Padma Bank Limited, formerly known as the Farmers Bank, has been relieved from the obligation to maintain the Statutory Liquidity Ratio for more than two years, having suffered severe fund withdrawal pressure in 2018.
In a Bangladesh Bank circular issued on Wednesday, the duration mentioned is from 31 October 2017 to 31 December 2019.
As a result, the commercial bank will enjoy exemption from paying Tk89 crore in fines that would have been imposed for failing to hold the minimum percentage of deposits in the form of liquid assets during the time.
The order issued by the central bank says the decision has been made in consultation with the government.
In November 2019, the private bank requested the central bank not to charge it Tk144 crore for failing to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) in 2017 and 2018.
Under Cash Reserve Ratio (CRR), commercial banks have to hold a certain minimum amount of deposit as reserves with the central bank.
Banks have to keep 4% of the cash deposited into them in reserves, which cannot be lent to corporate or individual borrowers. Banks do not earn interest on the money, and the main purpose of it is to ensure availability of a small portion of funds against deposits.
On the other hand, 13% of the deposited money is to be invested in gold, government treasury bills or bonds – which is the Statutory Liquidity Ratio.
The CRR and SLR are intended to protect the interests of depositors.
Following the Bangladesh Bank circular, Padma Bank will have to pay Tk55 crore in fines for not abiding by the CRR requirement.
On this, former governor Dr Salehuddin Ahmed told The Business Standard that if a bank was in trouble, the central bank could be lenient towards it, but it was not wise to exempt the bank from the charges altogether.
Instead, the Bangladesh Bank could bring down the SLR requirement, he said.
It was clear from the circular that Padma Bank was incapable of maintaining the SLR, Salehuddin said, adding that the banks that were facing such issues should be merged with other banks.
The central bank changes the CRR and SLR from time to time. To ensure cash flow, it reduced the rates last year.
At present, CRR and SLR combined that banks have to hold with them is 17%. For Islami banks, it is 9.5%.
If a bank fails to maintain the CRR as stipulated, it has to pay a penalty of 5% of the money in deficit every day.
In case of SLR, the penalty has to be calculated according to the interest charged for repossessing the deficit amount. At present, the repo rate is 7.75%.
The Financial Institutions Division in a report submitted in 2016 to the parliamentary standing committee on finance ministry identified the Farmers Bank as a threat to the country's financial sector.
Against the backdrop of loan scams and other financial irregularities, Sonali Bank, Agrani Bank, Janata Bank, Rupali Bank and ICB Bank bought most of the shares of the Farmers Bank in 2018 in a government intervention to salvage it from drowning.
The name of the bank was changed to Padma Bank in January next year.
Until the end of 2020, default loans of Padma Bank amounted to nearly Tk3,500 crore, which was 61.6% of the total loans disbursed.
Around that time, the overall default loan rate of the banking sector was 8%.