BB tightens rules to rein in bank’s in-house irregularities
The central bank has tightened rules on lending to individuals and institutions connected to banks — such as directors, managing directors, their family members, and bank subsidiaries — to tackle widespread irregularities and scams in the banking sector.
For all latest news, follow The Daily Star’s Google News channel. On Thursday, the Bangladesh Bank issued a new guideline titled “Transactions with Bank-Related Persons or Institutions” with the view to ensuring the proper use of bank funds and restore depositors’ trust.
Although the Bank-Company (Amendment) Act 2023 already covers such transactions, the guideline provides detailed instructions and regulations.
Over the past 16 years of the Awami League rule, several bank directors took out large loans, some of which were allegedly siphoned out of the country.
For example, the controversial S Alam Group — led by its owner and family members — allegedly controlled more than half a dozen banks and took loans through fake or paper-based companies, according to the central bank.
As of 2024, defaulted loans in the banking sector hit a record Tk 345,765 crore, with toxic loans rising sharply following the ouster of the Sheikh Hasina-led government in August last year. The large amount of defaulted loans is a reflection of massive irregularities.
According to the new guideline, banks must now obtain prior approval from the BB before providing loans of Tk 50 lakh or more to bank directors, their family members, any related institutions or companies under their control. For shareholder companies or their nominated directors, the threshold is Tk 1 crore or more.
If the total or expected amount of credit facilities provided to significant shareholders, their family members or related institutions exceeds Tk 1 crore, the bank must report the transaction to the BB within seven working days. This requirement marks a major shift as such prior approval was not mandatory under previous rules.
Additionally, a bank director can only borrow up to 50 percent of the value of the shares they hold in the bank.
If a director’s loan exceeds the 50 percent-limit, the matter must be presented at the bank’s board meeting and reported to the BB immediately.
The guideline also states that the total amount of loans issued by a bank to all related persons and institutions must not exceed 10 percent of the bank’s Tier-1 capital. Tier-1 capital is the bank’s core financial strength, including equity and retained earnings, and is used to absorb losses.
Furthermore, while someone is serving as the managing director or chief executive officer of a bank, neither they nor any institution or company under their control can receive any form of credit facility.
Any existing loans to such individuals or their affiliated entities cannot be extended, renewed or modified, and no interest waivers or exemptions are permitted.
However, the MD or CEO may be issued a credit card, but only under the same conditions as regular customers. In this case, the BB must be notified at least seven working days before the credit card is issued.
