Bangladesh Bank has asked Farmers Bank to explain why it continues to disburse fresh loans despite having a bar on lending since January.

Earlier in January, the central bank slapped some restrictions on fresh loan disbursement and opening of new branches, with a view to protecting depositors' money given the precarious financial health of the newly established bank.

But the bank has frequently breached the central bank's restrictions and disbursed fresh loans, said a senior BB official.

So much that the bank's credit-deposit ratio stood at 88.70 percent in June -- higher than the limit of 85 percent set by the central bank.

Subsequently on Thursday, the central bank issued a show-cause letter to the bank's Managing Director AKM Shameem about the fresh loan disbursement and asked him to respond within seven days.

AKM Shameem, managing director of Farmers Bank, acknowledged the receipt of the letter from the BB.

He said the central bank wanted to know why the bank suffers from liquidity crisis.

“The BB also sought to know why we are disbursing fresh loans despite facing liquidity crisis,” Shameem added.

Established in the second half of 2013, the bank's financial health started deteriorating not long after, and in January last year the central bank appointed an observer in Farmers' board with the view to bringing in loan discipline and improving risk management and internal control. 

Between September and November in 2015, the BB conducted special inspections at Farmers Bank's three branches and found gross violation of banking rules in disbursing loans of about Tk 400 crore.

In a meeting held on October 29, the parliamentary standing committee on the finance ministry voiced deep concern over the deteriorating condition of Farmers Bank and NRB Commercial Bank, another fourth-generation bank.

The BB provided the committee with reports on the two banks. At Farmers, 13 counts of irregularities were found, which include disbursement of loans to non-existent companies.

The bank also gave loans to its own directors as well as those of other banks, violating the credit discipline.

“Farmers Bank does not have the capacity to pay back the depositors' money and refund the credit taken from other banks,” the BB said in the report.

The bank has been facing an acute liquidity crunch over the last one year.

“It is now surviving through mobilisation of funds from general people and other banks, offering interest rates higher than the market rate,” the report said.

The bank has failed to maintain the cash reserve ratio with the central bank between October last year and September this year and has subsequently been penalised with Tk 18.49 crore.

For a few days between January and June, the bank also could not maintain the statutory liquidity ratio with the BB due to its liquidity crisis.

A bank has to keep 19 percent of its depositors' money in the form of SLR and CRR with the BB to protect the depositors' interest.

Besides, the bank disbursed loans to defaulting clients against forged Credit Information Bureau reports and took the burden of a number of bad loans from other banks, flouting banking rules.

Awami League lawmaker Muhiuddin Khan Alamgir, also a former home minister, is the chairman of the Farmers Bank board. He is also the chairman of the parliamentary standing committee on public accounts.

As of June, Farmers' non-performing loans amounted to Tk 306.21 crore, which is 6.35 percent of its total disbursed loans. This is much higher than many older private banks.