Loans taken for separate units must be reported under parent company

Loans issued to any company registered with the Registrar of Joint Stock Companies and Firms (RJSC) or to its various units must be reported to the Credit Information Bureau (CIB) database of the Bangladesh Bank under the name of the parent company.

Bankers say these instructions are intended to enhance transparency in CIB reporting and ensure accurate data collection for loans of individual entities.

On Tuesday, the central bank issued a circular asking the managing directors of all scheduled banks and non-bank financial institutions to adhere to this procedure.

Bankers note that companies registered with the RJSC often take loans under the names of their various units, which can circumvent the single-borrower credit limits set by banking regulations.

This practice leads to an increase in the total loan amount attributed to a single individual or company, creating additional risk for the banks' loan portfolios, they added.

The recent circular highlights that some banks and financial institutions have been approving loans under the names of different units from various sectors of a single company.

To address this issue and improve transparency in CIB reporting, it is now essential to report loan information to the CIB under the name of the registered company.

For example, if a company named "A Limited" is registered with the RJSC and operates different units such as "A Limited (Unit-1), (Unit-2), (Unit-3)," or "A Limited (Garments Unit)" at various locations, each unit is still considered part of the parent company, A Limited. Consequently, all loan information should be reported to the CIB database under the name of A Limited.

According to central bank policy, no bank can lend more than 25% of its paid-up capital (both funded and non-funded) to a single borrower. An official from the central bank noted that large industrial companies registered with the RJSC often take loans under the names of their various affiliated units. This practice can lead to credit limits being exceeded significantly, bypassing central bank policies.

The central bank has issued this new circular to ensure transparency in credit information and to prevent such practices.

Although the central bank allowed defaulting customers to obtain loans starting in early April, the notification issued by Bangladesh Bank at that time stated that even if one company within a business group defaults, other companies in the group can still secure loans.

However, the bank will assess whether the defaulting institution is a wilful defaulter or if the default occurred due to justifiable reasons. Based on this evaluation, Bangladesh Bank will grant final approval for the loan.

In July 2023, the Bank Companies Act was amended to permit defaulting customers to take out new loans. Subsequently, in April of this year, Bangladesh Bank issued a notification outlining specific conditions for granting new loans to defaulters.

A senior official of the central bank explained that if a customer's company defaults on a loan, the facilities extended to other companies within the same group will be withdrawn. This is because defaulting customers, after receiving policy concessions, may seek new loan facilities. The governor will review these policies to ensure their effectiveness.

Defaulted loans have surged to an all-time high of Tk2.11 lakh crore at the end of June, as a lack of governance and various irregularities – such as concealing the true financial picture through window dressing – in the country's banking sector during the ousted Sheikh Hasina regime have begun to surface.

According to data from the Bangladesh Bank, toxic debt in banks rose by Tk29,096 crore in the June quarter, marking an increase of around 16% from the default amount at the end of March.