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Connected lending makes banking sector vulnerable

Directors take away Tk 1,75,000 crore from banks

By Special Correspondent
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Directors of commercial banks have resorted to a massive connected lending making things even worse for the country's ailing banking sector, sources said.
They borrowed nearly Tk 1,75,000 crore from each other's banks till September 30 last year, shows a Bangladesh Bank (BB) data.
Banking analysts expressed serious concern over the growing trend of insiders' loan saying such practice must be stopped immediately to maintain stability in the country's financial system as well as save the banks from future shocks.
The BB also figure shows, the country's commercial banks have altogether disbursed Tk 9,00,700 crore loans as on September last year and the amount of connected lending accounted for 12 per of the total outstanding loans in banks.
Islami Bank Bangladesh Limited tops the list of connected lending granting Tk 19,175 crore loans to bank directors followed by Exim Bank Tk 10,513 crore, Jatata Bank Tk 10,126 crore, Pubali Bank Tk 9,735 crore, United Commercial Bank Limited Tk 6,945 crore, Prime Bank Tk 6,540 crore, Shahjalal Bank Tk 6,301 crore, Dhaka Bank Tk 6,008 crore, SIBL Tk 5,103 crore and Southeast Bank Tk 4,889 crore, National Bank Limited Tk 4489 crore, Mercantile Bank Tk 4,456 crore, DBBL Tk 4294 crore, Jamuna Bank Tk 4,369 crore,   City Bank Tk  3,970 crore, AB Bank Tk 3,305 crore, Eastern Bank Tk 3,432 crore, NCC Bank Tk 3614 crore, Standard Bank Tk 3,520 crore, MTBL Tk 3,737 crore, Premier Bank Tk 3,049 crore, Fist Security Islami Bank Tk 3,015 crore, Al Arafa Islami Bank Tk 2,363 crore, One Bank Tk 2,436 crore and BRAC Bank Tk 2,205 crore.
Among all fourth generation scheduled Bank, NRB Commercial Bank granted Tk 1,090 crore loans to bank directors, Union Bank Tk 917 crore, NRB Global Tk 915 crore, Modhumoti Bank Tk 910 crore, South Bangla Agriculture and Commerce Bank Tk 630 crore, Meghna Bank Tk 461 crore, Midland Bank Tk 633 crore NBR Bank Tk 459 crore and Padma Bank Tk 77 crore.
Commenting on the issue, former BB Governor Dr Salehuddin Ahmed said, "Bank directors are largely involved in connected lending due to lack of corporate governance in banks. This shady lending practice is abruptly going on even after the prevalent crisis in banking sector surrounding big loan scams and high volume of non-performing loans."
He observed that directors of private have mainly involved in connected lending using their influence.
"It is a matter of concern that bank directors are taking away big fund but do not bother to repay. It will spread a contagion across the financial system unless the central bank step up preventive measures," said Dr Salehuddin Ahmed, adding, "Public trust in the banks will erode further in case of failure to rein in the growing insiders' lending."   
The existing rules permit directors to borrow sums not exceeding 50 per cent of the value of his or her stake in the bank. But the reality is a bank director borrows unlimited sums from another bank under mutual understanding and thus ultimately making concentration of capital in their hands.
Alarmed by the situation, Dr Salehuddin Ahmed asked the central bank authorities to formulate a certain guideline so that banks should not grant any loan, advance or non-fund-based facility or any other financial accommodation to its directors or their relatives.
"It is key to uphold the interest of shareholders and depositors," he added.
Sources in the central bank said, directors of private banks have invested Tk 6,000 crore to hold their shares, while they have already taken away Tk 1,75,000 crore through connected lending. This loan was concentrated mostly among 300 directors.
"Bank directors invested maximum Tk 20 crore to become directors but took away big funds through the unfair practice," an anonymous BB official told The New Nation.
Currently, the banking sector comprises with 10.05 crore depositors, 1.10 crore borrowers and 800 bank directors.
"Connected lending among the promoters and directors of different banks pose a serious threat to banking industry. BB should ensure transparency in such lending to protect interest of the depositors," said former finance adviser to the caretaker government Dr AB Mirza Azizul Islam.
He noted insiders lending should be stopped when risk remain high in the process.  Otherwise, it could lead to further increase in non-performing loans in banks endangering stability in the whole financial sector.
Mirza Aziz further said that connected lending demands an extensive scrutiny from the central bank, but the banking regulator is yet to come out with the move, creating an uncertainty over the banking sector.     
"Banks should not grant loans to its directors or their relatives and also to firms in which directors have interests to maintain their good financial health," former BB Deputy Governor Dr Khondoker Ibrahim Khaled told The New Nation.
He opined, "This lending practice should come under intense scrutiny to ensure transparency and mitigate risks in the operation of banks. BB should closely monitor the issue. Otherwise, banks will face a serious crisis as result of big cash out."

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