The leak of a secret Bangladesh Bank report on the overall health of each bank operating in the country seems to have set the cat among the pigeons in the industry, precipitating a slew of moves on the part of individual banks, apart from regulatory announcements that seem to go much further than they ever did before.

The central bank's financial stability department recently prepared banks' health index on the basis of June 2023-ending half-yearly financial performance.

The report put nine banks, four state-owned banks among them, in the red zone in terms of their financial health in the June 2023 edition of "Banks Health Index (BHI) and HEAT Map."

The nine banks, the financial health of which was stated to be fragile, were Bangladesh Commerce Bank, Padma Bank, BASIC Bank, National Bank of Pakistan, National Bank, Janata Bank, Agrani Bank, Rupali Bank and AB Bank.

It also said that special attention was required for the banks falling in the red zone.

According to the report, 16 banks were in the green zone with good financial health and 29 banks were in the yellow zone with their financial health staying between good and fragile.

The 16 banks, including eight local and eight foreign banks, in good condition are Prime Bank, Eastern Bank, NCC Bank, Midland Bank, Bank Asia, Shimanto Bank, Jamuna Bank, Shahjalal Islami Bank, Bank Alfalah, Woori Bank, HSBC, Commercial Bank of Ceylon, City Bank NA, Habib Bank, Standard Chartered Bank and State Bank of India.

The yellow zone contains two state-owned commercial banks, Bangladesh Development Bank and Sonali Bank, 19 conventional private commercial banks and eight Shariah-based islamic Banks.

The 19 conventional banks are IFIC Bank, Meghna Bank, One Bank, United commercial bank, NRB Bank, NRB commercial bank, Mercantile Bank, Mutual Trust bank, Dutch-Bangla bank, Premier Bank, BRAC Bank, Southeast Bank, The City Bank, Trust Bank, SBAC Bank, Modhumoti Bank, Dhaka Bank, Uttara Bank and Pubali Bank.

The eight Shariah-based banks are First Security Islami Bank, Islami Bank Bangladesh, Social Islami Bank, Al Arafah Islami Bank, Standard Bank, Union Bank, Exim Bank and Global Islami Bank.

The banks in the red and yellow zones all need supervisory attention, the report said.

The health of 38 banks deteriorated during the review period of December 2020 to June 2023, while 16 banks' health improved, according to the BB report.

Following the leak, Bangladesh Bank Executive Director and Spokesperson Mezbaul Haque said that the regulator is planning to merge 10 banks within a year.

"Following the merger, the weak bank can become the strong bank while strong banks can be stronger banks," he told reporters at a press briefing at the BB headquarters in Dhaka, reports BSS.

Mezbaul said BB's various departments assess different components regularly for financial risk management. But it is not a real health indicator, he added.

He said, "We developed a Prompt Corrective Action (PCA) framework to classify banks. As a result, banks will be evaluated in four categories. This will be done based on the balance sheet of 2024. It will be implemented from May 2025."

Later in the week in a clarification, Bangladesh Bank said that weak banks could merge with good ones by December 2024 on their own, otherwise the central bank will decide on the merger issue.

After December 2024, the BB will make a decision on which bank will merge with whom, and then the bank's board of directors will lose the authority to decide on the merger issue.

Md Mezbaul Haque, Executive Director and spokesperson of Bangladesh Bank, in a press briefing at Jahangir Alam Conference Hall confirmed this to the reporters.

Regarding the banks' health index (BHI) report published in the newspapers, he said this does not present the actual health of banks. It is a partial report that is prepared by different departments of the central bank for calculating the risky areas of the banking sector.

Mezbaul said that the BB is doing reports on banks' operations and financial health on a quarterly and half-yearly basis as part of regulations.

Replying to a question that some good banks have also been enlisted in the yellow category in the BHI report, the spokesperson said that the central bank usually works on the basis of the actual balance of a particular bank, not on the basis of assumptions.

Regarding the merger of 10 weak banks with the strong banks, the BB spokesperson said that banks will be merged to maintain the global standard, and depositors would not be affected by this process.

The first of these mergers followed quickly, as it was announced that Padma Bank, the fourth-generation bank struggling with toxic loans, is merging with Exim Bank to become the first lender to implement a recent decision of the central bank.

The decision to take over the troubled Padma Bank was taken on Thursday (Mar. 14)at a meeting of the Shariah-based Exim Bank's Board of Directors, said an official of the Exim Bank.

"We have already finalised the draft of the MoU that will be signed on Monday [18 March] in the presence of the Bangladesh Bank governor," said Nazrul Islam Majumder, chairman of Exim Bank.

When asked about the merger, Padma Bank Chairman Afzal Karim told UNB that the matter has been discussed. A final decision will be announced formally, he said. No date has been finalised yet.

The sources close to the development said that a formal approval from Bangladesh Bank has to be taken now in this regard. As per the directives of the central bank, the merger will be done step by step.

Padma Bank started out as the Farmers Bank which was established in 2013 but collapsed within three years of operation amid huge financial irregularities and toxic loans. It started operating again under the changed name in 2019.

Cleaning house

Apart from setting the train in motion for consolidation in the banking industry, Bangladesh Bank was involved in a number of other moves this week that suggested it has decided to take the bull by the horns in an effort to clean up the financial sector. One of these was, for the first time, setting out the qualifications of independent directors for non-banking financial institutions (NBFI) in order to ensure good governance in these organisations.

The central bank in a directive said that a maximum of 15 directors including two independent directors can be appointed for an NBFI in the country.

The independent directors should have a bachelor's degree with a minimum of 10 years of professional experience, a minimum age of 45 years and a maximum age of 75 years.

"Monthly salary will be a maximum Tk50,000 depending on ability. No person who has an interest or apparent interest in any financial institution can be eligible for an independent director," said the directives.

The Financial Institutions and Markets Department of the central bank issued guidelines on the experience and suitability of independent directors. The new directives will come into effect immediately.

The central bank said the independent directors must be from faculty of business education of public/ autonomous/ private universities, or experienced teachers in business administration, management, law, and information technology, persons engaged in the legal profession.

Besides, individuals with professional degrees in accounting engaged in the accounting profession, experienced bankers, Ministry of Commerce, Experienced officers of the Financial Institutions Division, Finance Division, Ministry of Industry, and Ministry of Law can be considered on a priority basis.

Next, focusing its attention on the burgeoning amount of default loans in the system, Bangladesh Bank said that those found to be wilful defaulters will be banned from travelling abroad.

"No new trade licence can be taken and would not be eligible for any kind of state awards or honours," said an instruction of the central bank.

Banking Regulations and Policy Department (BRPD) issued a circular in this regard on Tuesday and sent it to the top executive of all the banks for identification and finalisation of wilful defaulters and measures to be taken against them.

The circular stated that any defaulting borrower person, institution, or company repays the loan, advance, investment interest, or profit charged from any bank or financial institution in favour of himself, his family member, interested person, institution, or company despite his ability. Otherwise, he will be considered as a wilful defaulter.

Besides, by providing fraud, deception, or false information or using it in any sector other than the purpose for which it was taken or showing the secured assets of another bank as collateral for new loans without permission, he will be considered as a wilful defaulter.

The BB will list these wilful defaulters to the relevant agencies for a ban on foreign travel, a ban on trade licence issues, and a ban on company registration with the Bangladesh Securities and Exchange Commission and Registrar of Joint Stock Companies and Firms (RJSC).

Simultaneously, the list of vehicles, land, houses, flats, etc. of the wilful defaulters will also be sent to the registration authorities. So that the concerned organisation can take action against them.

Also, any wilful defaulter shall not be eligible for state awards or honours.

War on Hundi

Finally, as if to confirm the combat mode in which the central bank is operating these days, Governor Abdur Rouf Talukder on Monday (March 11, 2024) said that around 200 mobile financial services (MFS) accounts are closing each day due to their Hundi connection.

To this end, the central bank is rigorously checking trade transactions through LC and mobile financial services to prevent money laundering activities by any means, he said.

The governor said this in the opening ceremony of the money laundering prevention workshop held at the head office of the Criminal Investigation (CID), Bangladesh Police in the capital.

Rauf highlighted the steps taken to prevent money laundering since his joining the central bank as governor.

He said, "When I joined Bangladesh Bank in 2022, there was a severe crisis of foreign exchange in the country. At that time I took the first step to stop over-invoicing."

Again, money laundering occurs despite keeping the profit of export products abroad. Initiatives are also taken to prevent that, he mentioned.

The governor expressed the strong stand of the central bank on banning hundi.

He said that expatriates may send Tk500 to their family in the country, then he gives it to someone he knows abroad and asks him to give it to his family in the country.

That money remains abroad. In contrast, a representative in Bangladesh paid the amount. As earlier payment was made through home delivery, now it is done through MFS.

Around 200 such accounts are being closed every day. Later some accounts were opened again with guarantees, permanent action was taken against some of them, he said.

Highlighting the context of the campaign against money changers, the governor said that USD $45 to $50 million transactions are done through money changers in the country every year. About $270 billion in transitions are made in the banking channel.

But despite a small fraction of transactions, when money changers hiked the dollar rate, many expatriates tried to hold on to remittances. This is how the dollar crisis was created, Rouf pointed out.

"That is why the campaign against money changers is ongoing. Also, avoid dealing in cryptocurrencies. It is completely illegal in our country," said the BB Governor.

How CAMELS is applied

The BHI brought all banks under a common platform using the international CAMELS rating system.

CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by its acronym: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity, according to Investopedia.

Supervisory authorities assign each bank a score on a scale for each factor. A rating of 1 is considered the best, and a rating of 5 is considered the worst.

Composite and component CAMELS ratings are assigned from 1 to 5, with 1 indicating the strongest performance and 5 indicating the weakest.

The system can be used to more easily identify banks that are weak and pose a risk so that those banks can resolve their issues. So, banks that are given an average score of less than 2 are considered to be higher-quality institutions, and those with scores greater than 3 are considered to be less-than-satisfactory institutions. If a bank has a higher score, it is more likely to be subject to more examinations.

Capital Adequacy

Examiners assess institutions' capital adequacy through capital trend analysis. Examiners also check if institutions comply with regulations pertaining to risk-based net worth requirements.

To get a high capital adequacy rating, institutions must also comply with interest and dividend rules and practices. Other factors involved in rating and assessing an institution's capital adequacy are its growth plans, economic environment, ability to control risk, and loan and investment concentrations.

Asset Quality

Asset quality covers an institutional loan's quality, which reflects the earnings of the institution. Assessing asset quality involves rating investment risk factors the bank may face and balancing those factors against the bank's capital earnings.

This shows the stability of the bank when faced with particular risks. Examiners also check how companies are affected by the fair market value of investments when compared with the bank's book value of investments. Lastly, asset quality is reflected by the efficiency of an institution's investment policies and practices.

Management

Management assessment determines whether an institution is able to properly react to financial stress.

This component rating is reflected by the management's capability to point out, measure, look after, and control risks in the institution's daily activities. It covers management's ability to ensure the safe operation of the institution as they comply with the necessary and applicable internal and external regulations.

Earnings

A bank's ability to produce earnings to be able to sustain its activities, expand, and remain competitive is a key factor in rating its continued viability.

Examiners determine this by assessing the bank's earnings, earnings growth, stability, valuation allowances, net margins, net worth level, and the quality of the bank's existing assets. A bank earns money both through interest-earning assets like loans and non-interest sources like fees.

Liquidity

To assess a bank's liquidity, examiners look at interest rate risk sensitivity, availability of assets that can easily be converted to cash, dependence on short-term volatile financial resources, and asset and liability management technical competence.

Sensitivity

Sensitivity covers how particular risk exposures can affect institutions. Examiners assess an institution's sensitivity to market risk by monitoring the management of credit concentrations. In this way, examiners are able to see how lending to specific industries affects an institution.

These loans include agricultural lending, medical lending, credit card lending, and energy sector lending. Exposure to foreign exchange, commodities, equities, and derivatives is also included in rating the sensitivity of a company to market risk.