Sonali’s sorrows

Sonali Bank, the country's largest state owned commercial bank, continues to be at operational risk, stemming from misappropriating loan disbursements and later hiding default loans rather than going for recovery, according to a recent central bank report.

The non-uploading of credit data to the Credit Information Bureau (CIB) database of the Bangladesh Bank and offering frequent rescheduling and restructuring facilities to borrowers have led the country's largest state-owned bank to such a precarious position.

In 2019, Sonali Bank's rescheduled loans stood at Tk1,874 crore.

Sonali Bank's interest coverage ratio (ICR) is 0.05 even after taking deferral facilities from the Bangladesh Bank. Without getting the facilities, the ICR would be negative 1.15, according to the Bangladesh Bank's inspection report.

The bank now finds itself unable to generate the required cash to meet its interest obligation. The lower this ratio is below the standard value of 1.5, the greater the risk of a bank to default. In other words, the bank is at operational risk, says the Bangladesh Bank.

The detailed report on Sonali Bank – signed by Jiban Krishna Roy, general manager of the Department of Banking Inspection-2 of Bangladesh Bank – was sent to the finance ministry's Financial Institutions Division on 20 January. The report has been prepared based on data as of 31 December 2019.

The central bank identified various irregularities with Sonali Bank such as giving illegal facilities to clients ignoring laws and regulations, concealing important information from the Bangladesh Bank, indifference to realising default loans and showing lower amounts of default loans by giving constant rescheduling facilities to borrowers.     

Over 20% or around Tk11,200 crore of Sonali Bank's total loans and advances has now remained defaulted.  The Bangladesh Bank thinks that the recovery of most of these loans is uncertain and risky. As a result, there might be pressure on liquid assets of the state-owned bank to meet cash demand in the near future, according to the inspection team of the Bangladesh Bank.

The central bank says Sonali Bank is resorting to rescheduling and restructuring of defaulted loans only to show a low rate of its default loans. The loans are not being recovered owing to a lack of supervision and accountability.

Observing the tendency of these loans to get defaulted again, the Bangladesh Bank said the state-owned bank's financial condition is very unstable and risky.

As per rules, there is a provision to try to recover default loans by writing them off, but there is no effective initiative yet by the bank to recover the loans.

But the board and management of the bank are not taking any actions against the officials responsible. The loan is written off every year but there is not much recovery.

The amount of loans written off during the central bank's inspection was Tk7,091 crore, but only Tk44 crore was realised in 2019, which was 0.62% of the write-off loans.

As per the rules, information on personal loan, overdraft loan and the agricultural loan are not uploaded to the CIB database.

As of 30 June 2020, Sonali Bank disbursed over 17 lakh loans. But the bank did not upload information of 15 lakh loans – amounting to Tk29,870 crore – to the CIB.

According to the Bangladesh Bank, the bank has about 95,000 debit entries with a balance of Tk3,210 crore. Of these, over 70,000 debit entries have been inconsistent for two years or more. The balance in these entries is Tk675 crore. Besides, Sonali Bank has left about 53,000 credit entries with a balance of Tk250 crore uncoordinated.

The central bank said in 2019, Sonali Bank's net profit after-tax was Tk271 crore after having deferral facilities amounting to Tk4,868 crore. Sonali Bank would have incurred a loss of Tk4,597 crore, had it not been given an exemption from maintaining the required provisioning from its operating profit to avoid provision deficit.  

However, Ataur Rahman, managing director and chief executive officer of Sonali Bank claims the bank is not at risk and any crisis will be taken care of by the government.

Ataur told The Business Standard that Sonali Bank is not at risk because the bank is a 100% guaranteed organisation by the government.

"In some cases, Sonali Bank had problems. However, in 2020 the situation has improved a lot. The bank has done much better amid the pandemic. It has made the highest profit in 2020, the highest deposit is also ours," he added.

"Being a government bank, there will be no capital crisis. The government will inject capital into it if necessary," he added.

Numbers tell a different story, however. If the Bangladesh Bank had not given deferral benefits to Sonali Bank, its return on investment, return on equity, return on assets, and earning per share would have been in negative territory.

Even after enjoying such privilege, the value of these indicators is not at the desired level.

The central bank has advised Sonali Bank to take effective measures to increase the bank's income by realising classified loans and disbursing to good borrowers without having to depend on the Bangladesh Bank to get the deferment on keeping the required provisioning from its operating profit every time.

The Bangladesh Bank had given similar advice in the previous inspection report. On its basis, Sonali Bank formulated a plan. However, the central bank said there was no visible improvement in the situation, adding that "the bank's risk continues to grow".

Despite being aware of risks, the bank has invested large sums of money in various institutions. Loans have been given to various institutions exceeding the single borrower exposure limit. The bank also gave loans to Hallmark Group in violation of this limit.

On Sonali Bank's high defaulted loans, Ataur Rahman said, "The default loans have increased as a result of the Hallmark scandal. At present, only the loans given to two private organisations exceed the single borrower exposure limit."

The Bangladesh Bank said Sonali Bank is not identifying the loans as default ones on the basis of maturity. Besides, it is not uploading the information of default loans to the CIB properly. The report of the internal audit department of the bank also does not verify loan classification, provision estimation and quality of assets.

The Sonali Bank managing director claimed that regular information is being uploaded to the CIB database.

The central bank's inspection report raised serious allegations of Sonali Bank's reluctance to provide information to the inspection team as well.

It said the bank's compliance risk was created by not providing accurate information to the inspection team or showing reluctance to provide information, and not displaying loans in proper classes violating the instructions of the Bangladesh Bank.

Sonali Bank is also negligent in getting back the loans that moved to courts for recovery.

Sonali Bank filed 19,018 cases against defaulters with different courts to retrieve Tk27,092 crore. In addition, various borrower organisations filed 564 cases against the bank, involving a total of Tk5,522 crore.

There are many cases that cannot be settled quickly because of the lack of accountability on the part of the bank's management. However, the bank's cost in handling cases is increasing every year, the Bangladesh Bank said.

Highlighting various irregularities and embezzlement of money by Sonali Bank officials, the Bangladesh Bank said embezzlement through frauds and forgeries not only tarnishes the image of the bank but also financially damages the bank.

Therefore, it is essential to take strict disciplinary actions against those involved in irregularities as per the rules. Otherwise, it will not be possible to prevent the recurrence of similar incidents, it added.