Bangladesh Bank yesterday asked two specialised banks to strengthen their financial health by bringing down default loans and boosting capital base.
Bangladesh Krishi Bank (BKB) and Rajshahi Krishi Unnayan Bank (Rakub) have also been instructed to reduce their large number of unprofitable branches by cutting costs.
The banking regulator came up with the instructions during a meeting at its headquarters presided over by Governor Fazle Kabir. The chairman and managing directors of the two lenders were also present.
The directives were issued as per a memorandum of understanding (MoU) between the central bank and the state lenders.
The BB sets new targets for the two banks every year and reviews their performance once in every three months under the agreement.
The central bank earlier asked BKB to recover Tk 101 crore from the top 20 defaulters by 2020. It managed to realise Tk 11.36 crore in the first six months of the year.
The defaulters held 45.47 per cent of the total defaulted loans to the tune of Tk 2,733 crore as of June, according to central bank data.
Rakub also performed poorly as it realised Tk 3.21 crore in the first half against the annual recovery target of Tk 56 crore from the top 20 defaulters.
As much as 17 per cent of the bank's defaulted loans, amounting to Tk 1,756 crore, are now stuck with the top delinquent borrowers.
The central bank asked the lenders to take the initiative to recover these loans quickly, according to a Bangladesh Bank official, who attended the meeting.
The two lenders' capital shortfall also worsened between January and June.
The capital shortfall in BKB widened by 12.35 per cent year-on-year to Tk 10,318 crore as of June. It rose 96 per cent to Tk 1,338 crore for Rakub.
The central bank ordered the banks to take adequate measures to fortify their capital base by curbing non-performing loans.
A large number of loss-making branches also points to their financial health.
However, the number of unprofitable branches of BKB slightly went down to 311 as of June in contrast to 330 one year ago. Still, this figure is far too high as it has a total of 1,038 branches.
The number of unprofitable branches for Rakub jumped 323 per cent year-on-year to 195 in June. This means 51 per cent of the lender's 311 branches have fallen into a loss.
This led the BB to ask both BKB and Rakub to reduce the number of loss-incurring branches by following a useful cost-cutting model.
Poor corporate governance is the main reason for the deteriorating financial health of the two banks. Also, the central bank does not have full authority to control the lenders as per the Bank Companies Act 1991. So, the central bank frequently fails to force the state lenders to follow the MoU goals.
The two lenders have also been asked to speed up loan disbursements from the stimulus packages to accelerate economic recovery.