BANGLADESH Bank on Sunday asked all commercial banks to have prior permission from their board of directors for all loan transactions between a director or a business of his greater family and the bank of which the director is a member of the board. It has demanded strict compliance of the Bank Company Act 1991. News reports have it that the central bank has asked commercial banks to approve loans to bank directors and to their businesses which do not exceed 10 percent of the paid up capital of the bank. According to the directive, a bank director and his or her firms and the firm in which he or she has shares and the public and private companies to which he or she is a director, can take loans, advances or get guarantee for loans up to 50 percent of the paid-up capital of his or her share in the bank.
It was so far a good directive. But the central bank directive further said commercial banks must inform the central bank if such loans, guarantees and other facilities exceed the 50 percent limit. In that case the directors must bring down the excess amount within the limit by a deadline given by the central bank. Besides, the banks will also have to take prior approval to disburse Tk 50 lakh in direct loans and Tk 1 crore in total loans that includes direct and indirect loans and other facilities. The banks, however, will not be able to give waiver to any loans taken by a director and his or her family firms or by any of their dependents. The interest on such loans also can’t be waived.
The rule will be similarly applicable in case of Islamic banking and investment banks.
We know that as banks are suffering from loan scandals and it is only recurring causing severe loss of credibility to banks, the central bank’s initiative may work as a deterrent to the exploitation of funds by directors of the banks and their families. It may bring some check to new frauds being perpetrated. The new rule will not only restrain sponsor directors and their families, it will also bring more control on senior bank officials who are often blamed for working in complicity with directors or outside borrowers to cause a heavy run on the bank’s capital to some single exposure clients. A large number of banking scams including Hall-Mark or Bismillah Groups’ swindling of state owned commercial banks have taken place mainly due to the complicity of some directors and senior bank officials who worked in tandem to take away money from those banks.
The central bank’s attempt is good in this background; but it has not altogether sealed the loophole through which the money may go out of the banks. It left some rooms open for loans to exceed the limit and we fear that such loopholes are enough to allow exploiters; such as politically influential persons in powerful places in the government and powerful lobbies to make their targets fulfilled. We would suggest that the central bank must strictly implement the new rules to protect banks without bowing to pressure from vested quarters.
Loan scams are caused by politically influenced ones
