It is a question of ethics and judgement as well – a losing company in its worst performing year rewards its employees for "good performance".
It may sound surprising but that is what has happened in Janata Bank.
The bank's financial performance in 2019 was the worst in the last five years, but its employees were rewarded with the highest number of incentive bonuses – three, among the state-owned banks.
At the end of 2019, Janata's net loss stood at Tk12,296 crore. However, the bank showed an artificial profit amounting to Tk24.6 crore, taking a waiver from its obligation to maintain provisions against its risk-weighted assets.
It is a common practice, albeit questionable, among some other banks too as they show inflated profits by taking a provision forbearance from the central bank.
Surprisingly enough, Janata bank spent Tk119 crore on incentive bonuses, which was almost five times higher than its shown profit.
As per the regulator's instructions, banks must keep provisions against their loans and risk-weighted assets so that depositors feel certain that they will get their money back even if banks fail to recover loans and bad assets.
When a bank fails to maintain the required provision, depositors of the bank face the risk of not getting their money back.
Janata has already tainted its name in the over Tk8,300 crore loan scams involving two big groups – AnonTex and Crescent group – which surfaced in 2018. Yet the bank spent on incentive bonuses despite its failure to keep the required provisions against its bad assets.
A Bangladesh Bank's investigation found that every tier in loan processing – from top to bottom of the bank – was involved in two big loan swindles.
The bank management kept quiet about its huge losses by taking a provision forbearance only to give incentive bonuses to its employees, according to the investigation.
If a bank is in loss, it cannot hand out incentive bonuses. That is why Janata showed an artificial profit, said a senior executive at the Bangladesh Bank.
If the central bank had not allowed Janata to show the artificial profit, the government could have saved Tk119 crore that the bank spent on incentive bonuses, he added.
Although the bank was allowed to maintain 40% of the required provision, it could not maintain that portion even after taking a forbearance of the rest of the amount against loan losses.
A quick inspection report, conducted by the Bangladesh Bank, found that the bank was in a provision shortfall of Tk3,491 crore last year despite taking the provision forbearance.
If provision exemption was not considered, the actual shortfall would be Tk12,387 crore, according to the central bank report.
However, Md Abdus Salam Azad, chief executive officer and managing director of the bank, whose tenure will end in December this year, defended the incentive bonus payment, saying the bank performed well in terms of recovering loans and deposit collection.
He said the incentive bonuses were given to encourage employees for good performance.
He claimed that there is no relation between incentive bonuses and profits of a bank. Even if the bank does not make a profit, it still can give an incentive bonus by taking ex gratia.
The term ex gratia, from Latin, means "by favour" or "out of kindness" and, therefore, tends to refer to a payment made where there is no legal obligation to do so.
He said Janata rewarded their employees with three incentive bonuses as other state-owned banks gave more or less or the same.
There is no specific rule about whether a bank can spend on incentive bonuses. An incentive bonus is given if the board approves it, he added.
BASIC Bank has stopped giving incentive bonuses since 2012 as it incurred a huge loss after a loan scam of Tk4,500 crore.
Bangladesh Krishi Bank (BKB) which also has been running in losses did not give an incentive bonus in the last two years.
An incentive bonus is given on the financial performance of a bank, said Md Ali Hossain Prodhania, managing director of BKB.
If a bank gives an incentive bonus despite counting loss, it has to take permission from the government for ex gratia.