Published accounts of banks

This article is based on published annual reports of year 2002 of some randomly selected banks. The financial statements included in the annual reports show non-compliance with Bangladesh Accounting Standard (BAS) 30 -- Disclosures in the financial statements of banks and similar financial institutions. BAS 30 is adopted from International Accounting Standard (IAS) 30, and the Securities and Exchange Commission (SEC) requires that listed companies comply with International Accounting Standards. Contraventions of generally accepted accounting principles and financial reporting norms can also be observed.

The first instance of non-compliance is the presentation of "loan loss provision" and "interest suspense" as a liability on the balance sheet, and not as a deduction from the gross value of "Loans and Advances." Loan loss provision and interest suspension increases per BB guidelines as the quality of the loan portfolio decreases. But since these are not shown as a deduction from the loan outstanding amount on the balance sheet, the financial statements cannot show a true and fair view of the bank. I/BAS 30 clause 45 states:

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It is inevitable that in the ordinary course of business, banks suffer losses on loans, advances and other credit facilities as a result of their becoming partly or wholly uncollectable. The amount of losses which have been specifically identified is recognised as an expense and deducted from the carrying amount of the appropriate category of loans and advances as a provision for losses on loans and advances. The amount of potential losses not specifically identified but which experience indicates are present in the portfolio of loans and advance is also recognised as an expense and deducted from the total carrying amount of loans and advances as a provision for losses on loans and advances.

Again, some BB instructions on provisioning of re-scheduled loans are quite questionable even to the layman. Banks are required to create a general provision on unclassified loans and advances at the rate of 1 percent and on bad/loss loans and advances at the rate of 100 percent. However, under the current policy of BB even a "bad" loan requiring 100 percent provisioning can be re-scheduled to become an "unclassified" loan with just 1 percent provisioning requirement, provided 5 to 15 percent of the outstanding amount is paid.

It is well known that this system was introduced as a compromise for high profile loan defaulters wanting to contest public elections. A clear line needs to be drawn between ambitious loan defaulters wanting to contest national elections and the financial statement of a bank. What is acceptable from a socio-political viewpoint cannot and should not be allowed to have such an unacceptable effect on the financial statement of a commercial bank. BB may consider persuading the government to revise the instructions for the sake of better, more transparent, and acceptable reporting of the financial performance of the banks. Pending government approval, BB may on its own at least instruct the banks to disclose the rescheduled loan amount separately against each classification category.

The third question relates to disclosure in the annual audited accounts of significant concentrations of loans and advances. The relevant BB circular gave as an example four categories of concentration: Directors and others, Managing Director or Chief Executives, Customers by group, and Industrial groups. However, instead of reporting their own exposures, all the banks have disclosed the loan concentration only as per the above four classifications.

Clause 41 of I/BAS-30 states: "customer disclosures may deal with sectors such as governments, public authorities, and commercial and business enterprises." BB needs to inform the banks that the disclosure for customer and industrial groups is unique for each individual bank and the objective of the disclosure is to report the uniqueness. All banks need to analyse their loan portfolio and report the categories with high percentages separately and the categories with low percentages together as "others."

Loans and advances to Directors and Managing Director are already reported under "Particulars of Advances" and generally is not large enough to be considered a "significant concentration" and so need not be duplicated here. Some examples of concentration groups applicable for Bangladesh could be government, state owned enterprises, cotton and textile industries, readymade garments and accessories, poultry feed and hatchery, trading, cement manufacturing, etc.

The fourth and last question is about annual accounts of banks with a qualified audit opinion. Of the eleven annual accounts considered for this article, two banks had qualified audit opinion stating that provision against advances was not made to the tune of Taka 2,073 million and Taka 445 million respectively. Most non-accountants look at the net profit amount and do not bother to look at the audit report. After all, the auditor has affixed his signature at the bottom of the profit and loss account and the balance sheet. Those who read the financial statements and the audit report with understanding are shocked at the deliberate deception of the management. The position reported by the banks, and the effect of the audit report is further explained below:

To make it more clear, the profit and loss account signed by the bank management and the auditor shows a profit of Taka 24 million for Bank X and Taka 65 million for Bank Y. However, this profit has been reported without making the full provision for bad and doubtful loans as required under BB instructions. This short provision amount is disclosed by the banks in the annual accounts. As the accounts belong to the management, the auditor can only issue a report qualifying his opinion about whether the financial statements present a "true and fair view." It is only the layman who is deceived. The banking regulator, and/or the SEC, needs to discourage management from issuing such misleading financial statements to ensure financial discipline in the banking sector.

Improving the quality of the published financial information of banking companies results in greater transparency and accountability and leads to better performance of the whole financial sector. Bangladesh Bank, as the prime regulatory agency, needs to address the anomalies discussed in this article expeditiously. We all need to understand that commercial banks may be operated by the directors as the majority shareholders, but it is the depositors who provide the funds to run the bank, and have a financial stake many times more than the share capital.