Major non-bank financial institutions (NBFIs) in the country are operating with vulnerable financial health for long putting the sector to serious threats. Operational loss, poor credit quality, very low recovery, continuous stressed liquidity, significant capital shortfall -- all these are set to cripple the financial sector.
Recent failure to pay depositors' fund by a few NBFIs have eroded public confidence on this financial intermediary. Listed equity shares of a good number of NBFIs are being traded as B category issue because of failure to pay minimum expected dividend to equity holders and due to low or no long term earning prospects and poor fundamentals, many scripts are being traded lower than face value at both the country's bourses triggering the market capitalisation of this sector to a drastic fall. Lack of minimum governance and poor operating efficiency, and fund embezzlement forced the central bank to put observers on board of some financial institutions. Liquidation process of one NBFI has already been started and the High Court opted to appoint a retired justice of Supreme Court as Independent Director and Chairman to another listed NBFI which is at the verge of collapse.
To rescue the ailing sector and to bring financial discipline, the central bank adopted a number of steps recently which include formulation of guidelines of commercial paper to diversify the sources of short term financing for FIs, status quo of classification status of loan/ lease (based on 1 January) till June 30, allowing to borrow up to 40.0 per cent of their equity from call money market instead of existing 30.0 per cent, refraining from offering high interest rate through mobile phone messaging to collect deposit, formulation of detailed policy guideline of loan/lease write-off, formulation of guideline of integrity award to promote efficient and competent employee of financial institutions etc.
STATE OF THE SECTOR: Right now a total 34 NBFIs (three government-owned, twelve joint ventures with foreign participation and the rest 19 are locally private-owned companies) are operating in Bangladesh under Financial Institution Act, 1993 and are being controlled and regulated by Bangladesh Bank. In terms of deposit collection out of the total 34, five public NBFIs are non-depository, while rest are depository NBFIs. And out of the 34 FIs, only 22 are listed with DSE and 21 with CSE. In addition to these 34 FIs, Bangladesh Bank board has recently awarded its initial consent to a new non-bank financial institution.
On the other hand, India (with about 9.5 times bigger economy than Bangladesh) has 69 NBFCs and Malaysia has 13 financial institutions including 11 investment banks other than banks.
FIs in Bangladesh are managing a total assets portfolio of Tk 874.3 billion including loan/lease of Tk 678.1 billion concentrating its major assets in industry, real estate, trade and commerce and capital market against total liabilities of Tk. 751.8 billion including depositors' liability of Tk. 458.1 billion (as on June 30, 2019). The sector is struggling with survival risk with a total classified loan of Tk. 80.4 billion (11.90 per cent of total loan/lease portfolio). If qualitative judgment is applied, problem asset will be much higher than disclosed. Covid-19 fallout will surely further shoot soured loan in the industry as almost all the business segments of the economy are severely affected by the pandemic.
Too many NBFIs in such a small market created unhealthy competition and malpractice in the sector. Collecting deposits at higher interest rates also forced the financial institutions to lend money at higher rates to low credit-worthy borrowers with poor credit transaction profile, vulnerable financial health and lack of collateral facility. The sector is in the serious crisis of mobilising fund from depositors to meet financing requirement as well as to manage liquidity because of erosion of public confidence. Many financial institutions are failing to pay depositors' fund on maturity and in many cases depositors are going for early encashment of their term deposits and planning to put their fund in good credit worthy banks.
MERGER & AMALGAMATION: To bring back confidence among depositors, investors (specifically bond & equity investors) and lenders (as financial institutions mobilise a significant portion of its fund from banks and other financial institutions) and to establish financial discipline in this sector, the process of merger or amalgamation of a NBFI with another NBFI or of a NBFI with a banking company, should start right now.
NBFI with low fundamentals may be merged with another having good fundamentals or good fundamentals banking institution - for this strategic financial plan/scheme to be successful, commitment of the board of directors is instrumental and decisive. In this case role of central bank is also very pivotal. Here for effective and meaningful business transactions the actual financial health of both transferor and transferee company should be assessed and audited by internationally recognised, reputed and independent audit firms, and credit worthiness of both transferor and transferee company should be rated by independent and internationally recognised rating agency.
Since the issuance of detailed guidelines regarding merger/amalgamation of banks/ financial institutions by Bangladesh Bank, no such scheme took place among non-bank finance companies. The main impediment of existing guidelines of merger/amalgamation of banks/NBFs is that it lacks any trigger point or limiting health indicator of financial sector companies beyond which level it will warrant the initiation of merger or amalgamation. Another impediment of guideline is lack of regulatory binding on the board of directors ( in case of their failure to run the operations profitably) to initiate the process of merger as in many cases the board is reluctant to go for merger deal arising out of fear of losing control on newly formulated board when merger scheme is implemented.
Right now the Companies Act, Banking Companies Act, Financial Institutions Act contain the provisions of merger among banking companies or financial institutions or banking companies with financial institutions including the involvement of High Court Division of Supreme Court and central bank. However, for successful and quick implementation of legal and financial transaction of merger scheme, a separate Act may be enacted consolidating the scattered provisions and industry-specific guidelines.
Apart from merger or amalgamation to bring discipline in the sector and to make it financially vibrant, following things could be done: (a) scrapping the board of financial institutions that are running with loss and NPL more than 10.0 per cent; (b) appointment of competent but independent administrator from private sector with full delegation and authority to reshape the portfolio and investment strategy; (c) squeezing the unnecessarily big board size; (d) abolition of family concentration in the board; (e) strict compliance and monitoring of threshold limit regarding directors' loan; (f) involvement of third party to recover problem loan; (g) ensuring sufficient collateral (properly valued) before disbursing loan; (h) identifying gap of potential economic sectors and proper, impartial and independent CRM evaluation of proposal; (i) creation of scope of strong bond market in the country as an alternative source of fund mobilisation other than depositors' fund; (j) declaration of financial and non-financial motivation to attract foreign investment in this sector.
Moreover, to strengthen the financial base, minimum paid-up capital of NBFIs need to be increased. As financial institutions in Bangladesh often operate in funding mismatch (due to mainly collecting deposits at short and medium terms and lending in longer terms), the sector often struggles to mobilise fund at a very high interest rate and depend on other banks and NBFIs. To curb this situation, a significant portion of central bank's various refinance schemes (for agriculture, cottage, SME and various potential economic sectors) can be implemented through NBFIs.
Md Asiful Huq is the Chief Rating Officer of CRISL.
[Opinion expressed in this article is the author's own and does not necessarily reflect the position of the entity where he works]