The Bangladesh Bank has approved a proposal of restructuring Padma Bank's balance sheet by cleaning its accumulated loss of Tk803 crore, helping the troubled lender get foreign investment for its survival.
The bank was allowed to restructure the balance sheet to meet the prior condition of foreign investors who intended to invest in.
DelMorgan & Co, a USA-based global investment bank, proposed arranging an investment of $700 million for the bank. However, it sought policy support from the Bangladesh Bank – allowing the bank to clean up losses from the balance sheet and exempting it from maintaining Statutory Liquidity Ratio or SLR.
The SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers.
To fulfil the prior condition of DelMorgan, the bank approached the central bank, seeking policy support.
According to the balance sheet restructure framework, the bank was allowed to stagger losses for 10 years. The bank will adjust the losses from its profit every year.
The SLR requirement was also relaxed for Padma Bank until 2026.
The Bangladesh Bank also sent a letter to the finance ministry about the capital restructure framework as the government holds 65% stake in the bank.
Although Padma Bank got consent to clean up its balance sheet, the arranger DelMorgan is yet to raise the proposed capital from investors, according to the central bank officials.
Dr Samir Asaf, managing director of DelMorgan, met with Bangladesh Bank Governor Fazle Kabir on Wednesday regarding the investment issue.
In the meeting, Samir, who is working as the consultant for Padma Bank, discussed the fund repatriation issue, according to the meeting sources.
The bank was allowed to restructure the balance sheet, helping it to meet the prior condition of the investors, said Md Serajul Islam, executive director and spokeperson of the central bank.
However, restructuring approval will be effective only if the bank is finally able to bring in the investment, he said.
The balance sheet restructuring is not new for a bank, previously state-owned banks were allowed to do so, the bank official noted.
A decade ago, four state-owned banks, such as Sonali Bank, Agrani Bank, Rupali Bank and Janata Bank, were allowed to restructure the balance sheet so that the banks could transform huge losses into goodwill to show a clean book to foreign trading partners.
However, three banks adjusted their accumulated losses from their profits.
Padma Bank is the first private commercial bank that was allowed to restructure its balance sheet.
The balance sheet restructure is another effort to save the bank after the failure of the government's bailout package.
When Farmers Bank – which later became Padma Bank – was nearing collapse due to massive lending anomalies since its inception in 2013, the four state-owned banks and Investment Corporation of Bangladesh came up with a Tk715 crore bailout in 2018.
The state-owned banks also invested more around Tk1,000 crore in the bank in other forms, such as subordinate bonds and fixed deposits.
The total investment of public money could not stop capital erosion of the bank as it could not recover money from defaulters.
The capital shortfall of the bank stood at Tk 540 crore at the end of September last year. The default loan of the bank was 62% as of September last year, according to the Bangladesh Bank data.
The advance deposit ratio of the bank was 99.55% as of March last year, above the authorised ceiling of 87%.
Amid this worsening financial health, the bank sought either merger with or takeover by any state-owned bank without any delay, foreseeing its "possible collapse".
The bank's managing director submitted an M&A proposal to the finance ministry on 8 July last year. The ministry sent the proposal to the Bangladesh Bank for a review.
In response to the ministry, the Bangladesh Bank said it would be better if Padma Bank could fill its capital deficit by bringing in investments from abroad.
In a letter to the ministry, the central bank said the proposition of merger or raising capital from deposits is not a viable solution as it does not comply with the Bank Company Act 1991 and Company Act 1994.
The merger has to satisfy all the beneficiaries of both parties to be accepted.
Later, the Padma Bank authorities had sought foreign investment through DelMorgan to raise capital and received approval from the Bangladesh Bank on 2 August last year.