Rupashi Group, a little-known garment manufacturer based in Narayanganj, first took a loan from state-owned Sonali Bank in 2008 and the borrowing continued in the following years.

Over the past 12 years, the group has rescheduled its loans seven times but has yet to repay the loans; There are currently loans worth Tk 465 million, representing more than half of the outstanding loans granted by the branch.

This debt has since been classified as non-performing debt, forcing Sonali Bank to make 100% provision against it under banking regulations.

This revelation was revealed through two separate investigations, one by the central bank’s off-site audit team and the other by Sonali Bank.

The Bangladesh Bank report alleged collusion between insiders of Sonali Bank and the borrower and irregularities such as granting of nearly 150% of the letter of credit (LC) value to Rupashi Group as a funded credit facility and clear violation of banking rules.

Additionally, the report revealed that Sonali Bank failed to recover the loan from the customer’s export earnings, further complicating the recovery process.

According to reports, among the three subsidiaries of Rupashi Group as of May 31, Rupashi Knitwears had the largest share of debt at Tk254 crore, followed by Rupashi Fabrics Complex at Tk148 crore and Salman Knit Composite at Tk63 crore.

This debt came to light in 2008 when Sonali Bank’s Narayanganj Corporate Branch gave loans to three companies. Soon institutions began to default on their payments.

Business Standard contacted Mohammad Soharwardi, Managing Director of Rupashi Group, on October 22, and he requested to be contacted the next afternoon due to illness.

The next day, Executive Director Mohammad Mosharraf Hossain spoke on his behalf and stated that Rupashi Group should not be held responsible for loan defaults, placing full responsibility on the bank.

He noted that the group’s business has been closed since February 2022 due to insufficient support from the bank. “Despite this, we repaid Tk 174 billion to Sonali Bank, which is much more than the original loan amount.”

He claimed to have documentation to support these transactions.

Irregularities in credit disbursement

According to reports, in many cases, Rupashi failed to make payment after opening a letter of credit (LC) for imports, which subsequently led to the creation of compulsory loans.

The bank provided facilities funded through multiple LCs at 152%, 148.92% and 148% of the LC value in certain transactions.

Moreover, Bangladesh Bank’s report revealed that almost 100% of Rupashi’s export invoices were repatriated but Sonali Bank did not recover the money in Rupashi’s accounts.

The report defined such activities as “direct looting of bank funds” and pointed out that branch or bank management officials were directly involved in the incident.

In this context, Rupashi Executive Director Mosharraf Hossain admitted that a report by Bangladesh Bank contained such allegations.

“Although we tried to clarify these issues with the inspectors, our explanations were not accepted,” he added.

Collateral and asset valuation

One of the biggest concerns raised by the reports was inadequate collateral against large loans.

Even though the group has pledged assets worth Tk 441 billion, a huge collateral gap remains. Specifically, the report states a gap of Tk 107.78 billion for Rupashi Knitwears, Tk 67.76 billion for Rupashi Fabric Complex and Tk 31.28 billion for Salman Knit Composite.

Sonali Bank initially accepted minimum collateral and gradually included additional assets such as land, buildings and machinery to offset the increased loan value.

However, due to frequent rescheduling and restructuring, the debt swelled and the bank’s collateral became insufficient.

Raphi’s Mosharraf Hossain said the claim of inadequate collateral was false. “According to bank records, there is sufficient collateral.”

He added that they could not discuss the asset valuation with the company that Sonali Bank had recently appointed for the evaluation, and that this was a privilege they had benefited from in previous examples.

Other irregularities

The report documented defaulted loans as well as other irregularities.

For example, Sonali Bank allowed invoice purchases and discounts without reconciliation for back-to-back LCs of Rupashi, bypassing the required approvals of Bangladesh Bank.

The compulsory loans, which were rescheduled five times, allowed Rupashi to attract funds for non-commercial purposes such as land acquisition and construction projects.

In some cases, the group received packaging credit or PC credit despite failing to meet export requirements.

The audit report found that at least five branch employees were involved in these actions and that they were direct participants in the scheme.

Warning from Bangladesh Bank

The central bank sent an order on August 22, 2022, directing Sonali Bank to identify and take action against persons involved in irregularities related to Rupashi’s loans.

However, the fact that the bank has not yet taken any administrative action against the responsible parties is causing concern among regulators.

On February 11, 2023, Bangladesh Bank issued another letter to Afzal Karim, the then MD of Sonali Bank, expressing concern over the delay.

The letter called on Sonali to expedite investigation and recovery processes, stating that Sonali’s inaction was evidence of “weak internal controls”.

Despite the directive mandating action by March 14, no update was provided to Bangladesh Bank and the credit recovery situation remained unresolved.

Mosharraf Hossain from Rupashi Group said that they conveyed to Sonali Bank through letters that their loans were regular until January 2024 and that repayments would not be possible after January.

They also informed the managing director and chairman of Sonali Bank and the administrator of Bangladesh Bank that they could not continue with the repayments.

“In the letter sent to the Governor on October 4, 2023, it was informed that Sonali Bank’s businesses were closed due to non-cooperation. Sonali Bank abruptly stopped all loan payments since February 2022. A one-year extension was given to loan repayments. It was requested in the letter,” said Hossain. .

“Despite requesting assistance from the bank to continue its business operations, the bank did not respond,” he added.

He further explained that there are three instances of loan rescheduling and several restructuring exercises, each of which requires Bangladesh Bank’s approval.

He also stated that Rupashi Group has filed a lawsuit in Narayanganj court seeking compensation.

Sanjoy Kumar Roy, deputy general manager of Sonali Bank’s Narayanganj Corporate Branch, said efforts are on to recover the defaulted loan using all available legal measures.

Roy declined to comment when asked if Sonali had filed any lawsuits.

Another senior branch official, who wished to remain anonymous, said many regulations regarding loan distribution and recovery were not followed and continued to be ignored.

He pointed out that several officials involved knowingly facilitated opportunities for the customer to misuse the bank’s funds.

The official alleged that the former managing director of Sonali Bank played a key role in granting preferential treatment to Rupashi due to his personal relationship with the group’s managing director Mohammad Soharwardi.

He said the preferential treatment continued even after the loan recovery was delayed. “The group then shifted its accounts to another bank and defaulted there too.”

Speaking anonymously from Sonali Bank’s headquarters, a managing director told TBS that the allegations made by the Rupashi Group in its letter to the governor were untrue and fabricated.

He stated that the group received an excess loan of Tk 66 million in 2021 by hiding the information, which led to the cancellation of the aid.

“Even though some payments were made later and their loans were rescheduled, they still failed to pay regular installments,” the official added.