It is not the first time that state-owned Sonali Bank, Janata Bank, Agrani Bank, and Rupali Bank are financially aiding distressed organizations. The last time when these four banks took the initiative to provide such help, the-then Farmers Bank , later renamed as the Padma Bank, was able to turn its luck around.

The state-owned banks have now decided to acquire a large amount of loan taken by the financially-troubled Navana Group. However, this acquisition will be done based on a new model.

It is learnt that the organization fell into a crisis after Shafiul Islam Kamal, the chairman of the group, became ill.

In light of the situation, the owners of the group proposed the government take it over. Following the development, the banks have shown interest in acquiring some of the loans taken by the group from financial institutes.

Agrani Bank is playing the lead role in the loan acquisition and overseeing the whole process.

“A new model will be created in Bangladesh’s banking sector through the loan acquisition of Navana Group. Many corporate groups at risk will benefit if this model works. Moreover, the bank can also benefit from this,” said its Managing Director Shams-Ul Islam.

Several other business groups at risk

Several other large business conglomerates in the country have been troubled by the coronavirus crisis. A former governor of Bangladesh Bank has praised the loan acquisition by the four state-owned banks.

“Several industrial groups are in danger right now. Some of them have started laying off employees.

“Garment factory owners are taking loans to pay salaries to their workers, while some organizations are sacking workers owing to their inability to pay the salaries,” he said, asking not to be named.

New approach to save corporate organizations in trouble

If the new model is implemented, the complexities related to the liability of the endangered corporate organization will not be present anymore, according to the Agrani Bank top official.

Terming it as an “innovative idea”, Shams-Ul Islam said, “Conventional banking will not work anymore as the world has gone through a lot of changes, and we also have to go think out of the box.

“If it’s a win-win situation for Navana and the banks, then others can also follow this model.

“There are legal and structural arrangements in foreign countries for acquisition of distressed loans. Various banks and financial organizations in those countries are able to do this. Despite numerous limitations in our country, the state-owned banks are playing that role,” he added.

However, the Agrani Bank MD opined that the matter can be made easier and less risky for all through new laws and procedures.

The initiation

In December of 2018, it was proposed that Navana Group be taken over by the government.

A foreign audit firm ‘Deloitte’ proposed a model to the government regarding the issue. However, the Deloitte proposal was not implemented even in two years.

The organization’s crisis was only compounded by the coronavirus pandemic. Navana was forced to request a Tk1200 crore bailout package from the government in May to clear staff salaries.

What was in Deloitte’s proposal?

As per Deloitte’s model, everything including Navana Group’s loans, management, marketing, staff appointment, and layoffs will come under the control of the bank.

Regarding this model, Shams-Ul Islam said: “We can hardly manage our banking, running a financial organization is a tough task for a bank.

“Especially, the bank does not have the opportunity to oversee another organization’s management and marketing.”

The government wants to do something to help Navana Group, be it based on Deloitte’s model or any other formula. The four state-owned banks were called by the Finance Ministry in March for this reason.

The MDs of the banks were shown Deloitte’s model and were asked to come up with a way to save Navana Group. In that meeting, the MDs initially agreed that the four banks together can take over some of the liabilities of the business group but not all of it.

Agrani Bank MD said the four banks can only take over the principal loans of a non-bank financial organization, even though Navana Group wanted the state-owned banks to take over all of their loans.

“With Deloitte’s formula in mind, we have set a new model based on the realities of Bangladesh,” he added.

Notably, Navana Group said they are not able to pay interests during this time of crisis as the interest rates of those financial institutions are higher than the interest rates of banks.

If the new model is implemented, Navana Group will have to count 9% interest or even less than that on all loans. The group’s balance sheet will be improved as loans will go to the state-owned banks from financial institutions.

This will allow Navana to raise money through an IPO in four-five years, and the state-owned banks will also be able to get back their loaned money.

This is why the four state-owned banks will take over only the loans (principal) of the non-bank financial institutions based on the new formula. Before that, Navana will pay all the interests.

In this case, the required loan may be given to Navana from the package announced by the government. Meanwhile, it is learned that Navana has already applied for a loan. In this case, the government or Bangladesh Bank will take the initiative to reduce the interest rate of non-bank financial institutions.

In this regard, Shams-ul Islam said: “After the group pays all the interest, we will take over the collateral as well as the principal loan.”

“As a result, they will no longer have to pay interest at 15%; the rate will go below 9%. They will also have time to disburse the loaned money.”

The group will be able to turn its luck around again, and can also reschedule loans from private banks, he added.

Mentioning that foreign theories will not work in the Bangladeshi economy, the Agrani Bank MD said: “Foreign audit firms propose sacking workers at the outset to reduce the hardships of the organizations. However, this model does not work in Bangladesh; there is a risk of an unintended result.

“This is why we are having to form a model based on our country’s context.”

“The sackings have to be done only after laying off organizations. Small organizations have to be closed to save the group,” he added.

“We don’t want such a corporate group to vanish. They will sell their small industries to save the organization. They will pay the loans of non-government banks, or reschedule them. The organization can stand on its own again after it is reopened after the downsizing,” the MD said.

Bangladesh Bank working as the mediator

Bangladesh Bank has been given the responsibility to mediate the process with the aim of reviving Navana Group. Bangladesh Bank has already held separate meetings with the MDs of the banks and the financial organizations.

Bangladesh Bank Executive Director Serajul Islam said a meeting was held between Bangladesh Bank and the state-owned banks on the Navana Group issue.

Meetings with non-bank financial organizations were also held, he added.

“Things are still at the negotiation and testing stage. However, Bangladesh Bank has asked the financial institutions to settle by reducing the interest rate,” he said

“It will be better for the financial institutions too if state-owned banks take over their loans. The institutions may lose a party but they will be able to recover the money distributed during this time of crisis,” he further added.

Criticism regarding the takeover

The economic crisis caused by the pandemic is also having an impact on the banking sector. Is it realistic for state-owned banks to acquire loans from a corporate group at this juncture?

Moreover, many from the corporate world have raised questions about trying to save a defaulting organization.

Agrani Bank MD Shams-Ul Islam said it would be wrong to call it forced, rather it is a compromise.

“It is happening mostly due to the government’s interest, and a government bank cannot be dismissive of that,” he said.

“Such a big corporate house is distressed, it can turn around if we provide assistance. And it is not unheard of. For example, if the state-owned banks did not come forward to help the Farmers Bank, the economy would have been in grave danger,” he added.

Bangladesh Bank Spokesperson Serajul Islam also claimed that the banks or financial institutions are not being forced for the sake of Navana Group.

“It is not a matter of imposing something. All three parties would benefit if Navana’s principal loans from financial institutions are taken over by the state-owned banks,” he said.

Regarding the lowering of interest, the Bangladesh Bank official said: “Financial institutions have given loans to Navana at high-interest rates while they took low-interest deposits from state-owned banks. If they do not reduce the interest, they will not get the deposit facility of government banks as before.”

Why the four banks are only taking Tk550 crore of Navana’s loans

Based on the new model, the MDs of the four banks are trying to find the solution by exploring different avenues.

At first, they eliminated Deloitte’s model as it was not realistic due to legal reasons.

However, in the new model, it was not possible to take all the loans (Tk5,232 crore and total interest) at first as the single customer loan limit is violated and not covered by the law. The state-owned banks did not even have the opportunity to take over principal loans from private banks excluding interest.

In other words, the four state-owned banks do not have the capacity to spend Tk4,500 crore for Navana. Apart from the legal reasons, another problem is that 19 financial institutions will charge interest at the rate of 14-16% if this formula is followed.

However, as it is more beneficial to take over the principal loans of the non-bank financial institutions, Bangladesh Bank and the Finance Ministry have voted in favour of this system.

It was made easier for the four banks by taking over the principal loans from the non-financial institutions. On the other hand, taking over Tk554 crore would make the interest rate on the overall loan (Tk5,232 crore) go below 9%.

This does not violate the single customer loan limit and is covered by the law. Besides, the financial institutions are somewhat bound to lower the interest rate, however, the private banks are not. Because the financial institutions give loans while taking low-interest deposits from the state-owned banks. This translates to the fact that the relationship between state-owned banks and financial institutions is better than that of state-owned banks and private banks.

Attempts to lower the interest rate:

Bangladesh Bank has met with the financial institutions several times in order to lower the interest rate imposed on Navana, and are yet to reach a decision regarding that. The state-owned banks also had discussions with the institutions concerning the matter.

The current situation

Two departments of the Bangladesh Bank—Department of Financial Institutions and Off-Site Supervision Department—are working to bring the loans taken by Navana group from the financial institutions to the state-owned banks.

Bangladesh Bank Spokesperson Serajul Islam said: “Two departments of the Bangladesh Bank are still working. They are overseeing the legal side.”

“Bangladesh Bank is discussing the matter with all three sides but no decision has been taken yet. It is still at the testing stage,” he added.

Sonali Bank Chairman Ziaul Hasan Siddiqui said: “The decision regarding Navana has not been taken yet. But as far as I know, Bangladesh Bank talked with the MDs of all the banks. The MDs had a meeting on this issue, however, the matter has not yet reached the Sonali Bank board.”

Agrani Bank Chairman Zaid Bakht said: “The work regarding Navana’s loan is moving forward. Several meetings have been held with Bangladesh Bank, as well as other banks. It is still at the testing stage. Discussions are being held on what to take, how much to take etc.”

Principal amount and interest are still being calculated, he said, adding that they will not take the interest due to restrictions set by Bangladesh Bank.

He said they are having meetings with Bangladesh Bank on the issue, and also mentioned that this is happening owing to the interest from the top level of the government.

Loan acquisition is not something new

Loan acquisition in the banking sector is not a new thing. Even before this, many big parties have moved from one bank to another. Good banks would take big parties from weak banks.

It is somewhat opposite in case of Navana as they are considered to be a weak party or troubled.

At the same time, due to the intervention of the government or Bangladesh Bank, there are cases of withdrawal from financial institutions.

Zaid Bakht said: “When private banks were unable to give loans, good parties would come to us after paying off their debts to those banks.”

“Takeover has to be done after getting permission from Bangladesh Bank. We are doing it following the previous rules and after receiving permission from Bangladesh Bank. Navana is also coming to us after paying off their debts,” he added.

The condition of Navana Group

Loans amounting to Tk5,232 crore were taken by 17 organizations of Navana Group from 31 government and non-government banks and 19 non-bank financial institutions.

Of the amount, Tk4,677.67 crore was taken from banks, and the other Tk554.33 crore was taken from non-bank financial institutions.

Navana Group is one of the top industrial groups in the country. In 1996, Islam Group became Navana Group. There were 27 organizations in 15 sectors. The group’s financial troubles began in 2018; two of its organizations became defaulters. Now the group is unable to repay the loans taken from banks and they are incapable of regularly paying salaries to employees.

A letter sent by Navana Group on May 10 to the senior secretary of the Finance Ministry stated that the group’s financial crisis has worsened owing to the outbreak of coronavirus. In the letter, they also requested for a Tk1,200 crore bailout from the Tk30,000 crore package announced by the government.