that most have failed to achieve their objective of providing long-term financing. Habib urged urgent support and reforms, including in the bond and securities markets, to save the sector.

Tk20,000cr for initial bank mergers

In addition to the NBFIs, the central bank's previously planned merger of five troubled Islamic banks could demand another Tk15,000 crore to Tk20,000 crore in its initial phase, bringing the total potential financial burden to Tk30,000 crore.

"We are still assessing the financial requirements, but an initial estimate suggests that Tk15,000 crore to Tk20,000 crore will be needed in the first phase to restructure five troubled banks. Additional funding will be required in subsequent phases," Governor Mansur stated.

The initial capital for these mergers will come from the government budget, likely through bonds under a recapitalisation scheme. 

The government will initially cover interest payments, while the principal will be raised through bonds to strengthen the banks' capital bases. 

The long-term plan involves gradually transferring these restructured banks to private investors, both local and foreign, and offloading shares on the stock market to reinvest funds into the banks' capital. 

Governor Mansur expressed an openness to 100% foreign ownership if an investor desires.

The five Islamic banks identified for merger are First Security, Exim, Social Islami, Union, and Global Islami Bank. An external audit commissioned by the central bank revealed alarming default rates of 60% to 95% on loans issued by these banks.