For banks, financial numbers are safeguards not only for its clients but also for the investors who put money into its shares.
But ONE Bank has cooked up all its key figures to jack up its profit so that its directors, who hold over 30% of the bank's shares, can take out more money in the form of cash dividends.
In reality, ONE Bank's net profit was not as high as it showed because it did not adjust its provision shortfall – the money it has to keep aside against its bad debts before declaring net profit. So, instead of putting money aside to offset its bad loans, the bank showed that amount as its profit as well.
The result? As it declared a cash dividend – the maximum 6% as allowed by the central bank – its directors holding majority shares could take more money out of the bank.
In the process, the bank has violated all the basic norms of the Bank Company Act 1991, the Bangladesh Bank has found out.
The listed bank published its balance sheet for 2020 hiding its real financial condition by manipulating key financial numbers such as net profit, retained earnings, capital adequacy ratio, earning per share, net asset value and other indicators.
After identifying the false financial numbers, the central bank served a show-cause notice to the bank.
On 15 July, the Bangladesh Bank served the notice, asking it to correct the balance sheet by adjusting the provision shortfall and republish it in at least two national dailies within 45 days of receiving the letter.
The bank will be required to hold an extraordinary general meeting to change the balance sheet. If the bank fails to change the balance sheet, its managing director will face a financial penalty according to law.
If any managing director faces a financial penalty, he or she will be removed from the post and will be restricted from holding such a post in any other banks as per banking law.
In the show-cause letter, the bank was also asked to explain within three days of receiving the letter as to why a punitive action would not be taken against it for violating the bank company act.
According to the section 109 of banking law, the bank will face a financial penalty of Tk50,000 at a minimum and a maximum of Tk10 lakh for such a violation.
In response to the show-cause notice, the bank had already sent an explanation that was not accepted to the central bank.
Central bank taking action against it
The Bangladesh Bank is now in the process of taking action.
The bank misrepresented financial numbers in its balance sheet even keeping the Bangladesh Bank in the dark, ignoring its instructions in every step.
For instance, the bank did not take consent from the Bangladesh Bank before announcing a dividend for the last year, in defiance of the dividend policy.
Secondly, the bank was instructed to adjust the provision shortfall of Tk80 crore from retained earnings as the bank company act does not allow it to declare a cash dividend with a specific provision shortfall.
But the bank did not follow the instruction in its balance sheet, which was a violation of banking law.
If the instruction had been followed, the net profit and retained earnings of the bank would have come down and at the same time other financial indicators would have changed.
Specific provisions are made against losses that the bank has already incurred against default loans, while general provisions are made against expected losses.
The Bangladesh Bank has authority to give forbearance for maintaining a general provision, but maintaining a specific provision is mandatory for declaring a cash dividend, according to the bank company act.
The central bank observed that the only objective of the bank behind such misrepresentation of financial numbers in the balance sheet seemed to be enabling bank directors to take out money through declaring a cash dividend despite not having the capacity.
The Bangladesh Bank discovered the manipulation three months after the balance sheet was published.
When contacted, M Fakhrul Alam, managing director of ONE Bank, admitted that they did not take consent from the Bangladesh Bank for declaring dividends as per the new dividend policy.
"Previously, there was no need for taking permission from the central bank to declare a dividend. Following that practice, we did not take consent," he said.
However, the central bank had issued the dividend policy in February this year before the bank declared the dividend in March.
He said after the dividend declaration, the central bank asked them to adjust the provision shortfall of Tk80 crore from retained earnings. But by this time, the balance sheet was prepared and price sensitive information was published.
He claimed that they did not adjust the provision shortfall because the central bank allowed the forbearance of the amount in 2019.
But his claim does not match with the Bangladesh Bank's instruction.
The central bank sent a letter to the bank on 12 April this year, asking it to adjust the shortfall from retained earnings.
"We had no problem with changing the balance sheet, but the auditor refused to do so because price sensitive information had already become public. So, approval from the Bangladesh Securities and Exchange Commission (BSEC) was needed."
"When we contacted the BSEC, it did not allow us to change the price sensitive information," he said.
How the bank cooked the books
The inspection department of the Bangladesh Bank on 10 March this year sent a letter to ONE Bank, allowing the provision forbearance of Tk80 crore against loan losses. However, it instructed the bank to follow the dividend policy in case of declaring a dividend and take consent from the off-site supervision department in this regard.
On 29 March, the bank declared 11.5% dividend, including 6% cash and 5.5% stock, without taking permission from the central bank.
Moreover, the bank declared a higher dividend than in the previous year despite a 21% fall in its profit. In 2019, the bank declared a 10% dividend, including 5% cash and 5% stock.
According to the bank company act, a bank cannot give a cash dividend if it has a provision shortfall against loan losses.
In this perspective, the Bangladesh Bank in its letter said the declared dividend is not consistent with the bank's financial health. Moreover, the bank did not take consent from the central bank.
Considering the price sensitive information, the bank can keep its dividend unchanged subject to adjusting a specific provision shortfall from retained earnings.
At the same time, the bank was instructed to make a correction in the financial statement.
In the letter, the bank was also advised to be cautious about complying with Bangladesh Bank's instructions.
But the bank published the balance sheet without making any change in its financial indicators.
Provision is kept aside from the gross profit before tax. If ONE Bank has to adjust the loan loss provision amount, it will impact its net profit and consequently, other indicators will change.
Little practice of corporate governance in the bank
Earlier, in July last year, the Bangladesh Bank removed Sayeed Hossain Chowdhury from the bank's chairmanship for his loan defaulter status.
After his removal, ASM Shahidullah Khan was appointed as chairman on behalf of a company named KSC Securities Limited. He does not hold a share of this bank.
Contacting several top officers of ONE Bank, The Business Standard came to know that Sayeed still has full control over the bank.
The head office of the bank is located in the building owned by Sayeed.
The Bangladesh Bank also came to know about the interference of Sayeed in the bank board and following that it appointed an observer in the bank in November last year.
When the financial health of the bank has been deteriorating and employees have been suffering pay cuts ranging from 10% to 20% during the pandemic, directors seemed aggressive in taking a higher cash dividend.
When asked about the issue, the managing director of ONE Bank said a proposal was placed before the board to restore salaries of employees.
When the bank awarded its owners higher dividends, it kept the employees' incentive bonus as well as promotions suspended during the pandemic year, say bank insiders.
As a result, many high-ranking officials left the bank, causing a severe manpower crisis, they say.
The bank's default loan, a vital indicator of a bank's financial health, increased by 9% in March this year, the fifth highest among private commercial banks.
Moreover, the financial indicators of the bank are deteriorating due to a lack of good governance in the board.
The deterioration of the bank's financial health was also reflected in its stock prices at the Dhaka Stock Exchange (DSE).
Despite declaring a higher dividend, each share of the bank is currently trading nearly at the face value of Tk10.
In the last one year, the bank's shares had been traded between Tk8 and Tk15 each, according to the DSE.