Bangladesh Bank is likely to formulate a bailout plan for up to eight non-bank financial institutions which have no capacity to return clients’ money.
The central bank gave the hint at a recent meeting held at its headquarters in Dhaka on April 23 with BB governor Fazle Kabir in the chair. Managing directors of all the NBFIs were present at the meeting.
At the meeting, Kabir instructed its officials concerned to formulate a bailout plan soon so that the troubled NBFIs could get rid of the situation.
The central bank may take the initiative as the finance ministry is yet to respond to its proposal on liquidation of Bangladesh Industrial Finance Corporation.
In late 2018, the central bank placed the proposal before the finance ministry.
The BB governor said that the central bank received 10-15 complaints everyday on non-payment of depositors’ money from the NBFIs’ clients, said officials of BB and NBFIs, who attended the meeting.
At the meeting, a number of MDs of NBFIs also requested the central bank to take initiative so that the sector could get rid of the ailing condition.
They requested BB to follow bailout plan implemented at the Farmers Bank (now Padma Bank) in formulating one for the ailing NBFIs.
Under the initiative, financially sound NBFIs could come into the management of the ailing NBFIs upon fund injection, the officials said.
Besides, merger of insolvent NBFIs with well performing financial institutions could be another option, they mentioned at the meeting.
NBFIs also proposed BB allow them to borrow up to 80 per cent of their equity through call money market to tackle an intensive liquidity crisis.
In reply, BB informed that NBFIs would be allowed to borrow up to 40 per cent of their equity through call money market instead of existing 30 per cent.
Following request from NBFIs, BB also informed that NBFIs would not be forced to increase their paid-up capital to Tk 200 crore as the overall financial sector has been going through a liquidity shortage problem.
Central bank officials also asked NBFIs to consider small savers’ claims on priority basis.
As per the September-quarter end report of 2018, the amount of defaulted loans in the non-bank financial sector stood at Tk 7,890 crore, representing 11.2 per cent of the outstanding loans.
At the end of December, 2017, the defaulted loan amount was Tk 4,520 crore.
According to a stress test report of the central bank, 12 out of 34 non-banking entities were in the red zone that denotes high vulnerability.
Of the rest 22 NBFIs, 18 were in the yellow zone that indicates less risky state, and only four entities were in the green zone or safe state.
Of the NBFIs in the red zone, 95.31 per cent outstanding loans of Bangladesh Industrial Finance Corporation had become defaulted. The amount of defaulted loans in First Finance was 37.5 per cent.
Bay Leasing, Fareast Finance, FAS Finance, International Leasing and Financial Services, People’s Leasing and Financial Services, Premier Leasing, Prime Finance, Reliance Finance and Union Capital were the entities in the red zone, said BB officials.
A series of irregularities in loan distribution by a section of sponsor-directors of the NBFIs and to the individuals linked with them were the major reason for the present state of the sector, they said.
Not only the NBFI sector but also the banking sector suffered a series of loan scams in recent years.
As per the latest BB report, the amount of bad loans grew to Tk 93,911.4 crore in 2018 from Tk 22,482 crore in 2009 in the banking sector.
Despite the occurrence of scams, the government has offered a number of breaks to the defaulters and the banks.
For the last instance, the central bank in April this year relaxed defaulted loan classification rules, extending the time for treating overdue loans as doubtful and bad, giving further break to banks in this connection.
Earlier in February this year, the central bank relaxed loans write-off policy by extending banks capacity to write-off loans worth Tk 2 lakh. Previously the limit was Tk 0.5 lakh.
In April last year, the government reduced commercial banks’ mandatory cash reserve ratio to 5.5 per cent of their deposits from 6.5 per cent.
State agencies were also asked to deposit 50 per cent of their funds in the private commercial banks. The previous limit was 25 per cent.
Although the facilities were offered to bring down lending rate to 9 per cent and deposit rate to 6 per cent, the rates are yet to be come down to that levels.