Farmers Bank Debacle: BB measures not enough

Bangladesh Bank responded very late in dealing with the ailing Farmers Bank, former central bank governors and senior economists said.

Some of them went on to raise questions about the Bangladesh Bank move and said removal of the chairman and a director from the board is not enough to save the bank and regain depositors' confidence.

"The central bank should take over the bank immediately by appointing an administrator,” said Ahsan H Mansur, executive director of Policy Research Institute.

Restructuring the board only is not enough to protect the interests of the depositors as the bank does not have the capability to run its financial operations.

He said the BB should liquidate the bank after compensating the depositors as the restructured board will not be able to win back depositors' confidence.

“Merger is also another option for the bank. But the central bank should recruit an external auditor to conduct an audit on the bank before going for merger or liquidation,” Ahsan said.    

A former governor of the central bank said the regulator took action against the errant bank very late.

“It would have been better for the bank and the depositors if the BB appointed an administrator for six months. Mere restructuring of the board will not work,” said the former governor, wishing not to be named.

The Farmers Bank began operations in June 2013 with Tk 400 crore capital. However, irregularities resurfaced within a year.

Between September and November 2015, the BB conducted special inspections at three branches of the bank in the city's Gulshan, Motijheel and Shyampur, and found gross violations of banking rules in disbursing loans worth around Tk 400 crore.

The BB found some directors, including chairman Muhiuddin and Mahabubul, of the bank allegedly involved in sanctioning these loans, violating the credit rules.

A former governor, a deputy governor and a former finance adviser said the BB could have appointed an administrator in the bank, adding that the regulator can oversee developments under the restructured board for a period of six months.

Ibrahim Khaled, former deputy governor, said the central bank could appoint an administrator for the bank in line with the Banking Company Act if its board and management failed to protect the interest of the depositors.

“The central bank should appoint an administrator in the bank within six months if the restructured board and management fail to run the bank properly,” he said.

AB Mirza Azizul Islam, former finance adviser to a caretaker government, also echoed the same saying that the central bank should appoint an administrator within six months if the new board fails to bring back credit discipline.

“The central bank should watch the bank round the clock so that the former directors cannot intervene in the bank's regular activities,” said Dr Salehuddin Ahmed, a former governor.

He said legal action should be taken against the directors responsible for the financial scams.

Chronology of irregularities in the Farmers Bank:

The Farmers Bank has been mired in controversies even before the commencement of its banking operations in June 2013. The bank had allegedly recruited manpower before receiving its license from the central bank.

Then within one year of its operations, Md Mahabubul Haque Chisty, a powerful director who was the chairman of the executive committee, got involved in loan scams worth Tk 50 crore.

When BB detected the anomalies in the newly-born financial institution, it asked the Farmers Bank in May 2015 to remove Mahabubul from the committee. Further inspections in three branches found that some directors were involved in loan scams worth around Tk 400 crore.

Challenging the BB decision, the bank went to court on January 11, 2016. After two days, the central bank appointed an observer on January 13 to scrutinise operations of the bank and slapped a fine of Tk 10 lakh on charges of illegal payments and loan irregularities.

The BB move led by former Governor Dr Atiur Rahman irked Muhiuddin, a ruling party lawmaker and chairman of a parliamentary committee on public accounts, who then summoned a scrutiny report conducted on the functioning of the central bank.

The parliamentary committee raised questions on the functions of the central bank.

Muhiuddin flexed his muscles again when the then Muhiuddin-led parliamentary committee asked the audit office to submit a special report on Bangladesh Bank.

Later, Mahabubul replied to the show-cause notice issued by BB on March 26 last year confessing that he was responsible for the anomalies. But he said he violated the rules and regulations inadvertently in disbursing the loans.

He then resigned from his post in the executive committee, citing personal reasons as a cause to the bank's chairman Muhiuddin, but he was still in the board as a director. Then Muhiuddin, the bank's chairman made Mahabubul chairman of the bank's audit committee, another vital committee which supervised the bank's activities.

Finally, Muhiuddin and Mahabubul succumbed to central bank's pressure and tendered their resignation from the board on Monday.

Earlier on Sunday, the BB also took the initiative to remove Farmers Bank's Managing Director AKM Shameem. The BB asked him to explain within a week why he would not be removed from his post for failing to manage the bank efficiently and address its liquidity crunch.