Alarming `connected lending` of private banks` directors

A NATIONAL daily carried a news story that the Directors of Commercial Banks borrowed Tk 88,790.03 crore from each other’s banks till September 30 through mutual understanding. Such ‘connected lending’ among the Directors has raised serious questions regarding corporate governance in these banks as new entrepreneurs are often refused credit. Around 14 percent of total loan disbursed by 56 scheduled banks upto September was disbursed to 50-70 such bank directors. Mentionable, most of these banks got license during incumbency of ruling Awami League and Directors are very close to the power. This shady lending practice is abruptly going on even after the shock in banking sector surrounding loan scams and increasing rate of non-performing loans. The corporate governance practice that has been compromised raised a serious concern public trust in the banks. A small section is swallowing lion’s portion of banking facilities using their influence.

Alarmingly, the private banks disbursed Tk 88,790.03 crore as loans to only 50 to 70 directors of 57 banks, including newly opened Shimanta Bank. Shrinking practice of corporate governance in banking sector raised a question as to how much our banking system is transparent and sincere about ensuring security of the depositors’ savings. Insiders claim that direct involvement of directors in day to day affairs of their banks to pursue their interests raises serious questions relating to corporate governance in the country’s banking sector, particularly in private sector banks. This unfair practice simply opened scope to concentrate banks’ money in the hands of their directors which would ultimately severely affect the country’s GDP growth and employment generation as genuine entrepreneurs have limited access to bank credit in such situations – which is an obstruction to financial inclusion.

The directors in the state-owned banks are mostly appointed by the government while directors in private commercial banks hold such posts as promoter share holders but they own only a small share of total capital. While directors are superior and exert influence over the managing body, loan recovery from them is seemingly impossible until they willing repay. In the process, default loan ratio is increasing in the banks manifolds.

A large number of bank directors who became defaulters have presented themselves as regular borrowers by obtaining stay orders from the courts to show their non-performing loans as regular ones. In the face of legal restriction of borrowing from their own banks, the bank directors have devised the ‘concerted lending’ mechanism to borrow from other banks under mutual understanding. It thus protected their group interest. A Bank director can borrow unlimited sums from another bank within the single borrower exposure limit. But the rules permit no director to borrow sums exceeding 50 per cent of the value of his or her stake in the bank. The BB should set the ceiling of credit that the directors could take to stop concentration of capital in their hands for lending discipline or else the banking sector will suffer immensely.