In Bangladesh, industrialists and businesspeople become shareholders and directors of banks, and borrow money from each other's banks.
And not only that, up to four members of a family can now be in the board of directors of a bank, up from two previously, after the relevant rules were amended last year following Finance Minister AMA Muhith's recommendation.
But the picture is completely different in neighbouring India.
No industrialist or businessperson there can become a director of any bank as this creates a conflict of interest between the custodians and the borrowers of the institution.
India's Banking Regulation Act, 1949, clearly states that shareholders and directors of banks have two completely different roles, and the law prevents them from mixing the roles.
The shareholders own the shares of a company while the directors, who would predominantly be professionals, manage the institution. A director doesn't need to be a shareholder and a shareholder has no right to be a director, it mentions.
This reasoning is the basis of banking acts in the developed world as well.
But Bangladesh is an exception to this, and the result is as one can expect. Owner directors have given loans to each other through what can be termed “mutual understanding”.
According to Bangladesh Bank data, till March this year, bank directors borrowed Tk 107,695 crore from each other's privately-owned banks, which is 13.3 percent of the total outstanding loans of Tk 810,011 crore in the banking sector.
At present, a bank can provide loans of up to 25 percent of its capital to a single borrower, including a bank's director.
Cashing in on this, some banks have lent money to directors of other banks without due diligence.
Until March, Islami Bank Bangladesh disbursed loans amounting to Tk 11,755 crore to directors of other banks -- 16 percent of its total outstanding loans -- the highest by any bank.
National Bank disbursed 31 percent or Tk 7,896 crore of its total loans to directors of other banks, while the figure is 24 percent or Tk 6,149 crore for Exim Bank and 22 percent or Tk 4,101 crore for Prime Bank.
Besides, NRB Commercial Bank, established in 2013, has already disbursed 17.20 percent or Tk 712 crore of its total loans to directors of other banks.
According to bankers, most of the loans have been taken by around 150 directors of private banks, but not all of them are big borrowers.
Analysts have termed the practice “shady lending”, saying many of the “privileged' directors hardly repay the loans on time. Rather, they keep enjoying different benefits, including restructuring and rescheduling of loans, from the banks.
Some of the directors, who defaulted on their loans, filed writ petitions with the High Court and got stay on their defaulted status.
Talking to this newspaper, Ahsan H Mansur, executive director of the Policy Research Institute, said that in many developing countries, bank sponsors get involved only in the banks' activities, but in Bangladesh, bank directors use their influence to get loans for their own businesses.
“Borrowing by directors from each other's banks has become a serious concern for discipline in the banking sector in Bangladesh.”
Such a huge concentration of loans among a handful of directors creates a systematic risk for the financial sector, he said.
Ahsan suggested that the central bank address the issue by imposing restrictions. For example, no director should be allowed to borrow more than seven to eight percent of a bank's capital.
In 2015, the BB was forced to extend a restructuring facility for the large loans amounting to around Tk 15,000 crore given to 11 business groups. Coincidentally, the majority of the owners of the business groups hold directorship positions in the boards of different banks.
Take, for instance, the case of Beximco Group, the biggest beneficiary of the BB's restructuring facility. Its Vice Chairman Salman F Rahman is also the chairman of IFIC Bank.
Beximco owes more than Tk 7,000 crore to different banks, and the loans have been rescheduled several times, according to BB data.
Sikder Group, another beneficiary of the restructuring facility, owes around Tk 2,000 crore to different banks. Zainul Haque Sikder is the chairman of both the National Bank and Sikder Group.
Two more entities -- SA Group and Ratanpur Group -- also got their loans restructured.
Shahabuddin Alam, owner of SA Group, is also a member of the board of directors of Mercantile Bank while Maksudur Rahman, managing director of Ratanpur Group, is a director of South Bangla Agriculture and Commerce Bank.
S Alam Group, which has stakes in at least six banks, has loans of several thousand crores of taka with a dozen banks.
The large amount of loans taken by the directors is an ominous sign for the country's banking sector, said AB Mirza Azizul Islam, former adviser to a caretaker government.
The central bank should take immediate measures to stop this trend and restore corporate governance in the banking sector, he said.
“Some unscrupulous people are now trying to get licences to set up new commercial banks so that they can take loans from other banks through mutual understanding.”
Some directors have already become wilful defaulters but they have gone to court to show their loans as unclassified, Azizul said.
Salehuddin Ahmed, a former BB governor, said the banks usually disburse loans to directors of other banks without due diligence.
“Many directors have been controlling their banks to enjoy easy loans from other banks,” he said, adding that the outstanding loans taken by directors are one of the major reasons for the ongoing liquidity crisis in the banking sector.
Asked whether the BB would take any measures to stop the excessive lending to directors, Debashish Chakrabortty, the then BB spokesperson and its executive director, said, “The directors are allowed to take loans from other banks in line with the rules of the central bank.”
At present, 57 banks with around 700 directors operate in the country. Of those, eight are state-owned banks with around 100 directors and nine are foreign banks that have no local directors in their boards. The remaining 40 are private banks.