Banks hold on to a few borrowers despite risks
State banks in Bangladesh are maintaining an elevated level of loan concentration among a handful of clients, putting their own financial health and the interest of depositors at grave risk.
Four state banks – Sonali, Janata, Agrani and Rupali – lent a combined Tk 67,264 crore among only 78 companies as of June, data from the Bangladesh Bank showed.
As a result, the credit risk of the banks has widened to a large extent. If the borrowers default on their loan payments, the health of the lenders will deteriorate alarmingly, analysts say.
Depositors also face risk because of the loan concentration.
If the non-funded loans given out by the banks are taken into account, the credit concentration will be larger than the funded ones.
Funded loans refer to the credit facility where there is an actual transfer of money from banks to borrowers. In the case of non-funded loans, transfers of funds don't take place.
Funded loans are disbursed in the form of term loans and working capital, whereas non-funded credits are extended through letters of credit, bank guarantees and so on.
Sonali Bank gave out funded loans amounting to Tk 15,490 crore as of June. Loans totaled Tk 94,719 crore if the non-funded credit is taken into account.
The lender disbursed the loans in favour of 15 companies. Of the sum, about Tk 70,000 crore was given to settle the LCs of Rooppur Nuclear Power Plant.
Two borrowers of the bank held default loans of Tk 1,987 crore as of June.
Janata Bank lent Tk 31,000 crore in the form of funded loans. The non-funded credits took the total to Tk 37,733 crore.
Four companies out of 25 have already become defaulters, with combined bad loans of Tk 7,144 crore.
Md Abdus Salam Azad, managing director of Janata Bank, said the bank was trying to cut the loan concentration by disbursing loans among small and medium enterprises.
AnnonTex and Crescent groups, which were earlier given a large amount of loans in breach of rules, hold a good amount of non-performing loans.
The outstanding loans held by AnnonTex stand at Tk 6,700 crore, with more than half turning sour. Defaulted loans at Crescent Group are more than Tk 3,500 crore.
Janata Bank is desperately trying to recover the funds, said Azad.
Agrani Bank disbursed Tk 12,893 crore among 13 companies. Of the amount, Tk 8,255 crore is funded.
Mohammad Shams-Ul Islam, managing director of the state bank, said the lender had already taken initiatives to distribute loans among SMEs and underprivileged borrowers.
Rupali Bank gave out Tk 13,711 crore, of which Tk 1,189 crore non-funded. Twenty-five clients took the loans.
Concentration risk is relevant for the stability of both individual institutions and whole financial systems.
Exposures to large borrowers such as Enron and WorldCom contributed to financial problems of several US banks in the early 2000s, according to a paper of the International Monetary Fund.
"A housing crisis combined with concentrated mortgage portfolios resulted in a number of bank failures in Scandinavian countries in the 1990s, and contributed to the global financial crisis of 2007-08."
The four state-run lenders disbursed heavily among 25 clients, bypassing the single borrower exposure limit set by the BB.
Banks are allowed to disburse a maximum of 35 per cent of their capital in the form of funded and non-funded loans to a single borrower.
The aggregate outstanding principal amount of funded loans to a client can't be more than 15 per cent of banks' capital at any point of time.
The banks are disbursing a large volume of loans through a small number of branches.
For instance, Sonali disbursed Tk 18,737 crore, or 31 per cent of the total outstanding loans, through five branches, while Janata distributed 72 per cent of the total loans of Tk 63,435 crore through a similar number of outlets.
The ratio is 47 per cent for Agrani Bank and 61 per cent for Rupali Bank.
Salehuddin Ahmed, a former governor of the central bank, said that the state lenders had set a rare example in the field of loan concentration.
"This is not seen internationally."
"This has created a risky situation for their financial health and depositors. If the borrowers turn defaulters, the banks will face dire consequences."
Besides, small borrowers are deprived of loans due to the concentration, which also contradicts ethical banking, Ahmed said.
Fahmida Khatun, executive director of the Centre for Policy Dialogue, said the state banks should strictly follow the single borrower exposure limit to avoid the concentration.
On October 11, the central bank instructed the banks to avoid loan concentration in the financial sector's interest and lend more among SMEs.