At least five financial institutions risk losing assets following the recent bank merger, as shares held as collateral for loans they disbursed have been valued at zero.
IFIC Bank, Dutch-Bangla Bank, Shahjalal Islami Bank, Southeast Bank and National Housing Finance together face losses exceeding Tk 6.46 billion, according to the Central Depository Bangladesh Limited (CDBL).
Among the borrowers, former EXIM Bank chairman Nazrul Islam Mazumder alone took out loans equivalent to Tk 1.46 billion, pledging shares of his own bank as collateral. His action was replicated by 31 other EXIM Bank shareholders. The aggregate value of EXIM Bank shares held as lien by the above mentioned financial institutions amounts to Tk 6.20 billion.
Four shareholders of Social Islami Bank Ltd (SIBL) also took out loans worth Tk 264 million, putting their holdings in SIBL as collateral. The shareholders of EXIM Bank and SIBL may have borrowed from one or more lending institutions. Smaller loans were also disbursed against shares of the merged banks.
The central bank announced the nullification of shares of five troubled banks-First Security Islami Bank, Social Islami Bank, Union Bank, Global Islami Bank and EXIM Bank-which were merged as their liabilities had far exceeded their assets.
"Such a situation is completely new to us. No one would have thought that the value of shares of the merged banks would turn negative," said IFIC Bank Chairman Md Mehmood Husain.
The lenders are now exploring ways to recover their claims.
"We will seek legal opinions to identify possible remedies," Mr Mehmood said.
The matter remained undisclosed for a long time amid debates over the pros and cons of the merger and concerns surrounding the interests of shareholders and depositors of the merged banks.
The lenders holding nullified shares as collateral neither drew attention to the issue nor approached any regulatory authority for a solution.
Talking to the FE, senior executives of several financial institutions said they were "confounded" by the situation.
"There is no provision to recover such loans under the regulations set by the central bank for the merged banks," said Abidur Rahman, additional managing director of Southeast Bank.
Bangladesh Bank has prioritised repayment to depositors of the merged entities. "We also disbursed loans using depositors' money. We will inform our board about the impact of the collaterals becoming worthless," Mr Abidur said.
He added that Southeast Bank would take legal action against the borrowers while making provisions for the expected loan losses.
IFIC Bank Chairman Mr Mehmood said the bank would write to the Dhaka Stock Exchange (DSE) and the Bangladesh Bank seeking guidance on the issue.
"We will also communicate the matter to the Association of Bankers, Bangladesh (ABB)," he added.
Ashequr Rahman, managing director of Midway Securities, however, questioned the delay by lenders in responding to the situation.
Shareholders of the merged banks must have taken loans before the fall of the previous government, long before reform measures-including the merger-were initiated in the banking sector. Meanwhile, the stocks of those banks had already suffered significant value erosion amid a prolonged bearish trend in the secondary market.
The DSEX, the benchmark index of the Dhaka bourse, shed more than 15 per cent, or 996 points, between January 2023 and August 2024, severely squeezing the market value of shares held as collateral.
"Why did the lenders not issue margin calls following the erosion in collateral value?" Mr Rahman asked.
"They could have approached the central bank and the securities regulator to seek permission to liquidate the borrowers' shares to protect depositors' interests," he said.
According to CDBL sources, the securities pledged as collateral remain blocked by the relevant brokerage houses under lien arrangements with the depository.
The depository authority usually does not know the identities of lenders or borrowers, and its intervention is sought only when shares need to be confiscated due to loan defaults.
Meanwhile, the central bank had restructured the board of EXIM Bank following the ouster of the previous government in August 2024. Mr Mazumder, also chairman of NASA Group, was removed from the board and arrested in October that year.
Before his arrest, he had chaired EXIM Bank since 2007 and served as president of the Bangladesh Association of Banks (BAB) for around one and a half decades.
On loan recovery, Southeast Bank Managing Director Md Khalid Mahmood Khan said banks are generally aggressive in recovering loans from small and medium clients but remain timid when dealing with influential borrowers.
"They often wait for a change in the political regime, as influential clients are usually aligned with those in power," he said.
Asked why lenders had not raised the issue earlier, Mr Khan said the matter had been placed before the bank's board, but no solution was reached at the time.
Industry insiders said shareholders of the banks merged into Sammilito Islami Bank should receive shares of the new entity.
While general shareholders were left empty-handed following the nullification of their shares, influential shareholders and sponsor-directors-including Mr Mazumder-had already borrowed against their holdings.
"In a capitalistic society, privileged groups benefit even during financial disasters, leaving ordinary people behind," Mr Rahman said.
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