Auditors raise red flag as Tk2,340cr of state-run oil firms stuck in merged banks

Infographics: TBS

The financial health of three state-owned oil companies – Jamuna Oil, Padma Oil, and Meghna Petroleum – has come under scrutiny after auditors raised serious concerns regarding the recoverability of a staggering Tk2,340 crore currently locked in FDRs with five recently merged banks.

The external auditors for these listed entities highlighted the precarious situation in their reports for the FY25, noting that despite the maturity of many of these deposits, the banks have failed to encash them due to a severe liquidity crisis.

The funds belonging to these blue-chip companies are trapped in First Security Islami Bank, Exim Bank, Global Islami Bank, Social Islami Bank, and Union Bank. These five lenders, which faced immense financial strain, have recently been merged into a single entity under the directive of the central bank.

According to the breakdown provided in the audit reports, Jamuna Oil has the highest exposure with a total of Tk1,460 crore stuck in these troubled institutions. Meghna Petroleum follows with Tk540 crore, while Padma Oil has Tk339 crore tied up.

These investments were generating interest at rates ranging from 10% to 12.5%, a lucrative stream of non-operating income that has now become a source of significant financial risk.

The financials were prepared by prominent auditing firms. Hoda Vasi Chowdhury and Co, alongside MM Rahman and Co, audited Jamuna. Hoque Bhattacharjee Das and Co, and Hussain Farhad and Co were responsible for Meghna, while MM Rahman and Co and Mahmud Sabuj and Co audited Padma.

In their respective reports, these auditors stated that the banks were merged due to a severe liquidity crisis following directives from the central bank. While the oil companies have recognised the accrued interest from these FDRs in their books, the principal amounts remain due as of 30 June 2025.

The auditors further disclosed that following the maturity dates of these FDRs, the three oil companies had formally issued letters to the respective banks demanding encashment of the investments. However, the banks failed to provide a positive response or release the funds, citing an acute shortage of liquidity.

Consequently, the auditors opined that considering the investment has fallen into a high-credit-risk category, the companies should recognise an allowance for credit loss in line with the International Financial Reporting Standard (IFRS).

Failure to do so could result in an overstatement of the companies' assets, they reported.

Breakdown of Tk2,340cr

Jamuna Oil's Tk1,460 crore exposure includes Tk720 crore in First Security Islami Bank, Tk432 crore in Global Islami Bank, Tk289.49 crore in Union Bank, and Tk18.64 crore in Social Islami Bank.

Besides, the company has Tk74 crore in Bangladesh Commerce Bank and Tk7 crore in National Bank, institutions that have also faced challenges.

Meghna's Tk540 crore comprises Tk211.73 crore in Global Islami Bank, Tk169 crore in First Security Islami Bank, and Tk159.42 crore in Union Bank. It also has an exposure of Tk7.50 crore in Padma Bank.

Padma's Tk339 crore includes Tk152 crore in Exim Bank, Tk79.53 crore in Global Islami Bank, Tk55.85 crore in Union Bank, Tk35.57 crore in First Security Islami Bank, and Tk16 crore in Social Islami Bank.

Like Jamuna, Padma Oil also has funds stuck in National Bank amounting to Tk6.04 crore.

State intervention key to recovery

Mohammad Jobaer Chowdhury, deputy general manager (finance) of Jamuna Oil, told The Business Standard that the situation is now dependent on state-level intervention.

He explained that since the government has taken responsibility for the five banks through the merger process, the company is waiting for a government decision to recover the funds kept in these institutions.

He noted that while the previous management made the decision to place FDRs in these specific banks, the current management has been taking initiatives to recover the funds, though these efforts have not yet yielded success.

The root cause of this massive exposure appears to be deeply entrenched in the political economy of the previous regime, added Jobaer Chowdhury.

A senior officer at Meghna Petroleum, speaking on condition of anonymity, said the company has recently formed a committee to recover the funds and is currently negotiating with relevant government concerns.

He said that after the fall of the previous government, the new management managed to recover a partial amount. He noted that their total FDR exposure was originally over Tk2,000 crore, but following quick initiatives by the current management, the amount was brought down to Tk500 crore.

The official shed light on the pressure faced by the state-run firms, alleging that the previous management kept these massive amounts in those specific banks following persuasion and lobbying from the ministry and the banks' owners.

He claimed that the then-secretary of the Ministry of Power, Energy, and Mineral Resources under the Awami League regime actively lobbied for these deposits. In such cases, the company had little choice but to comply to avoid conflict with high-level authorities.

Flaw in business model

Financial analysts have pointed out a fundamental weakness in the business model of these state-run giants.

According to their financial statements, these companies often generate more income from interest on FDRs than from their core business operations. Their primary mandate is to distribute fuel across the country, for which they earn a fixed margin set by the government per liter of fuel supplied.

However, the reliance on financial income has created a complacency regarding risk management.

A senior analyst at a leading brokerage firm commented that this situation has exposed the companies' weak corporate governance and inability to foresee financial vulnerabilities.

He argued that the management of those oil firms should have conducted a rigorous risk analysis much earlier, well before the banks reached the brink of collapse.

He warned that the liquidity position of the state-run oil firms might be squeezed owing to counterparty credit loss or these blocked funds, and income from bank deposits is likely to decline significantly in the future, impacting overall profitability and dividend-paying capacity.

Cenbank assures deposits protected

The five lenders have been legally amalgamated into a newly formed entity named Sommilito Islami Bank, which has commenced its operations.

Although the new bank has begun its journey with a fresh license, it has not yet fully finalised its corporate structure.

The new entity has been established with a paid-up capital of Tk35,000 crore. Of this amount, the government is providing Tk20,000 crore, while the remaining Tk15,000 crore is being raised through the conversion of deposits into shares.

Mohammad Ayub Miah has been appointed as the chairman of the new bank, and its head office is located at Sena Kalyan Bhaban in Dhaka's Motijheel.

Addressing the anxiety surrounding the merger, the Bangladesh Bank assured depositors that none of them will lose their money and that all deposits will remain fully protected.

The central bank stated that the new entity will become the country's largest state-owned Shariah-based bank. Under the Deposit Protection Ordinance, deposits up to Tk200,000 will be fully protected in the first phase, with payments to depositors expected soon after the merger is completed.