The People's Leasing and Financial Services Limited (PLFSL), a listed non-banking financial institute (NBFI), is soon to be liquidated as the government has approved a central bank's proposal in this connection. The central bank is set to start soon the legal process for liquidation of the troubled entity.
This will be the first instance of liquidation of any financial institution in the country.
In the mid-eighties a privately-owned investment bank named the Bangladesh Commerce and Investment Limited (BCIL) turned out to be a strong candidate for liquidation because of the severe liquidity crisis it had been facing. But the government thought otherwise. With a view to protecting the interest of the entire financial sector and also the depositors, it allowed conversion of the NBFI into a schedule bank, now known as the Bangladesh Commerce Bank.
The PLFSL which is also encountering liquidity crunch like that of the erstwhile BCIL is not being considered for conversion into a commercial bank. The banking sector is already troubled by a few errant operators. The truth is that strict scrutiny might find one or two of the banks eligible for liquidation.
Actually, a fourth generation bank was saved by the government recently from liquidation. The Ministry of Finance through the central bank forced four state-owned commercial banks and an investment institute to buy more than 60 per cent stake and salvage the private bank in question.
The collapse of the PLFSL exposes the sorry state of the country's financial sector. The NBFI as of 2018 received deposits worth Tk 20 billion---Tk 7.0 billion from individuals and Tk 13 billion from different banks and NBFIs. The entity disbursed loans worth over Tk 11 billion. Nearly Tk 7.5 billion of the amount turned bad. Directors of the PLFSL have allegedly taken away more than Tk 5.7 billion as loans in breach of existing rules and regulations.
The central bank, however, advised the depositors not to be panicked as they would get back their money following liquidation of the PLFSL. The NBFI's total asset value as shown in its books of accounts might have prompted the Bangladesh Bank (BB) to issue such a piece of advice for the depositors. The total asset value of the sinking NBFI is about Tk 32.40 billion. The amount obviously is higher than its liability estimated at Tk 20.36 billion.
However, as far as the asset valuation of many listed entities is concerned, there remains a huge gap between actual value and the value shown in their financials. The actual value is much lower than the ones shown in the company balance sheets. So, individuals and institutions having deposits with the PLFSL would have to keep their fingers crossed until a proper valuation is made by the liquidator to be appointed by the court.
As it happens in the case of most sinking financial institutions, the PLFSL would put many institutional depositors in deep trouble. According to media reports, 15 banks and NBFIs have deposits worth about Tk 13 billion with the PLFSL. Four state-owned banks and a private leasing company do have sizeable deposits.
Some NBFIs offer highly attractive rates of interest to collect large deposits. Besides, they make under-the-table payments to a section of unscrupulous officials of the institutional depositors. This makes their deposits costlier.
The BB reportedly got allegations of irregularities back in 2014 and conducted a special inspection. It also tried to retrieve funds taken as loans illegally by the directors and appointed an observer to oversee the NBFI's activities. But it did not help much. The institute could not pay back its depositors and also salaries to its officials and employees regularly in recent years.
The BB, according to one of its executive directors, tried to bring in new investors, as a part of its efforts to salvage the NBFI. But that bid also failed. Thus, an extreme measure such as liquidation has come as the BB is left with no other option.
But a couple of questions might be agitating the minds of many. The questions are: (a) were the actions taken by the BB when allegations of irregularities first surfaced in 2014 enough? and (b) Did the BB take timely actions against errant PLFSL directors?
It is no denying that oversight activities of the financial sector regulator is not as stringent for NBFIs as they are in the case of scheduled banks.
But despite having all the provisions of frequent inspection, reporting and other oversight activities, the banking sector is deeply troubled by a huge burden of non-performing loans. The problem, it is widely alleged, lies in failure, deliberate or otherwise, on the part of the BB to apply the provisions where it is necessary.
So, when suggestions are coming from all directions to right the wrongs in the financial sector and restore discipline in operations of banks, the issues of NBFIs should not be left out. The rot in the NBFIs might have gone even deeper. It is, thus, necessary to pay special attention to the NBFIs as stakes could not be higher in their case too.