Seven NBFIs risk losing Tk 2,050cr for anomalies

Seven non-bank financial institutions (NBFIs) are now finding it difficult to recover Tk 2,050 crore they had lent to their subsidiaries and associates in breach of rules.

Preliminary analysis indicates that the funds have been misused, with neither Bangladesh Bank nor the Bangladesh Securities and Exchange Commission (BSEC) stepping in to prevent it.

What is more, the NBFIs, a majority of which are now unable to pay back their depositors, have not classified these funds.

The seven are Fareast Finance & Investment, FAS Finance & Investment, GSP Finance Company, International Leasing & Financial Services (ILFS), Union Capital, Aviva Finance, and Prime Finance & Investment.

As per the Financial Institutions Act 1993, NBFIs are permitted to disburse a maximum of 30 per cent of their capital to an individual or company, which also could be their subsidiaries and associates.

But the seven lent the amounts violating the single borrower exposure limit.

The central bank has recently stepped up its monitoring on them and has subsequently sought data from the BSEC on how the funds were used.

The BSEC is the regulator for monitoring subsidiaries and associates of the NBFIs as they have mainly been formed to invest in the stock market.

A BB official said the funds given out to the subsidiaries were supposed to be turned into classified loans, but the NBFIs had not done so.

In addition, the central bank did not monitor the NBFIs' investments properly but it has recently stepped up the supervision.

The NBFIs set a roadmap in 2018 to realise the funds by 2025, but the recovery rate of the loans is very low, according to the BB's documents seen by The Daily Star.

It will take anywhere from 140 years to 302 years if the ongoing recovery trend continues.

Some non-banks showed smaller figures as the outstanding loans in documents they provided to the BB than what really was, going against the banking norms, which has created apprehensions for the entire NBFI sector.

This will detrimentally affect the interest of depositors, the BB said.

For instance, Fareast Finance gave out Tk 302 crore in loans to its associate, Fareast Stocks & Bonds, between 2010 and 2011.

The single borrower exposure limit of the fund stands at 14,201 per cent of the non-bank's capital, which stood at Tk 2.13 crore as of September last year.

Contacted, Muhammad Ali Zaryab, managing director of the lender, said the then management and board had not followed any rules in transferring the funds to the associate, in which Fareast Finance has a 50 per cent stake.

The funds were transferred to the associate just through the issuance of treasury notes, a gross violation of banking norms, he said.

"We do not know anything about where the fund had gone," he said, adding that the funds might have been siphoned off.

There had also been regulatory failures in stopping the misuse of the funds since the regulators concerned had hardly taken any timely measures to recover the fund, he said.

"The existing management is now trying to realise the money. But it will take years if the ongoing recovery trend persists," said Zaryab, who joined the NBFI in August last year.

Aviva Finance, which changed its name from Reliance Finance in November 2020 to brighten its image and restore depositors' confidence, is another example of how the funds were misused.

The non-bank disbursed Tk 285 crore to its subsidiary, Reliance Brokerage Services, but Md Abdul Jabbar, managing director of the lender, did not know when the funds were lent.

He said he had recently joined the NBFI, which was why he did not know about the matter.

The NBFI even showed a smaller figure as the outstanding loans disbursed to its subsidiary without recovering any amount, which baffled the central bank.

"Although the NBFI recovered only Tk 50 lakh from its subsidiary between July and September last year, it showed the outstanding loans to be Tk 3 crore less than what it really was," showed the BB data.

Similarly, it also showed an outstanding loan amount that is Tk 2.5 crore less than the actual figure in the April-June period last year without realising any fund from the subsidiary.

Jabbar said, "The NBFI has recently recovered funds from the subsidiary. We have waived a portion of the interest of the loans."

Union Capital gave out loans amounting to Tk 458 crore to its two subsidiaries, Unicap Investments and Unicap Securities, which is 773 per cent of its capital.

ANM Golam Shabbir, acting managing director of Union Capital, said the non-bank had started to disburse the loan since 2010.

The subsidiary companies chiefly gave out the fund to the stock investors in the form of margin loans, he said.

But they failed to recover the amount from clients due to the debacle of the capital market in 2010.

Asked why the non-bank did not treat the loan as default ones, he said there was no loan classification policy to this end.

The non-bank has also waived loans disbursed to the subsidiaries, violating the rules, according to a BB probe.

In November last year, the BB ordered Union Capital not to disburse any loans exceeding Tk 1 crore after it found gross violations of rules in running its business.

ILFS disbursed Tk 259 crore to its subsidiary, International Leasing Securities, as loans in phases since 2009. The non-bank faced a capital shortfall of Tk 3,353 crore as of September last year.

The NBFI had earlier faced a wide range of scams as former managing director of NRB Global Bank, Prashanta Kumar Halder, allegedly swindled a large amount of funds from the company.

Md Mashiur Rahman, acting managing director of the lender, said the non-bank had restructured the loans last year.

"We are now trying to recover the fund," Rahman said.

Prime Finance disbursed Tk 372 crore in loans to its subsidiary, which is 104 per cent of its capital.

Md Ahsan Kabir Khan, managing director of the lender, said the non-bank had given out the fund to be invested in the capital market.

In addition, the subsidiary also disbursed margin loans among individual investors of the stock market.

The loan amount previously outstanding was higher than the existing amount, as it has already recovered Tk 712 crore, he said.

FAS Finance disbursed Tk 168 crore to its subsidiary, FAS Capital and Management. The lender faced a capital shortfall of Tk 302 crore.

Pritish Kumar Sarker, managing director of the lender, said the non-bank disbursed the fund to help the subsidiary in doing business in the capital market.

"We recovered the loans steadily before the pandemic. But it is now a bit tough to realise the fund," he said.

GSP Finance Company (Bangladesh) also disbursed loans worth Tk 241 crore, which amounted to 80 per cent of its capital.

Mohammad Imdadul Islam, managing director of the lender, did not respond to The Daily Star's requests for comment.

A BB official says the subsidiaries were regulated by the BSEC.

Against this backdrop, the central bank sent a letter to the BSEC on January 12 requesting it to submit a report on the utilisation of the funds.

Mohammad Rezaul Karim, spokesperson of the BSEC, said they were now collecting data as per the requirements of the central bank.

"The stock market regulator will give a reply to the BB in the quickest possible time," he said.