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Unhealthy competition rife among new banks: study
Unhealthy competition rife among new banks: study

Unhealthy competition rife among new banks: study

Unhealthy competition rife among new banks: study

A private commercial bank had provided a Tk 130 crore loan to a company for establishing a power plant.

The renowned company specialised in manufacturing and trading furniture and home appliances and had no experience in electricity generation, for which it became a defaulter on failing to run the plant within a year.

Unable to abide by the terms and conditions even after the loan was rescheduled, the company approached a fourth generation bank which took over the loan despite the business going bad.

The company is now listed as a defaulter with the new bank, paying not a single instalment in the past eight months.

The events were revealed in a research paper, “Loan takeover in Bangladesh: Is it a healthy practice?” presented by Mohammed Sohail Mustafa, associate professor of the Bangladesh Institute of Bank Management (BIBM), at a roundtable.

Mustafa said there was an “unhealthy competition” among new banks to take over loans from older ones and that his research team found ill motives working behind it in most of the cases.

Loan takeover is a global practice but in Bangladesh there is no positive motive behind it, he said.

In another instance, the research paper showed how a good loan turned into a bad one due to unhealthy competition.

A borrower of the real estate sector was properly paying instalments against a second generation bank’s Tk 200 crore loans when a new bank offered a 1.5 percent interest discount, an additional credit of Tk 100 crore and maturity extension from the ongoing eight to 12 years.

The borrower accepted it, but business in the sector declined, causing it to face difficulties in paying the instalments. Ultimately, the borrower became a defaulter.

The research paper said the borrower was sanctioned 1.5 times what it was eligible to get, which was sufficient to classify the loan.

New banks are providing loan limits beyond their clients’ capacity just to get some business for which loan takeovers are not resulting in successes, said Mustafa.

Bankers cannot work freely to make proper assessments in cases of loans being taken over, said Khondkar Ibrahim Khaled, former deputy governor of Bangladesh Bank.

Referring to Meghna Bank managing director Mohammed Nurul Amin’s resignation on November 2, he said a professional banker resigned due to the pressure of unprofessional owners.

Khaled, also the former chairman of Bangladesh Krishi Bank, said the banking sector was under the grip of “some miscreant

owners”.

For instance, he said a private bank’s managing director was changed thrice in three years due to the interference of unprofessional owners. The bank has been searching for an executive for the top post for several months.

He said such banks would eventually get an executive in exchange of money but it would be a servant, not a professional.

Loan takeover is needed in the banking industry for improvements in service quality but banks have to make proper assessments beforehand, said Helal Ahmed Chowdhury, supernumerary professor of BIBM and former managing director of Pubali Bank.

Loan takeover amounted to Tk 8,161 crore last year, with state banks accounting for Tk 615 crore, foreign banks Tk 30.20 crore, Islami banks Tk 1,641 crore and private commercial banks Tk 5,874 crore, according to the study.

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