Despite huge losses, the worst-performing state banks have been spending big amounts of public money on incentive bonuses to reward their employees for "good performance".
The Bangladesh Bank has sent a letter to the Financial Institutions Division of the finance ministry, raising objections over incentive bonuses given by state banks.
In the letter, the central bank recommended taking necessary measures against state banks for deviating from its incentive bonus guidelines.
According to the incentive bonus guidelines issued by the central bank in 2014, state banks will give incentive bonus from their net profit by maintaining the non-performing loan rate at a satisfactory level and the required provisioning.
In 2019, four state banks – Sonali, Janata, Agrani, and Rupali – mentioned losses of Tk18,500 crore in provisional statements. Despite the huge losses, they spent Tk437 crore on incentive bonus.
However, in the final financial statements, they showed profit, taking provision forbearance from the central bank.
A loan loss provision is an income statement expense set aside to cover the risk of default loan.
Around 48,000 employees work at these four state banks.
Incentive bonus should be based on the performance of individual employees, said Salehuddin Ahmed, a former governor of the Bangladesh Bank.
He said incentive bonus is given for good performance in developed countries to encourage employees, but this practice is not followed in Bangladesh.
It is illogical if state banks give incentive bonuses even after making losses, he said.
He further said there is a difference between incentive bonus and festival bonus. "All employees can get festival bonus, which is not related to the company's performance."
Time has come to make a proper guideline on incentive bonus for state banks, he suggested.
Among the four state banks, Janata was the worst performer in 2019 but spent the highest amount on incentive bonus.
It incurred losses of Tk12,297 crore in 2019 but showed profits of Tk24 crore in the audited financial statement.
Despite this huge loss, the board of the bank approved an incentive bonus of Tk112 crore, which was equivalent to the basic salaries of its employees for three months.
Though the amount of loss widened in 2020, the bank did not stop spending to reward its employees.
In 2020, Janata incurred losses of Tk5,054 crore even after taking provision deferral. If it was not allowed to take provision deferral, the loss would have been Tk12,567 crore, according to the Bangladesh Bank data.
Moreover, the bank's Capital Adequacy Ratio (CAAR) came down to 1% in 2020 due to a huge capital shortfall.
Capital shortfall requires a bank to maintain provision.
The Bangladesh Bank provided provision forbearance against the capital shortfall of Janata, helping it to show CAAR, which measures risk-weighted assets in the banking industry, at 10% as per the regulatory requirement.
The bank was given relief from maintaining provision against capital shortfall because if it cannot maintain the required CAAR, it will create a bad reputation in the international market, putting negative impacts on its external business.
With this worst financial health, the bank spent Tk135 crore on incentive bonus in 2020.
Of the three other banks, only Sonali was able to show net profit without taking provision deferral in 2020 while Agrani and Rupali showed artificial profits, taking forbearance of Tk1,319 crore and Tk822 crore respectively.
The Bangladesh Bank in its letter said incentive bonus is needed to encourage employees for their spontaneous involvement in the bank, but there is no chance of giving incentive without making profit.
In 2016, the commercial audit raised objections over Agrani Bank spending Tk104 crore on incentive bonus despite incurring losses of Tk697 crore.
Only Bangladesh Development Bank was able to show profit without taking provision forbearance while BASIC Bank incurred losses in 2019.
BASIC Bank stopped giving incentive bonus in 2013 due to loss.
Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank had been providing incentive bonus after they started incurring losses since 2009 by taking approval from the finance ministry. They stopped giving this bonus in the financial year 2018-19.
At the end of 2020, six state banks – Sonali, Janata, Agrani, Rupali, Bangladesh Development Bank, and BASIC – accounted for 48% of the total default loan in the banking industry.