The cash-strapped Farmers Bank failed to repay interbank short-term loans of about Tk 700 crore to four banks over the past two months, a development that may further erode depositors' confidence in the scam-hit bank. 

The interbank lending market is where banks borrow from each other for a specific term, mostly for one week or less. Often, such loans are taken for a day.

Left without a choice, the troubled bank was forced to pay off loans from the four banks with its securities -- treasury bonds and bills -- with the Bangladesh Bank, according to BB data.

The Farmers Bank had kept the securities with the central bank to maintain its mandatory Statutory Liquidity Requirement (SLR). But now the bank has no securities to maintain SLR.

A bank has to keep 19 percent of its depositors' money in the form of SLR and CRR (Cash Reserve Ratio) with the BB to protect the interest of the depositors.

The BB has already slapped a penalty of Tk 18.49 crore on the Farmers Bank because of its failure to keep the CRR and SLR between October last year and September this year.

The bank took the short-term loans from state-run Sonali, Agrani and Janata banks and privately-owned NRB Global bank between November 22 and December 5 this year by way of repo to meet its instant liquidity demand. Sonali alone gave over Tk 419 crore. 

In a repo, or repurchase agreement, one party sells an asset (usually fixed-income securities) to another at one price at the start of the transaction and commits to repurchase the fungible assets from the second party at a different price at a future date or (in the case of an open repo) on demand.

On November 21, the Farmers Bank got a shot in the arm after the BB agreed to provide short-term loan amounting to Tk 96 crore by way of repo to meet its instant liquidity demands.

A number of senior officials of Bangladesh Bank and commercial bankers told The Daily Star that in their long banking career they never heard of any bank failing to repay the interbank loans due to cash crunch.

The situation has turned so bad that no bank now wants to lend money to the Farmers in the overnight call money market, BB sources said.

Against this backdrop, the central bank has verbally instructed four state-owned commercial banks to provide Farmers Bank loans through the interbank call money, also called overnight money market, after private commercial banks refused to do so even at higher rates of return.

According to the BB data, the ailing bank is now receiving about Tk 150 crore from the state-owned banks every working day through the interbank call money market. And to take loans, Farmers has to count 4.5 percent interest, higher than the average 3.8 percent in the market.

Contacted, former caretaker government adviser AB Mirza Azizul Islam said, “The central bank should take over the Farmers Bank if it fails to pay back depositors' money.”

Mustafa K Mujeri, former chief economist of the BB, said corruption and a lack of governance turned Farmers into a bad bank. Once, the Oriental Bank (now ICB Islamic Bank) faced a crisis and the BB rescued it by appointing an administrator there.

“Those who are liable for this situation [at the Farmers Bank] should be punished,” said Mujeri, now the executive director of Inclusive Finance and Development.

Earlier in January last year, the BB appointed an observer at the Farmers Bank after it found gross violation of banking rules in sanctioning and disbursing loans and hiding defaulted loans amounting to around Tk 400 crore.

That was the first time the central bank appointed an observer for a new bank since the government allowed nine banks in 2013 on political consideration, according to the sources. 

As the situation turned from worse to worst, the BB forced the bank's Chairman Muhiuddin Khan Alamgir and its Audit Committee Chairman Mahabubul Haque Chisty to step down on November 27.

In line with the BB directives, the Farmers Bank, established just four years ago, restructured its audit, risk management and executive committees on that day.

In a statement, the BB had said the restructuring of the board would help the Farmers Bank restore confidence of the depositors who have been withdrawing funds due to its deteriorating financial health.

Meanwhile, the BB Standing Committee, headed by its Deputy Governor Abu Hena Mohd Razee Hassan, yesterday grilled Farmers Bank Managing Director AKM Shameem, asking him to explain why he should not be removed from his post for failing to manage the bank efficiently and address its liquidity crisis.

Despite repeated attempts, Shameem could not be reached over the phone for comments.