The banking sector’s capital base worsened in the fourth quarter of 2020, with a number of banks’ financial health taking a turn for the worse.
As of December last year, banks’ capital adequacy ratio (CAR), which determines the adequacy of banks' capital in keeping with their risk exposure, stood at 11.64 per cent, down from 11.94 per cent three months earlier, according to the latest data from the Bangladesh Bank.
The capital shortfall of a number of banks rose in the December quarter, which impacted the banks’ capital adequacy ratio (CAR), said a top official of the central bank seeking anonymity.
The country’s banking sector has already failed to maintain CAR as per the deadline set by the BB for implementation of Basel–III by December 2019.
Basel–III is an international standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations, the BB official said.
The BB set the December 2019 deadline for banks to increase the capital adequacy ratio to 12.5 per cent.
The country’s state-run banks have maintained a very low capital adequacy ratio as the CAR of those banks were as low as 4.34 per cent until December last year owing to their bad financial health.
The overall CAR in the banking sector is not bad at all but the state-run banks and some new banks’ capital adequacy ratios are not good owing to their high amount of default loans, said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.
State-run specialised Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank have been maintaining negative CAR. Their average CAR went down to -32.9 per cent.
However, the country’s private banks have been maintaining a relative standard CAR.
The average CAR of those banks stood at 13.96 per cent at the end of December last year, which was higher than the required standard.
In addition, the foreign banks have also been maintaining a high-standard capital adequacy ratio. The average CAR of the banks stood at 28.2 per cent.
The country’s banking sector has failed to achieve the global standard for CAR owing to 10 banks, including seven state-run banks.
They jointly faced a total capital shortfall of Tk 28,949.97 crore as of December last year.
The banks are: Agrani Bank, Rupali Bank, Basic Bank, Sonali Bank, Janata Bank, Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank, Bangladesh Commerce Bank, ICB Islamic Bank and Padma Bank.
Bangladesh Krishi Bank (BKB) has the highest capital shortfall of Tk 10,819.3 crore.
“We are a specialised bank for the agriculture sector. So our cost of funds is higher than the interest rate on loans. As a result, we have faced an operating loss,” said its Managing Director Ali Hossain Prodhania.
The capital shortfall was due to the operating loss.
“However, BKB has a big contribution to the agricultural sector,” he added.
In the last quarter of 2020, Janata Bank’s capital shortfall rose Tk 5,217.5 crore; Agrani Bank’s Tk 519.6 crore, Rupali Bank’s Tk 458.3 crore, Sonali Bank’s Tk 2,947crore and BKB’s Tk 216.85 crore.
The banks had taken a deferral facility from the central bank for keeping their provisioning, which expired. As a result, their capital shortfall soared.
The capital shortfall was the direct consequence of a bank’s default loans as the lenders had to keep their provisioning against default loans, said AB Mirza Azizul Islam, a former finance adviser to the last caretaker government.
“Foreign businesses usually monitor the ratio of required capital and default loans of scheduled banks before investing. Such capital shortfalls will discourage them from investing,” he added.
At the end of December last year, total defaulted loans in the banking sector stood at Tk 88,734.1 crore, according to data from the BB.