Observers appointed to ailing state banks

Bangladesh Bank yesterday appointed observers to four state-owned banks -- Sonali, Janata, Rupali and Agrani -- after their key financial indicators such as capital adequacy and classified loans took a turn for the worse.

"We want these banks to perform better," said Subhankar Saha, executive director and spokesman of the central bank.

The main problem of the four banks is high nonperforming loans (NPL), according to BB officials.

As of June 30 this year, the average NPL of these four banks stood at 26.92 percent of their total loans in contrast to single digits for other banks.

Naushad Ali Chowdhury has been appointed the observer for Sonali Bank, Ahmed Jamal for Janata Bank, Abdur Rahim for Rupali Bank, and Nirmal Chandra Bhakta for Agrani Bank.

All the observers are working at the BB as executive directors.

The move comes a day after the International Monetary Fund said the country's banking system, particularly the state-owned banks, is burdened by NPL and weak corporate governance, which create pressure on interest rates and hamper credit flows to the economy.

Earlier in August, BB Governor Atiur Rahman warned chief executives of these banks that the central bank will appoint observers if the internal governance over financial operations deteriorates.

High operating cost, low skills, a lack of good governance, absence of technology use, weak internal audit and risk management policy, and weak management of assets and liability are resulting in high default loans and capital shortfall in these banks.

As of June 30, Sonali's capital shortfall stood at Tk 2,678 crore, Rupali's Tk 554 crore and Janata's Tk 345 crore. Only Agrani had a capital surplus of Tk 52 crore.

The advance-to-deposit ratio (ADR), which compares all loans to all deposits, of Agrani, Janata, Rupali and Sonali banks, has gone down below 52 percent, which indicates that these banks will not be able to earn as much as they could.

In contrast, the average ADR of the 39 private commercial banks stood at over 76 percent on August 27. It is nearly 60 percent for nine foreign banks and over 80 percent for Islamic banks, BB data shows.

The financial health of state-owned banks is not satisfactory, said a BB official. In some cases, it is getting worse.

He also hinted that none of these banks will get the permission to open new branches until the indicators improve.

Bad investments often erode these banks' capital, which not only causes sufferings to the depositors but also hurts the government as it has to inject money to make up their capital shortfall.

Loan forgeries also take place in the state banks frequently. For example, Ruposhi Bangla Hotel branch of Sonali Bank had lent little-known Hallmark Group and five other companies Tk 3,547 crore between 2010 and 2012 on forged documents.

Of the amount, Hallmark Group alone took Tk 2,686.14 crore. Almost all these loans have become bad and Sonali is still bearing its brunt.

As the central bank of the country, the BB can appoint observers to any bank if it deems that the bank's board is failing to play its due role to protect the interests of depositors and shareholders.

At present, state-run BASIC, partially state-owned Bangladesh Commerce Bank and privately-owned ICB Islamic Bank, Islami Bank, Mercantile Bank and National Bank have BB-appointed observers in their respective boards.