AB Bank, which had been in a critical state until 2018 due to significant downturn of its financial health, returned to a comfort zone last year by restoring depositors trust and cutting down default loan drastically under the special loan rescheduling policy.
The bank, which experienced 372 percent rise in default loans just a year back, has managed to cut 62 percent of its bad loan in last one year thanks to a relaxed loan rescheduling policy that the central bank formulated in May 16 last year.
Under the policy, defaulters are allowed to pay only a 2 percent down-payment, a 10-year loan repayment period, and a one-year grace period. The rescheduled loans will have to be repaid at only 9 percent interest rate – the lowest range of rate.
Moreover, the bank sent out a strong message that it meant business by suing defaulters for depositing valueless cheques to the bank against their installment, according to bank insiders.
Visible improvements in most financial indicators and appointment of new management helped the bank restore depositors' confidence increasing fund flow.
In a disclosure to the Dhaka Stock Exchange (DSE) the bank said its deposits increased by Tk3,473 crore, helping it to ease net cash flow.
The bank lost deposit of Tk50 crore in 2018, according to its annual report.
In the disclosure, the bank said that the net cash flow per share turned to positive Tk32.67 in the first nine months of last year in comparison to negative Tk11.79 in previous year.
Other financial indicators of the bank also improved.
For instance, advance deposit ratio of the bank had been remaining beyond authorised limit until 2018 came to the regulatory ceiling last year, according to the bank.
Muhammad A. (Rumee) Ali, former deputy governor of the Bangladesh Bank, said, when he took over, the advance deposit ratio (ADR) was above 100 percent, it has come down to below 86 percent. Per the central bank guideline, conventional banks can lend a maximum of 85 percent of its deposit.
ADR is the ratio of total advances to total deposits. A ratio of 100% or less shows that the bank is funding all its loans from deposits rather than relying on wholesale funding (funding from the capital markets or other banks).
Rumee Ali, chairman of the bank who took over last year said special loan rescheduling policy helped the bank to cut down default loan burden.
Moreover, the bank has been filing money loan cases against the defaulters to recover loan.
As a result, liquidity position of the bank significantly improved, he said.
Just in three months from October to December last year, AB Bank had been able to cut down defaulted loan by Tk2,608 crore, according to Bangladesh Bank data.
As a result, the default loan rate of the bank came down to 13.24 percent in December last year from 36 percent in the same period of the previous year.
Ali said the fact they were able to attract fresh deposits indicates people have confidence in the bank.
Though, the bank was in liquidity crisis, it did not fail to pay back money to the depositors, he added.
The bank improved its quality in all aspects like management, and financial health but it is a challenge to keep it up, he admitted.
"We are changing our credit process to ensure governance," he added.
It is the governance issue which ruined the once well-reputed first generation bank.
The bank, once a lucrative career choice, had suffered from a lack of efficient top manager as no banker was interested to take charge of the sinking institution.
As a result, it had to go nine months with its top managerial post vacant since the last managing director, Moshiur Rahman Chowdhury, suddenly resigned in October 2018.
Tarique Afzal, the then deputy managing director, had been in charge of the MD post during those months as the bank could not find anyone willing to take charge even after offering a higher salary package.
A bank cannot run for more than three months with the position of managing director remaining vacant, according to the Bank Company Act.
Failing in the head hunt, it promoted Afjal from deputy managing director to the managing director post in July 2019.
Meanwhile, failure of the board, which mostly consisted of nominated directors, to take strong actions in time seems to be a reason for the bank's ailment.
AB Bank is as close to a one man show as it can get with M Morshed Khan, founder of the bank and his family owned Pacific Group, holding the majority shares.
Some 90 percent of nominated directors are appointed by Khan and the bank.
Although the family members hold above 30 percent stake in the bank, they are not directly present on the board.
Among the nine directors, including two independent directors, all except two from Elite Paint group, has been nominated by Khan and his business firms.
Failure of Citycell and money laundering cases
Business failure of Pacific Telecom, known as Citycell, badly impacted the bank's health as the business firm had outstanding loan to the tune of above Tk 700 crore with the bank. Khan, who was also the former foreign minister of BNP-led government, owned Citycell.
A case of alleged money laundering of above Tk 320 crore by Morshed Khan and his family members also worsened the already tarnished reputation of the bank. The money laundering case is still being investigated by the Anti-Corruption Commission (ACC).
Appointment of Wahidul Haque, a tea garden manager, as chairman of AB Bank was considered a blunder. Haque, nominated by Morshed Khan, joined the bank in 2007 as its chairman but lacked any experience of the financial sector.
Majority of the financial irregularities and corruption in the bank took place during his time as chairman. It seems that he let the board have a free rein.
In December 2017, he resigned from the board at the directive of the Bangladesh Bank on charges of his alleged involvement with the money laundering.
When the bank was on the verge of collapse, Muhammad A. (Rumee) Ali , former deputy governor of the Bangladesh Bank, took the helm of the bank as chairman. He was also picked by Morshed Khan, representing Pacific Traders.
Rumee Ali said, "I have taken responsibility to bring it in the black. But AB Bank is not an island. If the banking sector functions properly, if we had good team members on board and management, we hope the bank will turn around."
The new management managed to turn around the bank's financial health.
In December last year, the bank managed to reduce its provision shortfall thanks to reduction of default loan.
The provision shortfall of the bank declined to Tk637 crore in December from Tk2,832 crore in September.
A bank has to maintain a certain amount from profit as provision against its bad loan to mitigate future risk. The provision requirement goes up with increasing bad loans eroding a bank's profitability.
With reducing provisioning requirement, the profitability of the bank started to increase in the last year.
In the nine months of last year, the bank made a profit of Tk14 crore, according to the DSE.
The bank that once ranked as one of the highest profit makers within the banking sector with profit above Tk150 crore, made only a paltry profit of Tk1.8 crore in 2018.
Moreover, this profit seems to be exaggerated as it had a huge provision shortfall of Tk. 6,500 crore in 2018.
The bank remains in "Z" category on the stock market since 2017 as it declared no dividend.
Though, the financial health improved, it could not get back the confidence of stock investors and its share has been trading at below face value of Tk10 since it's earning the "Z" category.