Three Non-Bank Financial Institutions (NBFIs) defaulting on a total of Tk170 crore loans from Al-Arafah Islami Bank Limited have sought rescheduling.
After approving the proposals seeking a 10-year rescheduling with a grace period of one year, the board of the bank has sent those to the Bangladesh Bank for the final nod.
Of the three NBFIs, FAS Finance and Investment Limited defaulted on loans amounting to Tk53.73 crore, International Leasing and Financial Services Limited Tk56 crore and People's Leasing and Financial Services Limited Tk63 crore.
The central bank has already turned down the proposal of People’s Leasing.
The two other proposals are still under consideration, central bank sources said.
This is the first time the central bank is considering rescheduling proposals from NBFIs.
People’s Leasing initiated liquidation in June after losing the capacity to pay the depositors back.
Liquidation is the process of bringing a business to an end and distributing its assets to claimants. It usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims.
FAS Finance and Investment, and International Leasing failed to maintain the required cash reserve with the Bangladesh Bank due to liquidity crisis and inefficiencies in fund management.
Deposit collecting institutions have to maintain five percent liquid assets, including 2.5 percent cash of total deposits, as per regulatory guidelines. Financial institutions will be imposed a one percent fine on everyday’s shortage as per the rule.
Both FAS Finance and Investment, and International Leasing could not even pay the fine.
In some cases, International Leasing could not even pay back the depositors’ money, according to a Bangladesh Bank report.
Both FAS Finance and Investment, and International Leasing were put in the red zone in the stress testing report published by the Bangladesh Bank in March 2019.
Stress testing is a tool to measure the resilience capacity of NBFIs. The reasons why a NBFI will be put in the red zone include weak capital base, high non-performing loans, high amount of large loans, inefficiency in liquidity management and inadequate collateral.
Despite the poor financial condition of the three NBFIs, the board of Al-Arafah Islami Bank Limited approved the rescheduling proposals.
Farman R Chowdhury, managing director of the bank, denied to make any comment on the matter.
“NBFIs are given loans without collateral because it is unusual that a financial institution will default,” a senior executive of the Bangladesh Bank told The Business Standard.
“As a result, in case of rescheduling of loans, how the collateral issue will be settled needs to be defined. Besides, rescheduling of loans by financial institutions will convey a negative message to their depositors,” explained the central bank official who did not want to be named.
“Earlier, the Bangladesh Bank denied the rescheduling proposal of Bangladesh Industrial Finance Company on this ground.”
Health of FAS Finance
The net profit of FAS Finance fell by 10 percent to Tk12 crore in 2018. There was no income from investment. Rather, it incurred a loss of Tk53 lakh last year. Non-performing loans stood at 15.21 percent at the end of December 2018, according to the institution’s annual report.
FAS Finance is listed with the Dhaka Stock Exchange. Each of its share has been trading at below the face value of Tk10.
Health of International Leasing
The net profit of International Leasing saw a steep fall of 71 percent, reaching Tk11.22 crore last year. There was no income from investment, and the amount of loss was Tk6.35 crore. Non-performing loans stood at 4.56percent at the end of December 2018.
The institution could not maintain the required cash reserve with the Bangladesh Bank and everyday shortage is above Tk30 crore, according to the central bank report.
Each share of the institution has been trading at below the face value of Tk10 at the Dhaka Stock Exchange.