SOS as BASIC problems compound
According to the Bangladesh Bank’s findings, BASIC will be unable to cover its operating expenses unless it takes steps to recover its outstanding loans, disburse fresh loans, and attract low-cost deposits.
BASIC Bank Ltd, a once-trusted and profitable state-owned financial institution, is currently facing a severe financial crisis, struggling to meet its operating expenses.
A recent report from the central bank, obtained by The Business Standard, says BASIC Bank's current operational model is unsustainable.
The Bangladesh Bank conveyed these findings to Sheikh Mohammad Salim Ullah, secretary of the Financial Institutions Division of the Ministry of Finance, on 22 January this year, urging the ministry to intervene and protect the bank.
According to the Bangladesh Bank's findings, BASIC will be unable to cover its operating expenses unless it takes steps to recover its outstanding loans, disburse fresh loans, and attract low-cost deposits.
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According to the report, while the average ratio of total non-performing loans in the country's banking sector stands at 8.20%, BASIC Bank exhibits a highly elevated total non-performing loan rate of 57.85% as of 31 December 2022.
In December 2022, the bank experienced a six-day statutory liquidity ratio (SLR) deficit and has been directed to prevent such deficits going forward.
SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.
Approximately 92% of the bank's SLR is invested in Bangladesh Treasury Bonds, highlighting its strained business activities, says the report.
Given the erratic nature of loan activities and stagnant deposits, the bank has predominantly invested its SLR in Bangladesh Treasury Bonds. In situations requiring immediate cash, the bank may resort to borrowing from the money market at elevated interest rates.
The BB suggests that increasing business activities is a viable means for the bank to gradually overcome this predicament.
Question arises: What factors have contributed to the downfall?
BASIC Bank's downfall is traced back to 2009 when Sheikh Abdul Hye Bacchu, the then chairman, allegedly orchestrated scams amounting to Tk4,500 crore between 2009 and 2013. These scams involved the distribution of loans based on forged documents. Bacchu stepped down from the bank in July 2014.
In 2008, prior to Bacchu assuming the chairmanship, BASIC demonstrated robust financials with a net interest income of Tk112 crore. During that period, the bank efficiently managed its operating expenses, a mere Tk81.7 crore, solely through its net interest income.
However, following Bacchu's forced resignation in 2014 due to his alleged involvements in mega scams totalling around Tk4,500 crore, the bank's financial health deteriorated significantly. The net interest income plunged to Tk139 crore in negative territory, while operating expenses soared to Tk277 crore.
Despite a recapitalisation of approximately Tk3,000 crore over the years, BASIC Bank's financial condition continued to worsen. The bank's annual audited report for 2022 revealed alarming figures with operating expenses doubling the operating income of Tk131 crore, a net interest income of Tk246 crore negative, and a loss before provision of Tk127 crore negative.
Earnings per share (EPS) of BASIC Bank, which stood at Tk37.7 in 2008, plummeted to over negative Tk37 in 2014. The bank's financial damage is evident as its EPS remains in negative territory at Tk1.20 in 2022.
Amid eroding trust, the troubled bank faced more hurdles with the private sector and individuals avoiding financial transactions with it. State-owned corporations, supported by the government, remained the primary depositors.
The deteriorating trust widened the gap between Basic Bank's income and expenses.
Md Anisur Rahman, the bank's managing director, underscored the present harsh financial situation citing an annual interest payment obligation exceeding Tk1,000 crore in contrast to deposits of around Tk15,000 crore and earnings of only Tk300 crore from a Tk3,000 crore active loan portfolio. This resulting disparity has resulted in a significant operating loss of Tk700 crore.
"Our current focus is on improving loan recovery and cost management to ensure the bank's survival," Anisur Rahman told The Business Standard in response to the central bank findings.
To sustain BASIC Bank, Anisur suggested a dual approach. First, he urged securing affordable deposits, emphasising government mega-project support. The second proposal aimed at obtaining Tk10,000 crore in deposits with reduced interest rates of 2-3%, significantly lower than the market rates of 8-8.5%. This strategy, Rahman believes, could yield an annual interest of Tk500 crore.
What more the central bank report says
As of 31 December 2022, BASIC Bank reported an interest expense of Tk869 crore compared to an interest income of Tk622 crore. The resulting net loss for the bank that year amounted to Tk246 crore.
The Bangladesh Bank said BASIC Bank's pre-provision loss amounted to Tk4,225 crore. The ongoing trend in the collection of outstanding loans suggests that it might require approximately 16 years to reduce the bank's accumulated losses to zero.
As of 31 December 2022, the bank's total deposits declined by 1.34% to Tk14,896 crore and total loans and advances fell by Tk985 crore to Tk13,459 crore with defaulted loans accounting for Tk7,786 crore.
The bank's capital deficit stands at Tk2,345 crores which would have been Tk7,386 crores without various concessions from the Bangladesh Bank.
However, the outstanding debt collection of the bank has risen by Tk118 crore in 2022 compared to the previous year.
MD Anisur Rahman said the figures for deposits, loans and advances, and default loans might be higher as indicated by the unaudited balance sheets of 2023.
The central bank's report also said the bank can move towards profitability by increasing deposit collection, expanding lending activities, increasing overall business operations, converting the current negative spread into a positive one, and gradually reducing the capital deficit.
Anisur Rahman said, "We have not declined any cheque, regardless of the amount. However, ordinary depositors and private institutions do not have confidence in us due to chronic losses. We are relying on obtaining deposits from government institutions at an interest rate exceeding 8%, leading to a notably high cost of funds."
BASIC's initiative to reduce operating costs
In response to financial troubles, BASIC Bank authorities implemented cost-saving measures across various areas leading to the temporary suspension of low-interest home loans for its officers and employees. The bank has now resumed the loan service following a partial improvement in the situation.
Since assuming office in April 2021, current Managing Director Anisur Rahman implemented cost-saving measures, including the sale of 65 out of the bank's 133 vehicles. This resulted in a reduction in the head office size from five floors to three. The bank's operating expenses are now sustained through various service fees and commissions.
In contrast, during the tenure of Abdul Hai Bachchu, a substantial portion of fraudulently disbursed loans was laundered abroad, while the remainder defaulted.
These current initiatives have led to the recovery of Tk900 crore in outstanding loans over the past three years. There has also been a reduction in net losses and a decrease in the capital deficit.
Despite improvements in these metrics, the bank's financial condition remains precarious. The liquidity position is currently unfavourable, with a decline in deposits compared to the previous year.
The Anti-Corruption Commission has filed charge sheets in 61 cases related to loan fraud at BASIC Bank, amounting to approximately Tk3,000 crore in defaulted loans.
According to bankers, the issuance of charge sheets has diminished the borrowers' interest in reaching settlements with the bank.
Anisur said despite the prevailing dollar crisis the bank has maintained its regular business operations without seeking dollars from Bangladesh Bank. He further stated that last year, BASIC Bank surpassed Sonali Bank in terms of exports, with BASIC Bank facilitating exports amounting to Tk2,500 crore, whereas Sonali Bank's exports totalled Tk2,000 crore.
Some positive developments
During Bacchu's tenure, the bank's loan portfolio exceeded its deposits, placing stress on fundamental management. However, as of the end of 2022, the bank's loan-deposit ratio decreased to 90% from 96% the previous year.
Despite a negative growth of 6.72% in import financing in 2022, the bank witnessed noteworthy growth in export financing.
A senior official explained that the decline in import financing was deliberate in line with measures taken to discourage imports of non-essential commodities and maintain a healthy level of the country's forex reserves.
Nevertheless, export financing surged by 37.22% compared to the previous year reaching Tk2,931 crore by the end of 2022.
Also, the bank's operating performance demonstrated improvement, leading to a reduction in operating losses by Tk274 crore compared to 2021. In 2022, the bank incurred an operating loss of Tk128 crore.
