Audit Firm Review to Be Mandatory

• Loans Exceeding 500 Crore Taka Disbursed

The use of loan funds up to 500 crore taka must be verified through a bank’s internal audit or risk management department, while for loans of 500 crore taka or more, the use of loan funds must be verified through an audit firm. This proposed policy from Bangladesh Bank is awaiting final approval. A senior Bangladesh Bank official confirmed the matter. According to the proposed policy, the proper use of loan funds between 100 crore and 500 crore taka must be verified through the bank’s internal audit or risk management department, though officials involved in this verification cannot be drawn from units or departments directly involved in loan approval and disbursement.

For loans of 500 crore taka or more, alongside the bank’s own verification, the proper use of loan funds must be verified through an audit firm listed with Bangladesh Bank. However, the audit firm conducting the loan-fund-use audit cannot be engaged in finalizing that same bank’s financial statements. Under the new policy, for loans under 100 crore taka, a statement or declaration must be obtained from the borrower on how the loan funds were used, after which the bank will conduct risk-based verification as needed, considering the borrower’s risk profile, account-management pattern, and other relevant factors.

Bangladesh Bank officials believe that strengthening banks’ own audit systems, combined with third-party verification after disbursement of large loans, could significantly reduce loan misuse and irregularities. This would also create an opportunity to take action against those involved in irregularities based on these audit reports.

Bangladesh Commerce Bank’s Managing Director Mr. Mohammad Obaidul Haque said that if effective monitoring can be ensured of which sector loan funds are used in and how, after disbursement, accountability will increase on the part of both banks and borrowers. This will also create transparency in loan management and make it possible to ensure loan funds are used only in the approved sector.

He said this could reduce the tendency to take out loans for business purposes and instead use them for unapproved activities such as buying land, investing in the stock market, or laundering money abroad. As a result, loan misuse would decrease, and the risk of new defaulted loans being created in the future would also be reduced. NRBC Bank’s Managing Director and CEO Mr. Touhidul Alam Khan said the proposed framework is timely and appropriate for Bangladesh. He said many large loans have failed to serve their purpose due to disbursement based solely on paper documents, inflated project costs, and diversion of borrowed equity and fund money elsewhere. Therefore, he said, the initiative to more strictly verify how loan funds are used after disbursement is extremely timely and appropriate. Mr. Touhidul said the proposed framework aims to address these weaknesses by building on existing safeguards such as internal control and concurrent audit systems, ICAB’s professional framework, and the Credit Information Bureau’s (CIB) verification process. He said it is also important to set a clear limit on the overall group exposure of an entire industrial conglomerate, so that borrowers cannot split loans into smaller amounts to avoid audit obligations.

Stricter Rules for Term and Project Loans

Under the proposed rules, provisions have been made for stricter monitoring of the final use of funds when term and project loans of any amount are disbursed in installments. If a term or project loan of any amount is disbursed in multiple installments, the bank must verify whether the funds from each previous installment were used properly before releasing the next installment. If the total amount of a disbursed term or project loan is 100 crore taka or more, the overall use of the loan funds must be verified through a listed audit firm after the entire loan has been disbursed. This audit will examine whether the loan funds were used in the approved business or project, and whether funds were diverted to any sector other than the approved one. It will also examine whether any portion of the loan was withdrawn in cash and used outside the approved purpose, whether it was used to repay loans from another bank or financial institution, and whether it was invested in the stock market, real estate, or any other unapproved sector. It will further be verified whether the loan funds were used for personal or non-business purposes, and whether funds were transferred, directly or indirectly, to any related party. Similarly, it will be examined whether the loan funds were used to transfer money abroad or for any other unapproved purpose. It must be verified whether assets, goods, machinery, equipment, or vehicles purchased with loan funds actually exist. For project loans, the actual progress of the project will also be reviewed. For import financing, relevant import documents, letters of credit (LC), bills of entry, customs documents, and other necessary papers must be examined.

Additionally, bank account statements, bills, vouchers, invoices, purchase-related documents, and other supporting records must be reviewed. Alongside verifying the physical existence of projects, assets, stock, or other materials and project progress, it must also be checked whether any significant irregularities have occurred.

If necessary, banks may conduct on-site inspections either through their own management or through audit firms. Third-party verification of information authenticity, checking the genuineness of transactions with suppliers or buyers, and other appropriate verification activities may also be conducted.

Loan Misuse Identified as the Main Cause of Defaulted Loans

Bangladesh Bank officials say that anonymous and fake loans are one of the leading causes of high defaulted loans in the country’s banking sector. There have been allegations that in many cases, loan funds were extracted by overvaluing collateral property several times over. Officials say a large portion of these loans has been laundered abroad, with borrowers fleeing the country.

Investigations have at various times revealed that various forms of fraud were committed, with the collusion of bank directors, senior head-office officials, and branch-level officials, to obtain these loans.

Officials say that although Bangladesh Bank inspects banks every year, these inspections generally prioritize only a few important branches and activities, leaving many instances of loan irregularities at other branches outside their view. They said that in many cases, audit firms have also approved banks’ annual financial statements without raising proper questions. The central bank believes that introducing a separate and effective audit of the actual use of loan funds could reduce this risk.

Bangladesh Bank Increasing Monitoring of Large Loans

Bangladesh Bank has stepped up efforts to verify who is receiving large loans and whether these loan funds have been used properly. In May, the central bank requested information from every bank on loans of 20 crore taka or more disbursed and rescheduled from July 2025 through April of this year, including data on which sector and which customer received these loans.

This data was then used to verify who received these loans, whether anyone involved in previous fraud or money laundering had taken loans anonymously or through other means, and whether rules were followed in rescheduling loans.

Officials say Bangladesh Bank found evidence of several irregularities through this process, including one case of anonymous lending from a state-owned bank. Additionally, some instances were uncovered of large loans being rescheduled without the required down payment, and loans being disbursed without adequate collateral. Bangladesh Bank has sent warning letters to the managing directors of the relevant banks over these irregularities.

Despite Bangladesh Bank’s continued efforts to control defaulted loans by easing rescheduling facilities and relaxing down payment conditions, defaulted loans in the country’s banking sector exceeded 6 lakh crore taka by the end of June. In just three months through the end of June, newly defaulted loans increased by about 18,000 crore taka.

According to Bangladesh Bank’s latest data, the total ratio of defaulted loans in the banking sector rose to 32.79% by the end of June, up from 32.26% at the end of March. The total amount of defaulted loans at the end of March was 5,80,000 crore taka. Under these circumstances, most banks, barring a handful, have failed to achieve the desired level of profitability. While banks are required to maintain capital of about 12.5% against their total loans, the sector’s capital shortfall stood at 2.64% at the end of last year.

International Practice

To prevent misuse of loan funds, various countries have systems for third-party verification of fund usage, although specific conditions vary by country. In neighboring India, after disbursement of large loans, utilization reports are collected through chartered accountancy firms and submitted to the country’s central bank, the Reserve Bank of India (RBI). The RBI has also said that lenders should not rely solely on external certificates but should strengthen their own internal controls and credit-risk management. If there is suspicion that loan funds have been diverted from the approved sector elsewhere, a forensic audit can also be conducted through a third party in India. Under European Union rules, in accordance with European Banking Authority guidelines, banks must collect customers’ financial statements and external auditor reports at specified intervals after loan disbursement.