Imprudent lending, regulatory lapses blamed
Financial health of at least one-third of Non-Bank Financial Institutions (NBFIs) is alarming, thanks largely to Bangladesh Bank’s oversight failure, lack of management accountability and regulatory actions.
The regulatory lapses paved the way for imprudent lending by the NBFIs, which are now shouldering a huge accumulation of bad loan coupled with a tendency of becoming defaulters against bank credits and fall in deposit mobilization, it is learnt.
The Bangladesh Bank has appointed 'Observers' at three of the ailing NBFIs — BIFC, First Finance and PLFS — so that their business can turn around while others went scot-free. Either observers were withdrawn from the NBFIs in question, or not reappointed.
The weak financial status of the NBFIs came to forefront following the liquidation move of Peoples' Leasing and Financial Services Limited (PLFS) on July 14.
PLFS loans and advances stood at Tk1,131crore as of December 31 last year, which was 56 percent of total deposit of Tk2,044.24 crore, according to a recent report of the finance ministry.
The BB found Tk748crore or 66.14% of the loans and advances of PLFS as bad.
Talking to Dhaka Tribune, general manager of Department of Financial Institutions and Market (DFIM) of Bangladesh Bank Md Shahidul Islam rejected the allegation and said, "The central bank has always been watchful on NBFIs."
He, however, admitted that three NBFIs, which had 'Observers', had none now.
"Observer at Bangladesh Industrial Finance Company Limited (BIFC) was not reappointed after promotion of the then BB official a couple of years ago. Observer at the First Finance Limited stopped discharging duty because of illness. No one replaced him till date. On the other hand, the function of the observer at PLFS is no longer relevant as Liquidator has been appointed there," Shahidul Islam said.
Ibrahim Khaled, a former deputy governor of BB, thinks the central bank should have been more proactive in protecting the NBFIs.
“The central bank has a scoring mechanism to measure the financial health of the NBFIs like banks. Precautionary measures could have been effective to protect them from becoming sick," he mentions.
NBFIs largely depend on banks for sourcing finance for lending while a small portion of investable funds come from individual depositors. Therefore, imprudent investment involves extensive risks, sources say.
Among the ailing NBFIs are Bangladesh Industrial Finance Company Limited (BIFC) topped the list followed by Peoples' Leasing and Financial Services Limited, FAS Finance & Investment Limited, First Finance Limited, International Leasing and Financial Services Limited (ILFSL), Prime Finance and Investment Limited, Fareast Finance and Investment Limited, Bay Leasing and Investment Limited, Premier Leasing and Finance Limited, Reliance Finance Limited and Union Capital Limited, according to the annual report of financial institutions (Banks and non-banks) of the Financial Institution Division of Finance.
The report was based on data available up to December 31 last year.
According to the report, BIFC disbursed loans and advances to the tune of Tk841.48 crore, which was 154.2 percent higher than deposits of Tk545.60 crore till 2018. All the loans turned bad.
First Finance's deposit stood at Tk800.06 crore while loans and advances were found 109 percent higher than deposit at Tk879.41 crore while its deposit fell by 4.3 percent, mentions the annual report.
According to the report, the deposit of FAS Finance stood Tk837.50 crore while loans and advances disbursed by the company almost doubled at Tk1535.35 crore. The company's classified loan stood at Tk233.53 crore at the end of 2018, which was 15.2 percent of total investment. FAS Finance obtained loans to the tune of Tk500 crore from banks and, of the amount, Tk77 crore was defaulted. The company was listed at DSE in 2007. In 2018, its deposit fell by 4.6 percent from what it was the previous year.
The ILFSL's deposit stood Tk2855.77 crore while loans and advances reached Tk3689.67 crore, 129.2 percent higher than deposit during the period. The company was listed at DSE and CSE respectively in 2007. It experienced 1.5 percent fall in deposit over the previous year, 2017.
ILFSL borrowed Tk837 crore from different banks and financial institutions and turned defaulter of loans amounting Tk53 crore.
Deposit at Prime Finance and Investment Limited stood Tk688.50 crore while loans and advances was Tk847.05 crore in 2018; around 123 percent higher than deposit. The company was listed at DSE and CSE respectively in 2005. Its deposit fell in 2018 by 25 % over last year. Prime Finance and Investment Limited had Tk207 crore loans from banks, of which, Tk22 crore was defaulted in 2018.
Bay Leaning’s deposit stood at Tk774.17 crore while loans and advances were found 131 percent higher at Tk1,016.75 crore. The company was listed at capital market in 2009.
Fareast Finance's deposit stood at Tk557.79 crore and the volume of loans and advances was Tk998.94 crore, which is 179 percent higher than deposit. This company was listed with the capital market in 2013. Its deposit fell in 2018 by 19.3 percent than previous year.
Premier Leasing's deposit stood at Tk893.45 crore and loans and advances was Tk1,282.69 crore, 183 percent higher than deposit. This company's deposit in 2018 fell by 11.8 percent.
In the PLFS's post-liquidation regime, a total of 33 NBFIs are now in operation in the country.
The total investment of the NBFIs together stood at Tk67,000 crore as of June, 2019, said Khalilur Rahman, chairman of Bangladesh Leasing and Finance Companies' Association.
NBFIs bank borrowing was around Tk25,000 crore during the period, he said.
Commenting on NBFIs financial status, Khalilur Rahman said that liquidation of one company would not create any instability in the industry.
Contradicting him, DFIM General Manager Md Shahidul Islam said the liquidation of PLFS created instability to a small extent in the industry.
"It may hurt the economy if any more company's liquidation takes place," he said in response to a question over whether BB had any plan of liquidation of weak BBFIs.
He said NBFIs having sound financial standings were asked to take care of sick ones.
"We will sit with our higher authorities including the Bangladesh Bank governor to find ways to address the ongoing crisis, generating following the PLFS's liquidation move," he added.