In a rare move, the central bank has taken a raft of measures to put National Bank Ltd back on track in the wake of massive irregularities at the first-generation private lender.
The Bangladesh Bank said NBL, one of the oldest private banks in the country, would not be able to disburse fresh loans before bringing down the advance deposit ratio (ADR) to 87 per cent.
Conventional banks must maintain an 87 per cent ADR, meaning they can lend Tk 87 against every Tk 100 mobilised.
NBL has been maintaining more than 90 per cent ADR for a long time, breaching the rules, compelling the central bank to take such a decision, BB officials said.
The higher ADR indicates that the bank is lending aggressively, ignoring the interest of the depositors.
The central bank issued a letter to the lender on May 3, asking it to follow a number of instructions strictly.
"The instructions have been given to the bank to improve its financial health and preserve the interest of the depositors," the letter said.
The move from the BB came after the allegations of worsening governance at the bank surrounding approval and sanction of loans and appointment of top executives.
The financial health of the bank started worsening in 2009 when Sikder Group took over the control of the board.
The board was restructured after its chairman, Zainul Haque Sikder, passed away on February 10. His wife Monowara Sikder was elected chairman on February 24.
NBL did not hold any board meeting between December 27 last year and April 11 this year, but it allegedly disbursed large loans without approval from the board.
The BB has imposed an annual credit growth ceiling of 10 per cent on the bank as part of its efforts to tackle aggressive lending.
NBL has been asked to take permission from the central bank before appointing any consultant, adviser, and additional and deputy managing directors.
As per the Banking Companies Act 1991, banks must secure approval from the BB to hire the managing director.
The board of NBL had earlier appointed Additional Managing Director ASM Bulbul as the acting MD.
His tenure ended on March 31, but Bulbul tried to continue holding the post with backing from a portion of the directors in a breach of regulations.
This prompted the central bank to order the NBL chairman on April 6 to remove Bulbul from the post.
The bank, which commenced its banking operation in 1983, appointed Shah Syed Abdul Bari as the managing director for three months.
The central bank could not rely on the board of NBL anymore, so it has imposed the conditions on the appointment of senior employees, the BB officials said.
The central bank instructed the lender not to take over loans from other banks or non-bank financial institutions.
NBL also will have to comply with various rules on the disbursement of loans once it is allowed to start lending after bringing down the ADR to the stipulated level.
For instance, it will be permitted to give out a maximum of 5 per cent in large loans against its capital amounting to Tk 3,066 crore.
In addition, the bank will not be allowed to lend more than 10 per cent of the capital to a single borrower, compared to 35 per cent applicable for other banks.
This means NBL can give a maximum of Tk 307 crore to a single party under the single borrower exposure limit.
Md Serajul Islam, spokesperson and an executive director of the central bank, said that the BB had recently unearthed gross irregularities committed by some of the directors of NBL.
"The latest instructions will help the bank restore the corporate governance," he said.
NBL has also been asked to submit a statement every month on the recovery trend of loans from the top 20 defaulters.
Last month, the central bank instructed the bank to send detailed information of the loans given to four companies – Rongdhanu Builders, Desh TV, Rupayan, and Shanta Enterprise.
The bank had disbursed a large amount of loans among the directors of other banks.
A good number of banks give such loans under mutual understanding among the directors, a practice that has created concern over corporate governance in the banking industry.
NBL disbursed Tk 7,216 crore among the directors of other banks, which is 18 per cent of the total outstanding credit as of December last year, showed data from the central bank.
Defaulted loans stood at Tk 2,085 crore as of December in contrast to Tk 388 crore in 2009. The non-performing loans would have been much higher had the bank had not written off Tk 2,154 crore last year.
NBL faced a provision shortfall of Tk 435 crore last year due to weak financial health. Forty of its 214 branches are incurring losses.
Shah Syed Abdul Bari did not respond to a request for comments.