The central bank of Bangladesh. BBN file photo

Dhaka, Bangladesh (BBN) – Bangladesh is getting tough with the nation’s bankers as it attempts to avert a looming crisis caused by rising bad loans and weak capital ratios, reports bloomberg.

The central bank on Tuesday said it ousted the chief executive officer of Farmers Bank, a small private-sector lender, accusing him of “gross irregularities in lending.” That followed the removal earlier in the month of the CEO of another small lender, NRB Commercial Bank, accused by Bangladesh Bank of “gross irregularities including reckless lending and forgery.”

Though the ousters could signal that financial regulators are finally waking up to risks in the banking system, more steps are required, bankers said.

“Immediate measures need to be taken to ensure that the governance around the banks is strengthened,” said Abrar A Anwar, who headed Standard Chartered Plc’s Bangladesh operation until November, when he transferred to Malaysia. “Otherwise this may create a systemic risk in the sector, which will have a long-term negative impact on the Bangladesh economy.”

Asset quality and capital adequacy ratios at Bangladesh’s banks are likely to continue declining due to mismanagement, a weak regulatory framework and economic headwinds, according to a recent report by BMI Research, a unit of Fitch Ratings Ltd.

Some 50 of the country’s 57 banks currently meet the Basel III capital adequacy ratios, BMI estimated. However, recent stress tests showed that only 37 of the banks would meet those standards in the event of a 15 percent rise in non-performing loans, BMI noted.

“It’s true that the NPL has slightly increased in recent times, and we are taking a hard look at the entire banking sector,” said Subhankar Saha, an executive director at Bangladesh Bank. “We will take action against any errant bank if and when necessary.”

Events at the two lenders sanctioned by the central bank point to the depth of the problem.

Former NRB Commercial Bank CEO Dewan Mujibur Rahman was removed after a Finance Ministry investigation accused him of forging the signatures of directors who were absent from board meetings, to back up his lending decisions. He approved 7 billion taka ($84 million) of loans that breached central bank rules, according to Bangladesh Bank. Rahman said he denies any wrongdoing, and has launched a legal action against the central bank seeking to reverse his ouster.

The central bank stepped in at Farmers Bank after a prolonged liquidity crisis threatened to undermine depositor confidence in the entire banking system, according to a report from the Finance Ministry’s Bank and Financial Institutions Division. The bank disbursed loans in excess of the central bank’s single borrower exposure limit and breached the maximum loan-to-deposit ratio of 85 percent, the report showed.

On Tuesday, the central bank ousted Farmers Bank CEO and managing director A.K.M. Shameem. Shameem didn’t respond to an email and calls to his mobile phone seeking comment.

Despite the latest moves, the central bank still needs to take additional steps to improve lending standards, some analysts say.

“There is a culture of impunity and lack of accountability for borrowers who default due to the poor legal framework and lengthy insolvency processes,” said Chua Han Teng, Singapore-based head of Asia Country Risk at BMI Research. “As a result, many of these soured loans are caused by habitual defaulters.”