Cenbank to extend liquidity support to 4 troubled banks but won't print money

Illustration: TBS

The Bangladesh Bank is going to provide liquidity support to four private banks – National Bank, EXIM Bank, Social Islami Bank, and First Security Islami Bank – that are facing a liquidity crisis due to significant irregularities during the Awami League regime. But the central bank would be using its own resources for this instead of resorting to printing money to keep the ongoing high inflation in check.

According to Bangladesh Bank officials, the four banks have collectively requested around Tk25,000 crore in funding. The central bank is expected to extend support of Tk15,000 crore to Tk18,000 crore to help them recover from the crisis.

The issue was discussed in a meeting last Tuesday between Bangladesh Bank Governor Ahsan H Mansur and the chairpersons and managing directors of these banks, National Bank Chairman Abdul Awal Mintoo and First Security Islami Bank Chairman Mohammad Abdul Mannan confirmed.

An official present at the meeting told TBS that the governor made it clear to the banks that amid the current high inflation, the central bank will not print money to support them.

Instead, the assistance will come from utilising the central bank's own income, deposit insurance premiums, and sales of bills and bonds, the official said.

Banks instructed to work with S Alam group

The official also said banks have been reluctant to open letters of credit (LCs) for S Alam Group since 5 August. In this context, to ensure the import of essential goods ahead of Ramadan, the governor instructed banks to open LCs for S Alam Group's subsidiaries involved in edible oil, sugar, and flour production and import.

How much the banks are asking for

According to Bangladesh Bank officials, First Security Islami Bank has requested Tk7,900 crore in liquidity support to the central bank.

Mohammad Abdul Mannan, chairman of First Security Islami Bank (FSIBL), said, "The current process of obtaining funds [from other banks] is slow. We have to approach five to seven banks, which then take the proposals to their boards for approval. This yields only Tk50 crore-Tk100 crore at a time."

The bank has so far received only about Tk1,000 crore in the last two and a half months, which is insufficient to meet the pressure of deposit withdrawals.

National Bank has reportedly requested Tk7,500 crore in assistance from the Bangladesh Bank. The country's oldest private bank is expected to receive financial support of Tk5,000 crore from the central bank, central bank officials say.

So far, National Bank has borrowed Tk800 crore from other banks, but this funding has provided little relief against the pressure of depositors withdrawing their money.

National Bank Chairman Abdul Awal Mintoo told TBS, "The bank suffered significant damage after being controlled by a single family for a long time. Restoring customer trust is our top priority."

With Bangladesh Bank's support, National Bank could return to normal operations within three months, he said.

A large amount of the bank's funds remains stuck with major industrial groups, including Beximco. When asked about plans to recover these loans, he said, "We are currently settling with borrowers who owe smaller amounts, such as Tk1 crore – Tk2 crore. Negotiations with larger borrowers will follow.

"Our approach won't involve shutting down their businesses to recover funds. Instead, we'll focus on how they can continue operations while repaying their loans."

Several banks in severe liquidity crisis

Officials say National Bank, EXIM Bank, Social Islami Bank, and First Security Islami Bank are facing severe liquidity crises. Many depositors, despite repeated visits, are receiving little to no funds from these banks.

According to Bangladesh Bank officials, two other troubled banks – Union Bank, owned by S Alam Group, and Padma Bank, owned by Chowdhury Nafiz Sarafat – have not been called upon by the Bangladesh Bank for assistance.

On the other hand, the country's largest private bank, Islami Bank, faced a severe liquidity crisis but is now gradually recovering, they say.

Following the fall of the Hasina government on 5 August, the Bangladesh Bank allowed struggling banks to borrow from other banks with the central bank acting as a guarantor. However, this mechanism has failed to provide sufficient liquidity to address their crises.

Gov initiative for banks to pay depositors

To restore depositor confidence and enable these banks to repay their dues and issue new loans, the government has initiated a plan for the central bank to extend direct financial support to the struggling banks.

"You will soon see new initiatives to support banks that are unable to return depositors' money due to financial constraints," Financial Institutions Division Secretary Nazma Mobarek told reporters at a press conference organised by the finance ministry last Tuesday.

Around 12 banks, including these four, have been facing a severe liquidity crisis for the past two years due to loan fraud and various irregularities. Eight of these banks were under the control of the S Alam Group during the previous regime of the ousted prime minister Sheikh Hasina.

Despite this, former governor Abdur Rouf Talukder took no action against these institutions. As the liquidity crisis worsened, transactions were allowed in violation of regulatory rules, despite the current account deficit.

After the fall of the Awami League government, new Governor Ahsan H Mansur halted all the undue facilities previously granted, revealing the true financial condition of these banks.

By the end of August 2024, it was reported that the current account deficit of at least nine private sector banks had exceeded Tk18,000 crore.

According to central bank data, among the banks freed from S Alam Group's control, First Security Islami Bank has the largest deficit exceeding Tk7,269 crore. Social Islami Bank comes second with a deficit of Tk3,394 crore, while National Bank ranks third with a deficit of Tk2,342 crore.