All the 10 banks marked as 'distressed' by the regulators are "technically bankrupt" and illiquid, according to the draft white paper that painted a dismal state of Bangladesh economy following past reign of plunder.
The draft 'White Paper on State of Bangladesh Economy', made public following its submission to the Chief Adviser of the post-uprising interim government Sunday, states that a banking system can only be protected by its capital and liquidity in a distressed situation.
"We chose 10 distressed banks to dig into their solvency and liquidity. Of the 10 banks, 2 are state-owned banks that were mostly hit by scams in the last decade. The other 8 are extremely weak shariya-based banks and conventional private commercial banks," the expert panel notes in the white paper.
The names of these banks are not disclosed for confidentiality. All the 10 banks are termed 'distressed' by the regulators, the media and the public. Combined loans and deposits of these 10 banks constitute 33 per cent of the total loans and 32 per cent of the total deposit of the banking sector, it said.
"All banks are rated very weak, which is the worst rating. They are all extremely weak in assets and capital. Two banks have moderate liquid assets. The remaining 8 are nearly illiquid. Most of these banks have apparently defaulted on their obligations," the document reads.
The banks have been denied support from the market and their support from the central bank is exhausted. Currently they are taking cover under the BB's (Bangladesh Bank's) Guarantee Scheme to stay afloat.
"Most of these banks did not disclose the fair value of their assets in their financial reporting. We had to identify the hidden toxic assets based on expert judgment backed by information gleaned from indirect disclosures in the banks' annual reports, regulators and various news published in the media in the last couple of years," it mentions.
Regarding the volume of distress loans in the banking system, the committee comments that the "window dressed" part of the NPLs (non-performing loans) are the loans rescheduled or restructured, because they turned bad in the past, and the amounts written off because they have been on the balance sheet as Bad Loans for too long.
All these categories have grown over time. Adding the stock of written- off (net of recovered) and the non-classified part of the rescheduled loans to the recognised NPLs, the incidence of "distressed" assets was 31.7 per cent of total bank loans at end-June 2024.
Of the distressed assets, the volume of recognised NPLs was Tk 2.11 trillion, rescheduled and restructured loans was Tk 2.73 trillion, outstanding written off Tk 754 billion, special-mention accounts Tk 392 billion while Tk 762 billion remains under court stay order. Altogether, the volume of overall distressed loans in banks reached Tk 6.75 trillion. The amount is equivalent to 13.5 Dhaka Metro systems and 22.5 Padma bridges.
"Banks did not get into such a deep hole due to idiosyncratic factors or a few bad apples. The fragmented regulatory system provided multiple avenues for wrongdoing. The banking system is inadequately provisioned to withstand such excruciating stress," the document says.
Recognised provisioning shortfall amounted to a paltry Tk 193 billion at end-June 2024. The size of actual provisioning is "puzzling". The BLs (bad loans), which require 100-percent provisioning, at end-June 2024 was Tk 1.68 trillion. The actual provision was Tk 893 billion, well below even the BLs. "Generous and allegedly nepotistic provisioning- deferral facility to banks of certain genre explains such a gigantic mismatch", according to the draft white paper.
It says Bangladesh's financial-sector distress did not emerge from economic disruptions or financial crises or even political instability. Economic factors such as trade, remittances, investments, inflation, commodity prices, exchange rates, and interest rates cannot explain the sustained drain in balance sheets and trust in market makers and regulators.
"An organised network of business conglomerates, bureaucrats and politicians coalesced explicitly and implicitly to use the financial system to mine public money by capturing corporate and regulatory governance. Laws and regulations were tailored and retrofitted to serve the interests of this troika in the spot and forward markets for local and foreign currencies," the report on findings says.
"De jure accountability systems were de facto deposited in deep fridge. The web of institutions to adjudicate disputes, regulate markets, and allocate resources largely exhausted the trust of the public."
Terming the culprits within the banking system 'all heavyweights', it says the big ones coincide with the bad ones. NPL concentration mirrors loans concentration and more. The fastest-growing manufacturing sector accounted for 49 per cent of the loans extended and 55 per cent of NPLs.
The collusion between BB insiders at the top and influential outsiders was never as open as it was during 2015-2024. The equation between BB and the leadership in the cabinet was recalibrated when fiscal and political dominance found a friendly reception in the leadership of BB.
How this coalition of interests tilted the rules of the game is best illustrated by the Bank Company (Amendment) Act 2023 passed on 21 June 2023. The amendment extended tenure of bank sponsor-directors to 12 years instead of nine years of its previous amendment in 2018.
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